Monday, August 15, 2011

Gold Video of the Day: When to Sell Your Gold – Sprott

Ok, you bought a dip.

Now what? What are the forces behind the 10 year bull market – and how will you know when they’re played out, spent, finito? Eric Sprott has some thoughts on that topic that he shares with us today.

Sell Signal #1: Mania

This is also known as a Bubble. It’s characterized by wild price swings and irrational exuberance. Not only do all the funds own gold in various forms, but so does your Aunt Judy and the guy who does your dry cleaning. And they’re all talking about gold and how they’re going to buy more. When everybody is in and there are no more buyers – guess what happens to the price? We are nowhere near this mania/bubble stage.

Sell Signal #2: Governments/Central Banks Become Responsible

The temptation to make a joke out of this idea is tempered by the fact that government irresponsibility has delivered the world’s economies to the end of a road – and that really isn’t very funny. Post-collapse, governments will be forced to become responsible again. Exactly how that collapse will play out is unclear but there is no sign that the guilty governments (you know who you are!) are willing or able to act responsibly anytime soon.

Sell Signal #3: Gold Standard is Reinstated

Advocacy of a return to the gold standard is no longer considered goofy. The president of the World Bank floated the idea last year and since then, discussion of how it would be implemented is fairly common amongst the exalted poobahs – not just the Ron Pauls of the world. Assume that this is under active consideration by the people with the ability to make it happen. But if it does happen, it will be sprung on the world as a surprise. And part of the surprise might include confiscation at bargain basement prices.

Thanks Eric Sprott! You provide the ideas and we’ll flesh em out!

Ain't It the Truth?

Commando Car Buying

Before you parachute into a new car dealer looking for the best deal on your next set of wheels, take time to equip yourself with these commando car buyer’s tips:

If you plan on paying cash, don’t say so until after you’ve negotiated the purchase price

A big chunk of the dealer’s potential profit is built into financing; that means the salesman may be more likely to negotiate a lower sales price – if he thinks he can make it back on the financing. Never discuss how you’ll pay for the car until after you’ve negotiated the sales price.

Get it in writing, too.

Don’t shop on a weekend (or weeknights)

The law of supply and demand doesn’t work in your favor when there are lots of other customers milling around; if you don’t buy, the odds are the next guy will. This puts you at a pyschological (and possibly, real) disadvantage.

But when you hit a dealership mid-week, especially in the afternoon when there aren’t nearly as many (if any) other customers around, interest in you and the potential sale you represent will go up. You’ve got a better chance of negotiating a great deal when the salesman sees you as possibly the only game in town.

Forget about the monthly payment

Worry about the actual sales price of the car. This goes for leases as well as purchases, since your monthly lease payment will be based in part on the purchase price you sign onto at lease inception. A “low” monthly payment does you no good if it is based on a higher-than-it-should be purchase price – with those “low” payments stretched out over an extra year (or obliterated by an obnoxiously high balloon payment to buy the car at the end of your lease).

Keep quiet about your trade-in

Never discuss what you plan to do with your current car until after you have finished negotiating the price of the new car. There are two reasons for this. One, you don’t want to add an additional factor (negotiating your old car’s trade-in value) to an already complicated process before you’ve dealt with the first one (negotiating the price of the new car). Two, if the salesman can get you talking about your trade-in before you’ve come to an agreement on the price of the new car, he may be able to shift your attention to the “great deal” he’s giving you on the trade – causing you to forget all about the not-so-great deal he’s giving you on the new car.

Focus on one thing at a time; deal with your trade-in after you’ve tied down the deal on the new car.

Beware “no haggle” pricing

Anytime you hear something that sounds too good to be true, it always is too good to be true. “No haggle” is the same as walking into a standard dealership and agreeing to pay the full MSRP sticker price. You don’t “haggle.” You just pay what they tell you to.

