Monday, October 24, 2011

Cheap Gold Stocks

Not even mighty gold escaped late September’s commodities massacre, so gold stocks never stood a chance. They were sucked into the violent maelstrom of commodities-stock selling, plunging sharply. And as usual when gold is weak, the gold stocks amplified its downside. The result is very cheap gold stocks today, great bargains. Relative to gold, they’ve been hammered back down near panic levels.

Throughout the entire stock markets, the long-term price of any individual stock is ultimately driven by its underlying company’s profitability. The more any company earns, the higher its stock price will eventually be bid to reflect those profits. And for gold miners, the price of gold is directly responsible for the lion’s share of their profitability. During a secular gold bull, gold prices generally rise much faster than mining costs. This leads to expanding gold-mining profit margins.

So over time higher gold prices directly translate into greater gold-mining profits, which ultimately entice investors and speculators to bid up gold-miner stock prices. Thus general gold-stock price levels are best understood in relation to the gold price that drives them. This critical fundamental relationship is a powerful trading tool too. When gold stocks get too cheap relative to gold, it is a great time to buy low.

And this is certainly the case today, as is readily apparent in the HUI/Gold Ratio. This HGR has been my favorite tool for quantifying the relationship between gold and gold stocks for many years now. It simply takes the flagship gold-stock index, known by its symbol HUI, and divides its close by the price of gold. Charted over time, this ratio provides outstanding insights into when gold stocks are cheap or expensive relative to the precious metal they bring to market.

In order to understand just how cheap gold stocks are today, we need some secular context. This first chart looks at the HGR over the better part of the last decade. It is slaved to the right axis in blue. For comparison, the raw HUI gold-stock index is rendered in red off the left axis. Thanks to the recent commodities and commodities-stock scare, gold stocks are now at some of their cheapest levels of their entire secular bull!

This week, the HUI slumped to 513 despite gold trading around $1642. The first time the HUI hit this level in March 2008, gold had just crossed over $1000! Today’s weak gold stocks despite such strong gold prices were enough to drive the HUI/Gold Ratio down to 0.313x. As you can see in this chart, the only time the HGR has been lower was during 2008’s epic once-in-a-century stock panic. Talk about cheap! (more)

The Great Silver Debate

Showtime! Watch the Great Debate featuring CPM’s Jeffrey Christian and GATA’s Bill Murphy as they battle it out on the topic of silver and gold manipulation — is it fact or fiction? You be the judge.

Federal Reserve Vice Chairman Lends Support to QE3

Federal Reserve Vice Chairman Janet Yellen said a third round of large-scale securities purchases might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil.

The central bank should also give “careful consideration” to Chicago Fed President Charles Evans’s proposal to tie the near-zero interest-rate pledge to specific levels of unemployment and inflation, Yellen said today in a speech in Denver.

The remarks signal Fed officials may be prepared to delve further into unprecedented monetary territory and take criticism inside and outside the central bank for expanding the balance sheet. Fed policy makers are struggling to lower unemployment that’s been stuck near 9 percent or higher for 30 months without boosting inflation that’s already close to the central bank’s long-run goal.

“Securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation,” Yellen said in prepared comments to the annual meeting of the Financial Management Association International.

The U.S. recovery is “disappointingly slow,” which leaves the economy “vulnerable to downside shocks,” Yellen said. Job growth is likely to remain “tepid in the coming months,” and the chance that Europe’s sovereign-debt crisis may pressure U.S. financial companies is “particularly worrisome,” Yellen said. (more)

US Money Supply Growing Fast

With all the troubles of Europe hogging the headlines, commentators are ignoring money supply in the US, which is growing strongly, with the broad measure of M2 growing by over 10% for the last 12 months. Furthermore, the annualised growth rate over the last six months has been above 15%. The story told by the True Money Supply, otherwise known as Austrian Money Supply, confirms this.

