Thursday, May 5, 2011

Gold, Silver Drop as Soros Fund Said to Dump Precious Metals

Silver futures fell, heading for the biggest three-day drop since 2008, and gold also retreated amid a report Soros Fund Management LLC sold precious-metal assets.

Soros Fund Management sold some holdings because of a reduced risk of deflation, according to the Wall Street Journal, which cited unidentified people close to the matter. Michael Vachon, a spokesman for George Soros, declined to comment.

The fund held shares in the SPDR Gold Trust, the biggest exchange-traded product backed by gold, and the iShares Gold Trust at the end of 2010, U.S. Securities and Exchange Commission filings show.

Silver futures fell as much as 5 percent to $40.465 an ounce on the Comex exchange in New York. The contract was at $41.72 as of 6 a.m. local time, for a three-day decline of 14 percent. Margin requirements were raised 38 percent in since April 26. Gold futures retreated 0.2 percent to $1,537 an ounce.

“Some small, speculative players had to trim their silver positions as they couldn’t afford to pay for such margins,” said Jerome Berset, a portfolio manager at Palaedino Asset Management SA in Geneva, which has 1 billion euros ($1.49 billion) in assets and has maintained holdings in gold and silver. “For long-term players with fundamental views, this may be a good time to get in for both silver and gold.”

The decade-long bull market in gold and silver attracted fund managers from Soros to John Paulson and spurred central banks to add to their reserves for the first time in a generation. Investors in exchange-traded products backed by gold accumulated more metal than all but four central banks, while silver holdings are equal to more than eight months of global mine supply, according to data compiled by Bloomberg.

Gold Reaches Record

Gold reached a record $1,577.57 an ounce on May 2, a sixfold gain since prices bottomed in August 1999. Spot silver rose to an all-time high of $49.79 an ounce on April 25, a 12- fold advance from the low of $4.04 reached in 2001.

The Soros fund held 4.72 million SPDR Gold Trust shares as of Dec. 31, equal to about 460,000 ounces, an SEC filing on Feb. 14 showed. It also owned 5 million shares in the iShares Gold Trust, equal to about 48,800 ounces. The firm had 19,900 shares in Pan American Silver Corp., a Vancouver-based company mining the metal in Mexico, Peru, Argentina and Bolivia. There were also stakes in Barrick Gold Corp., Kinross Gold Corp. and Novagold Resources Inc., the filing shows.

Soros described gold at the World Economic Forum’s meeting in Davos, Switzerland, in January last year as “the ultimate asset bubble.” In a Nov. 15 speech in Toronto the 80-year-old said conditions for the metal to keep rising were “pretty ideal” and at this year’s Davos forum he said the boom in commodities may last “a couple of years” longer.

Paulson Holding

Paulson & Co.’s holding was 31.5 million shares in SPDR Gold at the end of December, an SEC filing shows.

Passport Capital Management LLC also sold some gold holdings to lock in profit, the Wall Street Journal reported, citing a person close to the fund. Passport Capital held 3 million put options on SPDR Gold shares and 28,100 shares in Barrick Gold as of Dec. 31, according an SEC filing. Two phone calls outside of normal office hours to John Burbank, founder of Passport Capital, weren’t answered.

CME Group Ltd., the owner of the Comex exchange, said this week the minimum amount of cash that must be deposited when borrowing from brokers to trade silver futures will rise to $16,200 per contract at the close of business yesterday from $14,513. A year ago, the margin was $4,250.

“Silver is often the lead indicator for changes in trends, or at least for corrections,” David Wilson, an analyst at Societe Generale SA, wrote in a note. After futures rallied to a record $50.35 an ounce in January 1980, prices dropped 78 percent in four months.

From the start of this year to the end of April, silver futures rallied 57 percent and were the best performer among the 24 raw materials tracked by the Standard & Poor’s GSCI Index.

Silver assets held in exchange traded products fell 1.1 percent to 15,169.80 metric tons yesterday, while gold holdings stood little changed at 2,069.78 tons, according to data compiled by Bloomberg.

Marc Faber: Bulls to Get Slaughtered as Stocks Plunge

Contrarian investor Marc Faber says stocks will fall sharply in May, turning the recent breakout in stocks into a trap for the bulls.

The markets are due for a correction and the technicals point to a weak market, Faber tells Wall Street Pit. In particular, he points to the decline in new 52-week highs as evidence of an unhealthy internal market.