This may be less stressful for those who hate the back-and-forth of the typical new car purchase process, but it’s far from being a great deal. And: If the brand/car you want is only sold at a “no haggle” dealership, that doesn’t mean you can’t negotiate. You’ve got nothing to lose by making a fair offer under the “no haggle” price – especially in today’s market. Dealers are desperate to move inventory and a sale (even if it comes with “haggling”) is better than having the car sit on the lot costing the dealer money.

Or, enlist a buying service to handle the haggling for you. Yes, there’s a fee. But it will likely still be less costly overall than just paying whatever the dealer tells you to pay.

Worry about incentives and rebates after you negotiate your best deal, not before

Like haggling over your old car’s trade-in value, it’s best to stay focused on the Main Event and not confuse the issue by adding factors that can distract you from negotiating the best possible price before subtracting manufacturer incentives and rebates. If there’s a $1,000 cash back offer, you can subtract it from your final deal (or just have them send you the check, if that’s an option). Remember: It’s the sales price of the car that matters most; everything else is secondary.

Don’t take the car home for the night

This is a common gambit designed to get you emotionally attached to the vehicle; to get you thinking of it as “your” new car before you’ve come to terms on its price. Remember: Anything that clouds your judgment or tends to make you emotional should be avoided. If you buy the car, you’ll have plenty of time later on to gaze lovingly at it and think how nice it looks in your driveway. Don’t fall into this trap before you get the deal nailed down.

Be like Mr. Spock: Detached, unemotional.

Add-on fees are always negotiable

Don’t let yourself be talked into paying a couple hundred bucks above the “final” sales price you just agreed to for things like “detailing” (teenage kid washes the car) or “paint sealers” (ten bucks’ worth of Turtle Wax applied by teenage kid) and “fabric treatments” (a spray can of Scotch Guard also applied by teenage kid).

The only extras you’re obligated to pay for, above the sales price of the car itself, are any applicable sales taxes, title and vehicle registration fees mandated by your state/local government (and payable to them, not the dealership).

Otherwise, just say no. Be prepared to kibosh the deal if they get aggressive about it.

Be friendly

Just as car salesmen get you to drop your guard by getting you to think of them as “nice guys” just trying to help you out with friendly chit-chat, your cause will be well-served if you get the salesman to like you as a person. Being needlessly hostile (or cold) adds pointless tension to the process and should be avoided whenever possible. Remember: The salesman’s a human being, just like you – and most of us prefer doing business with people who are warm and friendly. If it helps you get a better deal, being nice pays for itself.

Always be prepared to deal your trump card

Which is to simply get up and walk away if the salesperson is pressuring you, or you just don’t like the way the deal’s going. Never forget: You are under no obligation to buy the car until you sign a contract. This is your number one ace to play. Be polite, but tell the salesperson it’s not working out and that you think it’s time to try your luck elsewhere. It helps if you pretend to be really disappointed. Not mad – just sad that the deal’s not coming together. Sighs are good here. Ham it up!

Nine times out of ten (unless you are being completely unreasonable) the salesperson will do whatever it takes to get you back to the table and close the deal.

And in your favor.

The Next Crisis – Mark your calendar

The date will be on or about September 30th. The issue will be the need to pass a Continuing Resolution by the House.

For more than 850 days the US has gone without a budget. The House passed one not long ago; the Senate tabled it. The Administration has not offered up one either. The absence of an approved budget means that the only way the country can continue to operate is through a series of temporary extensions.

The last time we went through a vote on a continuing resolution was just four months ago. That fight went down to the wire. At the time it was 50-50 that the government would be forced to shut down. In the end a deal was reached to extend things to the end of this fiscal year. That happens to be just six weeks from today.

The fight back in April was the opening salvo of the war between Democrats and Republicans. I think this was the first definitive evidence that our government was so deeply divided that it had become dysfunctional.

It was the debt ceiling catastrophe that drove S&P to cut the US credit rating. The seeds for that ratings cut came from the Continuing Resolution debacle.

To get a new Resolution through the house the Democrats and the WH will have to make concessions. We’ve seen where this takes us. Crisis.