The reason for using TMS is simple. According to the Ludwig von Mises Institute, it represents the amount of money in the economy available for exchange. Furthermore, it is designed to clearly show any expansion that results solely from central bank injections of cash and commercial banks’ credit creation, by excluding anything that has to be converted into cash first, such as credit and money market funds. It is therefore a pure measure of money in the economy available to be used for transactions, more pure than official MZM, M0 or any other central bank "M" measures.

In economic theory this is important, because money is simply a commodity that happens to be used exclusively as a medium of exchange. And as a commodity, its value ultimately depends on its supply and the demand for it. By using TMS we keep the relationship between actual money and prices pure from other arguable factors.

The growth in US dollar TMS over the long-term is shown in the chart below. From this chart it can be seen that following a pause in its long-term trend at the time of the 2007-08 financial crisis, TMS has been growing strongly ever since.

The bulk of the growth has been in check deposits (customer current accounts) and savings deposits (instant access accounts) at the banks. Some commentators point out that this reflects cash not being spent and cash representing risk-averse hoarding. But this opinion ignores the fact that the cash is being used, because the banks have lent it to the government, and the government is distributing it into the economy.

So this cash does amount to extra supply of money, which will be gradually reflected in a fall in its purchasing power. Given that the acceleration in TMS dates back to 2009, we are already seeing this, with, which applies an unbiased statistical rigour to key statistics, estimating actual inflation to be running considerably higher than official estimates.

The other aspects (other than of money that is) of the pricing effects of supply-and-demand is the variability of demand for individual goods. And here, the picture – as always – is uneven. Welfare, defence and healthcare spending by government maintain demand for energy, food, defence and healthcare-related items. Banking and related financial services are also doing well, despite balance sheet problems, as they are closest to the source of the new money (in this case, the Federal Reserve). Much of the rest, as business surveys and unemployment statistics confirm, is patchy at best. So there are identifiable winners and losers in pricing, and the expansion of TMS is feeding through to those goods, demand for which is supported by government spending.

With this monetary background, it is likely that the big headache for 2012 will be persistent and rising price inflation for the US and other economies tied to the dollar. So we can expect stagflation to be in everyone’s vocabulary in the New Year, which will inevitably lead to pressure for interest rates to rise sooner rather than later.

Don Coxe Conference Call

Don Coxe
Conference Call

Time: 10:00 AM (ET)
Date: Friday October 21, 2011

click here to listen

Debt: What You Simply MUST Understand

I linked a Youtube presentation a couple of days ago by a professor who explained the exponent thing. It was dry and I bet nobody went and watched the whole series; it was basically an hour long.

Yet if you don’t understand this, you understand nothing when it comes to economics and the lies told by both the left and right. You are not stupid, however: you are ignorant.

That ignorance is intentional. Our “educational system”, our bankers and our politicians intentionally fail to explain the fundamental concept explained in this Ticker for one and only one reason: Once you understand it – truly understand it – you can never fall victim to a ponzi scheme. Not only that, you will never allow any society you are a member of to fall victim to one either, as you will recognize the inherent danger and demand that they be stopped and the people responsible either locked up or burned at the stake (after a proper trial, of course.)

Ignorance falls to education. It is why we learn, hopefully, so we become less-ignorant. As such I was prodded in email this morning by someone who said “you get this well for a non-scientist” and I had to reply in riposte: Ah, but I am a scientist you see….

Anyway, here we go…. pull yourself a nice Espresso and sit down for a short story that will explain why we’re utterly screwed if we don’t act and why acting to stop the progression of what is going in our economy right now is not an option – it is an imperative.

There happens to be a particular species of pond lily that is extremely prolific. In fact it grows so fast that it doubles in size through both growth and reproduction in just one day.

We will start with a pond of a surface area of 4096 square feet, or about 64 feet square. We will place within that pond one lily with an area of of one square foot; that is, a lily that is a square of 12 x 12″.

This pond contains fish, which would like to live in symbiosis with the algae and other growing plant material within the pond. In order to do some part of the pond’s surface must be exposed to the air so that oxygen and carbon dioxide can be exchanged, and some part of the pond’s surface must be open to the sun, or the algae that make up a good part of the food the fish eat (we will assume they do not eat the lilies directly) can survive. The lilies will conveniently consume the urea (nitrogen) that the fish excrete, preventing the pond water from becoming poisonous. So long as this symbiosis is maintained all is fine. But if this symbiotic relationship fails all the fish will die.