Right now, Faber advises investors determined to buy stocks to stay away from cyclicals, tech stocks, and banks, sticking with safer plays such as consumer staples.

Marc Faber
(Newsmax file photo)
Faber, publisher of The Gloom, Boom and Doom report, likes gold as a long-term investment.

He’s more cautious when it comes to silver because of its recent runup in the price, and expects a 20-percent-plus correction in the metals complex because the inflation trade has become too crowded.

Faber says copper and the S&P 500 are highly correlated, and finds he fact that the stock index reached a new high while the metal didn't is another signal that stocks could follow commodities lower in the short-term.

Faber says the U.S. housing market has another 10 percent to fall, but valuations are now attractive and housing hasn’t been this cheap since the early 1980s. In a serious inflation environment, Faber would rather own housing than paper dollars.

Faber also expects the United States will run trillion-dollar budget deficits for the next 10 years and the Federal Reserve will have to at least partially monetize this debt to keep interest rates low.

But not everyone agrees with Faber. Another notorious equities bear now says he's bullish. David Rosenberg, senior strategist and economist at Gluskin Sheff in Toronto, is telling clients that the stock market isn't headed for a crash.

The market has been rallying since March 2009, yet Rosenberg has been wary of the trend, defending bonds against "inflationistas" and warning that deflation remains the far greater danger, CNBC reports.

Skies seem bluer. "This is not about throwing in the towel," Rosenberg writes in a letter to clients.

"It is an acknowledgment of what the market internals are flashing at the current time from a purely tactical and technical standpoint."

A Technical Look at the Russell 2000

Master technical analyst Chris Kimble shares his perspective on the Russell 2000.

Chris comments: The Russell 2000 attempted of late to break above it 2007 highs — with no success so far.

Since last Septembers lows, a rather large rising wedge has taken shape, which about two-thirds of the time suggests that lower prices are ahead.

Should the bottom of the wedge be taken out, this prior upside leader, could become a downside leader!

Chart(s) of the Day: Length of Recoveries, Interest Rates

Jim Stack of Investech Research always uses these terrific, informative simple charts. They are not fancy, but they simply convey an incredible amount of information:

The two below are a month old (April 8, 2011) but still instructive:


click for larger graphics


This chart tells you almost everything you need to know about the 1982-2000 bull market, the 2003-07 credit driven bear market rally, and the subsequent collapse and bounce back — as well as the demise of the Dollar.

Unbelievably informative.

Hong Kong Real Estate Transactions Plunge

A month ago, Zero Hedge observed the collapse in March real estate prices and number of transactions in Beijing (here and here), speculating that this could be the beginning of the end of the Chinese real estate bubble. Today, courtesy of the Hong Kong land registry service, we find that the drubbing has shifted from mainland China to Hong Kong. "The number of sale and purchase agreements for all building units received for registration in April was 10,386 (-23.1% compared with March and -27.4% compared with April 2010). Among the sale and purchase agreements,7,635 were for residential units (-27% compared with March and -37.6% compared with April 2010)." This number of transaction is the lowest since March 2009. As for the actual money changing hands: "the total consideration for sale and purchase agreements in respect of residential units was $39 billion (-24.8% compared with March and -26.8% compared with April 2010)" - another low, as this is the biggest Y/Y drop since June 2010. Yet, not too surprisingly, the actual prices of real estate remain sticky. As Bloomberg reports: "Housing prices in the city, ranked the world’s most expensive place to buy a home by Savills Plc (SVS), have gained more than 55 percent in the past two years on record-low mortgage rates and an influx of buyers from China. The government in November increased property transaction taxes and pledged to boost land supply amid public protests that housing prices are becoming unaffordable and as the central bank warned about the risk of a “credit-fueled property bubble.”" The reason for this is that despite the cash-n-carry scheme described by Sean Corrigan recently, credit was suddenly become so scarce that it is only available to the wealthiest, who in turn are not, for now, in urgent need of hitting bids, thus preventing prices from attaining market clearing levels.

More from Bloomberg:

Sentiment has clearly been waning since February,” said Buggle Lau, chief analyst at Midland Holdings Ltd., Hong Kong’s biggest publicly traded realtor. “A slowdown is almost inevitable when there’s a combination of government curbs, mortgage rate hikes and unpredictable events,” including the earthquake and tsunami in Japan on March 11.

