from King World News:
The ECB has the availability of funds for some activities in the euro bond market. They will use it, they didn’t get it to look at. Gold was up into the $1,760s, $1,755 (to) $1,760 has been a technical area to be challenged. It was a fortuitous statement by Draghi that, ‘We might not use it,’ after which gold (traded) $1,709. It’s something to watch.”
Jim Sinclair continues: Read More @ KingWorldNews.com
I think that buying silver today is like buying gold for $554 an ounce. Let me explain: As I am writing, silver is currently trading at about 65.2% (32.6/50) of its 1980 high. If gold was trading at 65.2% of its 1980 high, it would be trading at $554 (0.652*850).
Now, I really like gold, even at today’s price of $1 738, but why should I pay $1 738, if I can get it for $554 by buying silver and then exchanging it for gold when the gold/silver ratio is at an extreme (in favour of silver). The reason for this logic comes from the fundamental relationship between gold and silver as explained in my previous article.
For my argument to be valid, silver has to outperform gold over my investment period, and at least equal gold’s performance relative to its 1980 high. That is, for example, if gold reaches five multiples of its 1980 high ($4250), then silver should do the same ($250), in this example, giving us a gold/silver ratio of 17.
Now, if silver outperforms gold, then that means that the gold/silver ratio should decline over my investment term. In my previous article called: Why Silver for a Monetary Collapse, I analysed the gold/silver ratio from a very long perspective (200 years). Here I would like to take a slightly more short-term view (40 years).
Below, is a long +/- 40 year chart of the gold/silver ratio:
On the chart, I have identified two fractals, which I have both marked with points 1 to 3. The two patterns are visually very similar. I have indicated two option of where we could be currently (on the current pattern), compared to the 70s pattern. The ratio appears to be at a major crossroads, ready to make a big move, up or down. This could means that a massive move in the gold and silver price is due shortly.
Based on the patterns, if it moves up, it would likely signal the end of the precious metals bull market, similar to January 1980. A move down would be an acceleration of the current bull market in gold and silver, similar to August/September 1979.
The question is therefore: Do you think the bull market in precious metals is over? Before you answer that, first consider the following:
On the above graphic, the top chart is the current gold bull market from 1999 to date, compared to the bull market of the 60s and 70s, the bottom chart. The previous bull market in gold was about 14 years long, from a peak in the Dow/gold ratio to the bottom in Dow/gold ratio. The current bull market is 12 year old, from the peak in the Dow/gold ratio to date.
The previous bull market ended with a parabolic move in gold (on the above scale). The current bull market has not made a parabolic move (on the above scale); in fact, it has been rising steadily over the last 12 years.
To me, these two charts suggest that we are more likely to have a parabolic rise in the gold price, than being at the end of this bull market. Therefore, it also suggests that price action for gold and silver, and the gold/silver ratio is likely to be more like 1978/1979 than like January 1980.
So, back to my argument of buying silver, in order to get gold at $554: I certainly think that silver will outperform gold over the remaining part of this bull market in precious metals, as well as, at least equal gold’s performance relative to its 1980 high. I can certainly see how gold could be at $4250 with silver being at $250, or at higher prices, with the gold/silver ratio being at 17 or less.
There are very few sure things in markets and investing. So I don't say this lightly: the price of a barrel of crude oil will average over $125 this decade. Even if I'm wrong, you will want to explore my logic. Because even if I'm too bullish by $25 per barrel, there will still be lots of money made by smart traders exploiting the swings of the global energy megatrend in the 21st century.
My petroleum bullishness is based on three driving "mega forces" affecting global energy supply and demand. And my focus on these secular trends helps me pick winning stocks and ETFs in a half-dozen energy industries. Let's talk about the mega forces first, and then I'll tell you how to join me trading them.
Mega Force #1: Emerging Markets
Between the BRIC countries (Brazil, Russia, India and China) and dozens of other developing economies in Africa, Asia, South America and the Middle East; one could estimate that there are at least two billion people who aspire to the lifestyles of the West. These emerging middle class populations want the same jobs, housing, food, clothes and transportation we have.