We are the fish, incidentally, and the lilies are debt.

Now here’s the question: Will the fish inevitably die and if so how long, in days, will pass before they perish?

That’s easy.

On the first day there is 1 square foot of pond that is covered.
On the second, 2
On the third, 4.
On the fourth, 8.
On the fifth, 16.
On the sixth, 32.

Note that on the 6th day just 0.8% of the pond is covered with lilies. You would not detect any problem on the sixth day, I suspect. More than 99% of the pond is open to the sky!

Now here’s the nasty truth: If you’re a fish you’re halfway to being dead!

Wide awake yet? I hope so; let’s continue.

On the seventh day 64 square feet are covered.
On the eighth, 128.
On the ninth, 256.
On the tenth, 512.

The pond is now 12.5% covered. More than 80% of the surface area is open to the sky. When you hear someone say “we have 80% of our resource left; we can’t be in trouble”, consider exactly where you are. Why? You’ll see in a moment….

On the eleventh day, 1024 square feet are covered.
On the twelfth, 2048.
On the thirteenth day there is no surface open to the sky and every fish in the pond dies.

When did you figure out you’re in trouble? Was it on the twelfth day? Well if so you had literally less than 24 hours to commit mass lilicide or you’re all dead! You literally can’t spend one day debating with your fellow fish even though you still have half the surface area open to the sky on that 11th day.

This is the nature of exponents folks.

When it comes to economics we need to consider what the doubling time is to figure out how soon our situation will get intolerably bad. Math provides us the answer; we can use the natural logarithm to determine time, but most people’s eyes fuzz at the beginning of the discussion of “e” and thus I won’t explain it that way (those of you who were awake in high school and college math, however, should be perking up right about now.)

Years ago, long before calculators, bankers reduced the use of logarithms to a “rule” called “The Rule of 72.” Simply you can take the growth rate of anything and divide that into 72 to find the approximate doubling time. So if we have debt growing at 7% a year in the economy we can divide it into 72 and find that it takes about 10 years for the debt in the system to double. This is an approximation, but it’s close enough to do in your head (72 is a convenient number for mental division as it is divisible by both 12 and 6 and 6 of course factors to 2 and 3, so most common multiples can be quickly figured in your head without pencil and paper.)

Now go back and read the lily example again, and remember that when you’re one period away from being extinct half of the available resource, in this case the money you earn to pay interest and/or principal on your debt, remains available to you!

Yet even with a fifty percent current economic (in this case) surplus you’re just one period away from certain destruction!

Do you see the problem more-clearly now?

All the so-called “economists” (cough-Krugman-cough!) and the various commentators both in the mainstream media and blogosphere either do not understand this or simply refuse to accept and discuss it.

But it doesn’t matter whether you choose to accept that you’re inevitably doomed in three days when the pond is 12.5% covered with lilies. You see blue sky and breathe easily, yet you are literally three days away from certain extinction and your refusal to accept mathematics cannot change what is about to happen to you! You either start killing lillies FAST or you’re dead!

These are facts folks. They are governed by natural laws that are fixed and cannot be avoided. I cannot change them, you cannot change them, Barack Obama cannot change them, the Republicans cannot change them. Nobody can change them.

These facts are why this chart happened:

and why, if we don’t cut that crap out right now, we are screwed with absolute certainty.

The willful refusal of politicians and financial types, the latter of whom absolutely know this and the former who have no excuse for not understanding it, to discuss this point clearly when it comes to all matters in the economy is why I wrote Leverage.

We cannot avoid the mathematical facts or their effects. Unlike the laws of man that can be evaded through bribery and trickery mathematics cannot be.

You either accept these facts or you suffer the consequences.