Hong Kong’s bank interest rates will rise on loan demand and capital outflows when the U.S. increases borrowing costs, Hong Kong Monetary Authority head Norman Chan said on April 28.

Home prices in Hong Kong rose for a second consecutive week in the week ended April 24, extending a recovery from a three- week, 1.6 percent slide since mid-March when lenders started raising mortgage terms based on the Hong Kong Interbank Offered Rate, according to an index compiled by Centaline Property Agency Ltd. Prices have risen about 10 percent since November.

The next statement summarizes the glass is half full perspective on what is currently happening:

"The best time for the home market have passed,” said Eddie Hui, a professor at the real estate and building department at Hong Kong Polytechnic University. “At the same time I don’t think we’re at the brink of a crash. The government measures seem to have brought the market under control gradually.”

And confirming our view that bid/ask spreads are only going to widen with either another bubble being blown, or a sudden bourst of liquidating ending the stalemate, is the following:

Transaction numbers will probably remain stable over the next few months as developers plan to sell more new homes after a brief halt in March, Midland’s Lau said. That will compensate for a further slowdown in existing-home transactions, he said.

“We are not seeing a drop in prices,” said Lau. “There’s still plenty of buying power there and potential sellers aren’t rushing to sell.”

Then again, the rush to sell by everyone always emerges at precisely the same time. And when that happens, there just never are any buyers. Hopefully by then, the BRIC decoupling BS will be long forgotten, or it will be yet another smear on the already spotted reputation of Jim O'Neill.

McAlvany Weekly Commentary

A Birds Eye View on Afghanistan, Derivatives, and the Precious Metals Market

    A Look At This Weeks Show:
    -The real reason (not Bin laden) for the fight with the Taliban: The T.A.P.I. Pipeline.
    -What’s a quadrillion amongst friends?: The Derivatives Market today.
    -Manipulating precious metals by changing the rules of the game in the Futures Markets

BNN: Top Picks

Robert (Hap) Sneddon, Portfolio Manager & Technical Analyst, Castlemoore Inc shares his Top Picks. FOCUS: Technical Analysis & Macro Portfolio Strategy

Here's How to Choose a Great Stock

What if you could find a stock that was exciting for both value and growth investors? Can there be such a company?

A value investor would want to find a sound balance sheet, a strong return on invested equity, and sound prospects for the future.

The growth investor would pay attention to earnings growth, the P/E multiple, and future growth prospects.

A Company to Consider

One of my five investment programs focuses specifically on Great Stocks -- great companies, great management, great prices. It has been my most successful program, beating the S&P 500 nicely over more than ten years. When it trails, it is usually because the market is "selling winners."

Occasionaly I write about one of our selections.

Using my criteria, please consider the following facts:

  • Stock price -- about $35.
  • Cash and marketable securities -- $6.50 per share.
  • No debt.
  • EPS of $2.70
  • Earnings growth of about 60% every year for the last three years.
  • A broad product line, with massive demand for the newest entry.

This is a stock that is exciting in terms of both value and growth.

Hiding in Plain Sight

Why does this value persist?

I think there are two reasons.

  1. In a long-term success story the stock price runs higher. Just like the current market, people think they have missed out. This means they will never get on board.
  2. There is intense skepticism about continuing growth and many rumors.

And the Mystery Stock is..... Apple

Astute readers may have noticed that the facts fit the Apple (AAPL) story. All of the numbers have been divided by ten.

Last February I wrote a similar article, suggesting that most people incorrectly focused on the absolute stock price rather than the underlying fundamentals. I suggested that readers should divide everything by ten, pretending that Apple did a 10-1 stock split.

I strongly recommend that readers go back to the old article and compare it to the current situation. It is not that I am predicting a 10-1 split (but I would not be surprised). Instead, I suggest that people think about individual stocks and the market as a whole in terms of earnings and growth, not using absolute price. The price makes you think you have missed out.

Every day is a new one for investors. Look ahead!

The Current Apple Debate

There are some current articles about Apple and the huge cash accumulation. What a great problem to have.