As their governments and entrepreneurs oblige, this rapid development means lots of new urban infrastructure, including the roads, bridges, schools, hospitals and energy grids of any modern city. All of this means an incredible growth rate for energy demand. Plus, nearly every new automobile purchase in an emerging economy adds incrementally to oil consumption.
But don't take my amateur economist view on emerging economic development and the energy demands that go along. Here are some forecasts from the International Energy Agency (IEA) in its November 2011 "World Energy Outlook" report...
The last point is especially worth noting if you are an investor in "alternative" energy like solar and wind power. While global energy demand rises by over 30% in the next few decades, fossil fuels only drop off 6% in the total consumption pie.
Mega Force #2: Peak Oil
You have no doubt heard of the theory of "peak oil". In case you've forgotten its premise, this is the idea that we have reached, or are soon about to cross, the threshold where the majority of known global oil reserves in the ground are at their maximum and will only decline going forward.
There is a heated debate going on right now as we speak between the "peak oilers" and those who say this is mere big oil -- and small oil for that matter – commercial and political propaganda. It's clear how lots of petroleum companies would benefit from the idea that there will be less supply going forward.
You already know I'm not an economist. You will also not be surprised to learn that I am not a geophysicist either. My expertise is clearly limited in the realm of "peak oil" theories.
But just like I can make broad-stroke conclusions about the European debt crisis that guide my trades (without knowing all the micro-economic details), I can also do some classical inductive reasoning about global oil supplies. Since a new oil field bigger than Saudi Arabia's hasn't been discovered in decades of exploration, it's not a stretch to assume we may be very close to the "peak".
The price of oil and the awareness of a peak in natural supplies have driven the recent explosion in shale exploration and production in the US. Natural gas E&P companies are using "fracking" technology to unlock oil and gas from their vast fields in the Eagle Ford shale in Texas and the Bakken shale in North Dakota. The environmental concerns about shale only reinforce the idea that we are much closer to "peak" petroleum than to finding our own Saudi Arabia in the US.
Mega Force #3: Geopolitical Eruptions
We all know that the problems in the Middle East are not going away any time soon. No matter how many peace negotiations, wars or regime changes, the ages-old conflict between religions and cultures will persist for decades more.
The recent bid keeping crude oil near $100, even with so much economic uncertainty over Europe, is likely due to tensions out of Iran. Why is Iran so important? Because it forms the east coast of the Strait of Hormuz, the world's most important oil "chokepoint" due to its daily flow of over 15 million barrels per day.
Nearly 20% of global consumption must pass from the Persian Gulf through the Strait of Hormuz to the Gulf of Oman and on to the Arabian Sea. A war involving Iran and disrupting that seaborne cargo could spike crude to over $125 very quickly.
I make no political or value judgments about the problems or solutions in these parts of the world. I am not smart enough to do so because these difficulties are as giant and complex as they are ancient.
But I think I am a good enough student of the markets to accept what I cannot control and simply to invest accordingly when faced with 3 unstoppable megatrends that will continue to interact and make energy "the trade of the decade".
Gold has been quietly consolidating for several months following a surge to all-time highs. While the initial pullback was violent and well publicized, gold has been much quieter in recent months. The, metal as represented by the SPDR Gold Trust (NYSE:GLD) ETF, is currently forming a large triangle, as its trading range continues to narrow considerably. GLD swung from $185 per share to under $155 in just a few weeks in September, whereas it has been confined to a $5 range the past few days as the triangle comes to a climax. GLD has also been oscillating between a key horizontal price level near $165. This would be a key area to watch in the next few days, as a drop under this level could imply a retest of the September lows. However, any strength from this area could imply that the correction in GLD may be coming to an end.
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One group to watch in the case of strength in gold is, of course, the gold miners. Several miners have been perking up recently and may get a boost from strength in the metal. DRDGOLD Limited (Nasdaq:DROOY), for instance, surged in October and has since been trading in a bull flag pattern. Volume has been tapering off throughout the consolidation, which is a healthy sign. DROOY would be worth watching on any strength that carried it over the trendline that is marking the outer confines of the bull flag.
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Royal Gold, Inc. (Nasdaq:RGLD) is another gold miner that may be close to a breakout. While it is not as strong in the short term as DROOY, RGLD is sitting just under all-time highs after a several-month-long consolidation. This stock is certainly volatile, so traders should take that into account, but any strength that carries it above $82.50 could signal an important breakout. (For more, see How Gold Performed In 2011.)
