Friday, November 19, 2010

James Turk - Delta-Hedging to Cause Gold Price to Explode

With gold and silver taking off to the upside, King World News interviewed James Turk today out of Spain. Turk commented, “What we are seeing right now is the breaking apart of the gold cartel. They are losing control of the market just like they did back in the late 1960’s when gold began trading above $35 in the cash market in London, even though the price was still officially fixed at $35. The market was simply saying, we just don’t believe this $35 price anymore.”

Turk continues:

“The same principle applies today. The same group that is trying to hold the price down is being overrun just like they were in the late 1960’s. Normally you would expect the gold market to fade into next week’s options expiry. The fact that we are so strong today is an indication that the shorts are being overwhelmed and I am looking for higher prices as a result.

This could be explosive over the next few days if the shorts have to start buying because of delta-hedging on the calls that they have written. In other words, the more the price of gold rises, the more they have to buy. This can be a vicious cycle that feeds upon itself causing prices to explode. (more)

Former Treasury Secretary Rubin: Bond Market Could Implode; Vote to Increase Deficit Could be the Trigger

Former Treasury Secretary Robert Rubin is laying it on the line. At a conference today at the Pierre Hotel in NYC he said, according to Arron Tusk, that the soaring federal budget deficit and the Fed's quantitative easing are putting the U.S. in "terribly dangerous territory" and warned of a bond market "implosion."

Get this. He said Congress' vote on raising the deficit ceiling next spring could be the "trigger" for a rout in the Treasury market.

He also said the Fed's plan to buy $600 billion of Treasuries "has a lot of risk," calling the international reaction "horrendous."

BNN: Top Picks

Stan Wong, VP and Associate Portfolio Manager, Macquarie Private Wealth, shares his top picks.

click here for video

Goldman's O'Neill: S&P 500 May Rise 20 Percent as QE3 Looms

The Standard & Poor’s 500 Index may rise as much as 20 percent in 12 months and the dollar is poised to climb as U.S. economic growth tops investors’ projections, Goldman Sachs Asset Management Chairman Jim O’Neill said.

The U.S. equity market will probably outperform the rest of the world and the dollar may strengthen 5 percent from current levels, O’Neill said in an interview in London. The Federal Reserve will engage in another round of bond purchases, or “QE3,” if its current program fails to revive growth in the world’s largest economy, O’Neill said.

The S&P 500 is little changed since Nov. 3, when the Fed said it would buy $600 billion of Treasurys, adding to an earlier $1.7 trillion asset-purchase program known as quantitative easing that’s designed to cut unemployment and avert deflation. The Dollar Index, which tracks the U.S. currency against those of six trading partners, rose 3 percent during the period.

“If QE2 doesn’t work, then we’ll get QE3,” said O’Neill, who was named chairman of the money manager in September after working as the co-head of global economics research and chief currency economist at New York-based Goldman Sachs Group Inc. since 1995. There’s a “good chance” the S&P 500 will rise 15 percent to 20 percent in the next 12 months, he said. (more)

Chart of the Day: New home Sales and Recession

How Gold Performs During Periods of Deflation, Disinflation, Runaway Stagflation and Hyperinflation

A few years ago I did an appraisal for a client who was pledging his gold as collateral in a commercial real estate transaction. In the course of doing the appraisal, I was struck with the large gain in value. His original purchase in 2002 was in the seven figures when gold was still trading in the $300 range. His holdings had appreciated 50% after a roughly three-year holding period. (Since that appraisal, the value has risen another three times.) I asked his permission tell his story at our website as an example how gold can further one’s business plans.

"No problem at all,” he wrote by return e-mail, “I have viewed it as a hedge, but also as an alternative to money market funds. Now I can leverage it for investment purposes -- private equity and real estate mostly. The holding has averaged 7%-10% of my total assets. And I do hope to buy substantially more, when appropriate. Thanks again."

It needs to be emphasized that he was not selling his gold, but pledging it as collateral to finance other aspects of his business. Selling it would have meant giving up his hedge -- something he didn’t want to do. Instead, he was using gold to further his business interests in a transaction in which he would become a principal owner.

Upon publishing his story at the USAGOLD website, we received a letter from another client with a similar story to tell: (more)

Hourly Action In Gold From Trader Dan

What a difference an evening makes – once word began circulating that Ireland was going to be bailed out by the ECB suddenly the hedge funds fell back in love with risk after seeking a divorce from her just the other day. The result – where some markets were limit down yesterday (cotton), today there were limit up. Such is the fickle nature of global capital flows or more appropriately, hot money flows. Do some of you out there find it as amusing as I do watching these hedge funds panicking over Chinese talk about rate hikes to tame inflation only to then run right back into every single market that they threw away the previous few days once they see more QE this time coming from the ECB.

Make no mistake about it, the ECB is engaging in its own version of QE, just as Jim has repeatedly said they would. And if anyone is under any illusions that this was about Ireland, please let me dispel that notion here and now. It is about bailing out the BANKS who are on the hook for the money loaned to Ireland. It is always about the big banks ( I think that there is a special place in hell reserved for that crowd of international thieves). Now that Ireland has apparently received the same treatment as Greece, I suppose Portugal and Spain are next in line. (more)

Dollar to Become World's `Weakest Currency,' Drop to 75 Yen, JPMorgan Says

The dollar may fall below 75 yen next year as it becomes the world’s “weakest currency” due to the Federal Reserve’s monetary-easing program, according to JPMorgan & Chase Co.

The U.S. central bank, along with those in Japan and Europe, will keep interest rates at record lows in 2011 as they seek to boost economic growth, said Tohru Sasaki, head of Japanese rates and foreign-exchange research at the second-largest U.S. bank by assets. U.S. policy makers may take additional easing steps following the $600 billion bond-purchase program announced this month depending on inflation and the labor market, he said.

“The U.S. has the world’s largest current-account deficit but keeps interest rates at virtually zero,” Sasaki said at a forum in Tokyo yesterday. “The dollar can’t avoid the status as the weakest currency.” (more)

Brent Cook: Colombian Gold Rush

The Gold Report: More and more new gold companies are popping up as interest in gold as an investment vehicle increases. How does an investor begin to understand which gold companies are viable and which ones are just taking advantage of the building interest in gold?

Brent Cook: Investors should consider that most of the new companies coming in now are trying to take advantage of the gold price. Longtime gold investor Rick Rule has a classic statement that the only thing that limits the supply of paper that the Canadian market can print is the number of trees between British Columbia and Newfoundland. To some degree, that is very accurate. I think it is important to be even more diligent in reviewing companies today. Investors should look at management, share structure and the prospectivity of the projects the companies are actually planning to spend your money on. That is key.

TGR: Some companies may simply be springing up to take advantage of the rising price of gold, but there must be some legitimate new companies. Is the gold price making some projects economically viable?

BC: Certainly. If you run a geologic and economic model on a mine—let's say 0.7 grams per ton (g/t)—it could be economic with gold at about $1,300/oz. but not when gold was at $1,000/oz. You still have to look at that profit margin, plus the size of the capital needed to build the mine. I think we are going to see a lot of companies that have marginal deposits start to be put into production. Those deposits rely on the gold price staying above $1,000/oz. or more. (more)

HUMOR: Who Do You Listen To?