On AAA’s

We lost ours a week ago. I’m not sure how important that was for the violent markets this week. It played into the mix of crazy things that happened.

A new AAA was created this week. A country rises to this lofty rank? No, that’s not going to happen. One of the strong global companies gets a higher rating? No, that’s not likely either. Is this a name we all know? No, not unless you trade CRE CDOs for a living. This AAA goes by the moniker of:


This is a Commercial Real Estate Collateralized Debt Obligation. (Remember those ugly things?) The total deal is $685 million. The security for this borrowing? $685mm of mortgages on 168 hotel properties in 33 states. (Note: 100% leverage, O% equity). The average loan size behind the deal is $4mm. This means we are not talking big properties. I call this the “Red Roof” deal.

The CDO is structured with (get this) six tranches. The bottom of the credit pile is therefore just swill. The most subordinate piece is a $110mm. Somehow this junk managed to get a BB from Fitch.

The most senior tranche came to $350mm. (Note: This does not even have 2X coverage). Fitch took a quick look at this and gave it AAA.

My guess looking at some of the details is that the senior tranche has a very good chance of getting their money back. But this is by no means a sure thing. It was just three years ago when we last had deals like this. The vast majority of those AAA's got smoked. (Note: Only “Sophisticated” investors can participate in this deal)

I’m scratching my head. If a bond secured by a bunch of so-so hotels can get a AAA just what the hell does a AAA mean?

Gold vs Paper, Paperbugs Won't Get It Until It's Too Late

A brutal cyclical common equity bear market within this secular bear market for common stocks has already begun. Meanwhile, the parabolic phase in the uncommon Gold secular bull market has just begun with the latest thrust higher. Please don't mistake the forest for the trees: Gold should be correcting now and common stocks are due for a dead cat bounce higher. But these shorter-term considerations are not where the big money is made for retail investors now are they?

A shiny piece of metal continues to trounce common equities and this trend is set to continue. The best way to view this for American investors is by using the Dow to Gold ratio (i.e. $INDU:$GOLD), a chart I have been harping on long before I started ranting on the internet. How now Dow over this secular period of stock investor misery? Let's look at a 20 year monthly chart of the $INDU:$GOLD ratio:

This ratio is going to 2 and we may well go below 1 this secular cycle. The paperbugs still talk of dividend yields and how they are higher than the bond yield. This is true, but what good is a 3% dividend yield if the stock goes down another 50% over the next few years? And, using the dividend yield with an appropriate historical perspective (next chart stolen from a piece by Mark Lundeen), we are near a top in the stock market, not a bottom:

Trust me, we will get back to a 6% yield in the stock market before this secular bear is done mauling the paperbugs. A double digit yield wouldn't be surprising. The calls for a bottom here with a continuation of the cyclical equity bull market are amazing to me and show just how entrenched the belief in infallible central banksta wizards has become. These wizards are powerless to stop the new cycle now that the tide has turned, just like in late 2007. Manipulation works well only when it is in the direction of the trend, otherwise a few days to a few weeks is about it. The fact that Europe had to ban short selling to get a bounce in their markets suggests that we likely will make one more low before a multi-week dead cat bounce. This dead-cat bounce could be anemic or fast and furious - I don't know. A fast and furious bounce would be anticipated and better to keep the bulltards in this thing as long as possible before wiping them out.

Folks, we are already in a bear market in the majority of the world's equity markets by the standard definition: a 20% loss. Here's the list from peak to trough for multiple markets, in no particular order:

China ($SSEC): August 2009 peak to this week's lows: 30% loss
Brazil ($BVSP): November 2010 peak to this week's low: 35% loss
India ($BSE): November 2010 peak to this week's low: 22% loss
Russia ($RTSI): April 2011 peak to this week's low: 29% loss
France ($CAC): February 2011 peak to this week's low: 31% loss
UK ($FTSE): February 2011 peak to this week's low: 22% loss
Germany ($DAX): May 2011 peak to this week's low: 28% loss
United States ($SPX): May 2011 peak to this week's low: 20% loss
Italy ($INE): October 2009 peak to this week's low: 44% loss
Other PIGS countries: A little bit more than 20% down... (sarcasm off)

Get the picture here? I understand buying stocks here AS A TRADE, but not as an investment. We are going much, much lower in common stocks. And what of Gold? Ah, the shiny, worthless, barbaric metal that is the best performing asset over the past decade. Let's just say things are about to get hot to the upside after the current correction concludes.