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Yamana Gold, Inc. (NYSE:AUY) is another gold miner that is near the top of a recent consolidation. It has been trading between $17 and $13 since August, as it builds a base. AUY may need some more time before it can sustain a breakout, but the $17 level is certainly worth monitoring. Any close above this level could signal the next trend move higher.
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The Bottom Line
Gold has really been out of the limelight for a few months after a much-publicized rally. Talk of a bubble has subsided and gold is really not that far off its all-time highs. While it may not head directly back to test its recent highs, there is a chance that the metal can gain some momentum. Gold mining stocks have typically followed the metal higher and are showing signs of strength, so it is very possible that this group catches a bid soon. If this is the case, then traders certainly don’t want to be late to the party.
The Horizon BetaPro NYMEX Natural Gas Bull+ ETF (TSX: T.HNU, Stock Forum) has been one of, if not THE most profitable trades in natural gas for the last four years, yet my sense is retail investors have missed it completely.
Why? The reason is simple—you have to short it. Most retail investors don't short, and fewer think about shorting an "Up" ETF. I admit, it's not a trade for novices. But it's available to everybody.
I'm going to outline just how lucrative this trade has been over the last four years, and how you can capitalize on this downtrend in natural gas. I'll explain the two "built-in" factors to this ETF that add to the profits of a short position—and lose you money if you're long. I'll even tell you when, historically, the best time of the year is to initiate this trade—and it's coming up VERY SOON.
“Shorting” means selling first and buying back later, as opposed to the more common convention of buying first and then selling. The short seller profits by selling at a higher price and buying later at a lower price. The difference in the price between where he sold and where he bought is the realized profit of the trade. This is how money is made on downtrends like we are witnessing in HNU.
(If you just learned what "shorting" is by reading this, do not attempt this trade;-))
HNU started its steep downtrend in July, 2008 just a few months after its January inception. The ETF is down 99.86% from that high, far underperforming the underlying commodity it is supposed represent. Now, this is very bad news if you're long.
But if you're short, this underperformance is a key; if you're short it's kind of like being The House in Vegas.
The ETF actually represents one of the most reliable trades in the sector—and it is not too late to get in. And as I mentioned, one of the ideal annual entry points over the last three years is coming up very soon! If retail investors want to ride a trend this is it. The trend in natural gas is currently down, and even if the trend reverses, there are two built-in features within the fund that are likely to stifle long-term upward price appreciation: “contango” and re-balancing. I will explain both of these.
The Structure of Underperformance
HNU is a leverage ETF which attempts to “seek daily investment results equal to 200% the daily performance of the NYMEX Natural Gas futures contract for the next delivery month” according to Horizons website.
This is accomplished through purchasing natural gas futures contracts, and then at specified dates rolling the contracts which are nearing expiry into new futures contracts. According to Horizons website “This mechanism also allows the investor to maintain an exposure to commodities over time.”
Yet those who have bought, or gone long the ETF since the start of 2011 have lost 64% of their capital, while the underlying commodity has lost 22.77%. The ETF is leveraged. Therefore the theoretical loss HNU should have experienced so far this year is negative 45.54%. Investors have lost about 17% more than anticipated this year alone (the fund charges a 1.15% management fee). Since inception the picture is grimmer—but only if you're long It's actually a beautiful thing if you're short.
Adjusted for four reverse stock splits, the stock hit a high of $7,710.40 in 2008, and currently trades at $10.48 as of Friday, December 2. It should be noted that the actual price paid at the high in 2008 was not $7,710.4 (it was $48.19). This price reflects the equivalent value in retrospect based on the reverse stock splits that have occurred.
If an investor picked the top and shorted 1000 shares at $48.19 ($48,190 invested) in 2008 the trade is showing a profit of $48,124.68!
Whereas if an investor bought 1000 shares at $48.19 in 2008, the first split would have left him 250 shares (1 for 4), the second split with 50 shares (1 for 5), the third split with 25shares (1 for 2) and the fourth split with 6.25 shares (1 for 4). The original investment of $48,190 is therefore worth $65.5(6.25 times the current $10.48 share price) reflecting a 99.86% loss in capital (that is why the shorts have nearly doubled their money). The prices on the chart are adjusted to reflect the reverse stock splits and the appropriate percentage decline of the ETF.