  • Here is an intriguing article suggesting that the market values Apple only on cash. (HT Abnormal Returns). The author nicely acknowledges the correlation/causation issues and his interesting charts of stock price versus earnings, earnings growth, and cash.
  • CNBC's Fast Money has a good discussion featuring Herb Greenberg and Karen Finerman about what the company should do with the cash. Take a look.
  • To stay focused on data, I always recommend Chuck Carnevale's EDMP site. He carefully warns that the earnings summary chart is just a starting point. I agree, but it is a very good place to begin.Take a look. Click to enlarge:

EDMP Apple

Investment Conclusion

Apple continues to be an attractive stock. Many have missed out by making common mistakes instead of looking at earnings and earnings growth. I like this assessment. Investors could try the same exercise on the S&P or the Dow. Just divide everything by 2. You may be surprised to see that you have a situation similar to the March 2009 bottom, but with less risk.

How Far Does Silver Fall?

By Jeff Clark, BIG GOLD

With silver dropping roughly 19% in the last three days, a correction is clearly under way. Let's take a quick look at how far it might drop.

I've updated the "corrections" chart, which shows all major pullbacks in silver since our bull market began in 2001. The data measure any clearly visible drop in price greater than 10%, regardless of time length. As you'll see, some drops occurred over short periods of time, while others were prolonged.

It's clear that silver has had some large and scary sell-offs. But the "silver" lining to that fact is the realization that our current volatility is perfectly normal.

The average of all corrections is 19%. Applied to our high of $48.70 on April 28, silver would fall to $39.44 if it matched an average drop. So as I write, our current pullback is about average - though it's been quicker than most.

But corrections don't happen in a vacuum. It's generally true that the larger the rise, the bigger the subsequent pullback. Silver has registered an incredible 59% year-to-date gain - and measured from its January 28 low, it's up an astonishing 82.5%. This is important to note because based on my research,this was the biggest surge in the silver price in the current bull market. Thus, it seems reasonable to expect that the metal might fall more than the average.

You'll notice a couple corrections where silver fell by about a third; if we dropped 33.3%, we'd hit $32.48. As another reference point, a 25% fall would take us to $36.52. And if it matched the giant 53.9% sell-off, we'd get to $22.45, though I wouldn't hold my breath for that.

The value in this, of course, is that it gives us some idea of where we might start buying again. I personally would love to see $32 silver, because that would represent a healthy sell-off and appear to have limited downside from there. Only if you believe inflation "loses" would you hesitate to buy at that level.

Regardless of when you start nibbling again, it's important to remember that the fundamentals driving this market haven't changed one iota. The two big "Ds" - debts and deficits - are among the largest in history and cannot be repaid in sound currency. The U.S. dollar and other fiat currencies are getting inflated into oblivion - the full ramifications of which have yet to play out. In my opinion, viewing silver as a monetary replacement in our current environment is very prudent.

So maybe the appropriate question to ask isn't "How far does silver fall?", but "When do I get to start buying again?"

One Big Happy Family: The S&P 500 and the GSCI Index

Randy Degner is a commodities trader for an oil company in Houston, TX. Here is his snapshot of the relationship between equities and commodities.
I've thought at length about the bizarre correlation between crude oil and the S&P 500. With equities, oil, precious metals, and other commodities all falling over the last few days, I decided to extend my analysis to the broader commodity market as measured by the S&P Goldman Sachs Commodity Index (GSCI). The GSCI is made up of a basket of commodities covering all major asset groups. Since it's weighted by trading activity and volatility, a large portion of the index is made up of energy commodities. However, precious and base metals as well as agricultural, meat, and "soft" commodities are also represented. The GSCI is designed to give a portfolio view of commodity price movements. Logic would suggest that the value of commodities should be uncorrelated, or perhaps even NEGATIVELY correlated, to equity prices. But logic would be wrong.

The chart above shows the very strong correlation between commodity and equity prices over the last 18 months. The correlation actually extends back to the precipitous decline in all issue during the 2008 financial melt-down. Over the last 18 months the linkage has been particularly strong, with the r-squared an incredible 88%. Such a relationship is hard to ignore, and reinforces the belief that all markets are being influenced by the same broad macro-economic (or speculative?) trends.

This analysis makes clear that analyzing one particular segment of the financial landscape without considering the fundamentals of other parts of the global financial system is short-sighted and maybe even dangerous. Note for example how the GSCI is now at the lowest level since late March even while (until today) the S&P was very near the highs for the entire move. Could this be a sign of weakness about to emerge in the stock market? It's too early to say, but it's a strong possibility. We should know soon enough.