One final point and I will leave you to think this over: The World Economic Forum (WEF) said recently that for us to achieve a 3% GDP growth for the next decade we would have to double the total systemic debt. That is a roughly 7% annual growth rate in debt, or a “spread” of about 4% over “growth”. In order to do this, the amount of earnings from everyone in the economy that will have to be diverted to interest payments will also have to approximately double. Yet it is the inability to pay that interest (and principal where it is paid down) that is factually known as the trigger for the 2007/08 financial collapse and this growth in debt, at their assumed 3% growth rate in GDP, will produce only a 34% increase in output with which you must pay for that doubling!

We must accept what we have done.

The fact is that if the pond will be covered entirely with lilies on October 31st it is now October 30th.

We have two choices: We either start killing lilies and find a way to keep them from reproducing, even though it appears we have half of our pond still uncovered and all is fine, or we will all perish with certainty.

The Simple Magic of Moving Averages, That Can Alert You to Future Price Expansions

To a first-time observer, watching a technical analyst spot a major trend change in a financial market before it occurs can seem as mystical as pulling a rabbit out of hat. But once you learn the tools of the trade, you know there are no tricks up the technical analyst's sleeve. What you see, is exactly what you get.

On this, EWI's Senior Commodities Analyst Jeffrey Kennedy speaks to one technical indicator in particular: moving averages. In Jeffrey's own words:

"There is no magic in moving averages, the magic comes in finding something that you are comfortable with and applying it. I like it because it consistently works and you can customize it to your individual trading style and time frame."

Jeffrey's appreciation of the measure doesn't end there. In his highly acclaimed Commodity Trader's Classroom eBook, Jeffery expands on the many variations of MA analysis used to identify high probability trade set-ups. Among his favorites: the Moving Average Compression. The excerpt below is a direct quote from Jeffrey's eBook:

"Moving Average Compression works so well in identifying trade set-ups because it represents periods of market contraction. As we know, because of the Wave Principle, after markets expand, they contract (when a five-wave move is complete, prices retrace a portion of this move in three waves.) MAC alerts you to those periods of price contraction. And since this state of price activity can't be sustained, MAC is also the precursor to price expansion.

The Live Cattle chart above demonstrates three different simple moving averages based on Fibonacci numbers 13, 21 and 34. The point at which all of the moving averages become one and form a straight line is what Jeffrey refers to as Moving Average Compression. As you can see, the compression of the moving averages tells us that the market has contracted, and prompts the expansion shown in April and May 2004."

US Weekly Economic Calendar

DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
Oct 259:00 AMCase-Shiller 20-city IndexAug--4.0%-3.5%-4.11%-
Oct 2510:00 AMConsumer ConfidenceOct-
Oct 2510:00 AMFHFA Housing Price IndexAug-NANA0.8%-
Oct 267:00 AMMBA Mortgage Index10/22-NANA-14.9%-
Oct 268:30 AMDurable OrdersSep--1.5%-1.0%-0.1%-
Oct 268:30 AMDurable Orders -ex TransportationSep--0.1%0.4%0.0%-0.1%
Oct 2610:00 AMNew Home SalesSep-290K300K295K-
Oct 2610:30 AMCrude Inventories10/22-NANA-4.729M-
Oct 278:30 AMInitial Claims10/22-400K403K403K-
Oct 278:30 AMContinuing Claims10/15-3700K3700K3719K-
Oct 278:30 AMGDP-Adv.Q3-2.0%2.2%1.3%-
Oct 278:30 AMGDP DeflatorQ3-2.2%2.5%2.5%-
Oct 2710:00 AMPending Home SalesAug-0.0%-1.0%-1.2%-
Oct 288:30 AMPersonal IncomeSep-0.4%0.3%-0.1%-
Oct 288:30 AMPersonal SpendingSep-0.8%0.6%0.2%-
Oct 288:30 AMPCE Prices - CoreSep-0.1%0.1%0.1%-
Oct 288:30 AMEmployment Cost IndexQ3-0.6%0.6%0.7%-
Oct 289:55 AMMichigan Sentiment - FinalOct-57.057.557.5-