Looking at Gold on a weekly chart gives us a clue as to what comes next. Here is a 12 year log scale weekly chart thru Thursday's close to show you what I mean:

This type of MACD shift to a higher range has been seen in multiple prior secular equity bull markets as the parabolic phase higher began. I don't think this time is an exception. It's just that time in the investment cycle, nothing more. And the fundamentals support this fledgling move completely. While US Dollar-based deflationists call for a massive US Dollar rally, they will be shocked to see how high Gold goes relative to the US Dollar during a deflationary crash when no one trusts their governments and confidence is lost. And the US Bond permabears will be shocked how well government debt in the US holds up as the herd flees the stock market.

And for all those who say that this is not a replay of 2008, I agree. Things are much, much more serious now and the corresponding bear market has the potential to be even more devastating. When the banking system is broke plus many nations in the world are broke and at the breaking point, you are talking about a replay of the last year or two of the 1929-1932 bear market. It will be more drawn out this time (will it end in 2014?) due to endless apparatchik interventionism, which will fail again and again, as it always has in the past. Being a bear will become dangerous, as events in Europe this week related to abrupt banning of short selling demonstrate. Paper Gold may be banned or curtailed as things spiral out of control, so don't say you weren't warned.

Physical Gold held outside the banking system and away from the prying eyes of bankstaz and governments is the single best investment option out there. Period. The Gold bull market is not over by a long shot. Some physical cash under the mattress (i.e. outside the banking system) to cover short-term expenses is also not a bad idea.

If you're crazy enough to trade these dangerous and heavily manipulated markets, consider giving my trading service a try. We trade Gold, silver and Gold and silver stock indices, as well as other markets when opportunities present themselves.

Adam Brochert

US Weekly Economic Calendar

DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
Aug 158:30 AMEmpire ManufacturingAug-0.0-0.4-3.76-
Aug 159:00 AMNet Long-Term TIC FlowsJun-NANA$23.6B-
Aug 1510:00 AMNAHB Housing Market IndexAug-151515-
Aug 168:30 AMHousing StartsJul-575K608K629K-
Aug 168:30 AMBuilding PermitsJul-600K606K624K-
Aug 168:30 AMExport Prices ex-ag.Jul-NANA0.0%-
Aug 168:30 AMImport Prices ex-oilJul-NANA-0.1%-
Aug 169:15 AMIndustrial ProductionJul-0.1%0.4%0.2%-
Aug 169:15 AMCapacity UtilizationJul-76.6%77.0%76.7%-
Aug 177:00 AMMBA Mortgage Index08/13-NANA+21.7%-
Aug 178:30 AMPPIJul-0.1%0.0%-0.4%-
Aug 178:30 AMCore PPIJul-0.2%0.2%0.4%-
Aug 1710:30 AMCrude Inventories08/13-NANA-5.225M-
Aug 188:30 AMInitial Claims08/13-400K400K395K-
Aug 188:30 AMContinuing Claims08/6-3700K3698K3688K-
Aug 188:30 AMCPIJul-0.2%0.2%-0.2%-
Aug 188:30 AMCore CPIJul-0.2%0.2%0.3%-
Aug 1810:00 AMExisting Home SalesJul-4.70M4.87M4.77M-
Aug 1810:00 AMPhiladelphia FedAug-
Aug 1810:00 AMLeading IndicatorsJul-0.2%0.2%0.3%-