Figure 1. TSX: HNU - January 16, 2008 to December 2, 2011 Logarithmic Weekly Chart with Reverse Stock Splits
Source: FreeStockCharts and split information from Yahoo Finance.
Horizons does point out that “These ETFs do not seek to meet their investment objectives over any period other than daily.” This is clearly stated multiple times in the ETF prospectus, indicating the ETF does not track the commodity over the long-term, rather only on a daily basis.
CONTANGO
A major factor in the decline witnessed in HNU over the long-term—and something that stacks the deck in favour of being short--is due to a phenomenon known as “contango.” Futures contracts, which HNU purchases, are an agreement to buy an asset at a fixed price at a forward or future date. When the futures price is higher than the spot price, it is known as "contango". The natural gas market is usually in contango; futures prices are higher due to storage costs and uncertainty; so a premium is paid for that uncertainty.
But as that more expensive futures contract approaches its expiry date—the date the gas must be delivered--it will converge with the spot price—which by definition means it declines in price. Since HNU does not take physical delivery of the commodity it trades, it must continually “roll”, or sell futures contracts which are expiring and buy longer-term contracts—usually the next month.
By continually paying a higher price than the spot price each time the contract is rolled, there is an inevitable long-term systematic erosion of value within the fund, and a continual slide in the value of the ETF.
This is GREAT—if you're short. The House Rules are in your favour. But it's a profit killer if you're "long" though.
As for December 5, January 2012 Natural Gas is trading at $3.465. February, 2012 Natural Gas is trading $3.492. Not only does the fund lose money because of the downtrend (sells expiring contracts at a lower price) but it then pays a 2.7 cent (this will fluctuate) premium for the next futures contracts. Compounded and leveraged each month, the losses become staggering, as shown by the ETFs decline. Keep in mind the fund is leveraged-essentially doubling the premium and magnifying losses. . . Month after month, all else being equal, this occurs. The contracts HNU is forced to sell will almost always be lower than the price which is paid for the new contracts they must purchase. This will offset any long-term gains the fund could theoretically make, even if natural gas rises over the long-term. The fund loses if natural gas drops, stays the same or even rises slightly. These regular losses and inefficiencies continually drive down the value of the ETF. Again, if you're short, this is adding profits to your wallet.
The second big structural factor in HNU that is in favour of the "shorts" is the issue of leverage and compounding losses. HNU attempts to reflect 200% of the movement of natural gas on a daily basis. Assume you invest $100 in the ETF, on the first day natural gas rises 5%. This means your investment will be worth $110 (you make 10% because of leverage). But assume the following day natural gas falls by 5%. Your investment is worth $99 (you lose$11 or 10% of $110). Many investors think they should just be back at $100, but compounding and leverage create a loss.
If you're short, you just made $1 in two volatile days. If you're long, you just lost $1.
How to Make Money
Investors don’t usually think about short-selling but in this case, shorting the ETF has historically been the way to make money over the long term. Short selling is taking advantage of both sides of the market—up and down—movements which occur regardless of short-seller involvement.
“Market participants are permitted to sell Units of an ETF short and at any price...” according to the prospectus for the ETF. Short selling is a legitimate way to trade the ETF and is noted in the fund’s legal documents.
Shorting ETFs is often more efficient than shorting an individual stock or commodity:
NOTE: The underlying commodity may be prone to a short-squeeze where buyers push up the price and people with short positions are forced to cover their position (pushing the price even higher) or receive a margin call on their short position. Investors should be aware this can cause sudden, sharp short-term rises in the ETF.
In an ETF which has proven very inefficient for buyers over the long-term going short is the logical strategy. (The industry jargon for buying is called "going long".) Couple this with an overall downtrend in natural gas—even if natural gas begins an uptrend the rise in the ETF is likely to be muted—the trade sets up very well for investors who are willing to incorporate short selling as one of their tools.
The fund is leveraged which means on a daily basis there can be big percentage moves. Short-selling blindly is not wise.
