Friday, December 25, 2009

Christmas Day: Supply and Demand

It's a holiday so you get easy reading:

Worldwide mining supply is currently falling, worldwide demand is skyrocketing.

Hopefully it is easy to understand what this will do to prices.

Merry Christmas to you and your family.

Thursday, December 24, 2009

Welcome To The Seven Days Of Christmas

The intro can be found here, and each day can be found on the archive list to the left as we lead up to Christmas day.

Day 2: Central Banks Become Net Buyers

For decades Central Banks have been selling their gold into the open market. About six months ago they became net buyers.

The biggest announcement thus far was India's purchase of the IMF's gold reserves, which rocked the gold market.

Prepare to hear about larger and larger purchases coming from Asia as they continues to diversify out of their dollar holdings. Gold represents about 3% of China's total reserves as of their last report.

That percentage will change significantly over the next few years. They must move slowly in order to keep gold prices from rising too quickly, and keep the dollar from falling too fast.

Health Care

No need for me to drone on and on about the devastation the health care bill will ultimately bring. This article sums it up perfectly:

Dropping The Bomb On Health Care

Wednesday, December 23, 2009

New Home Sales Numbers

The monthly new home sales numbers were released a few moments ago and they came in "shockingly" low.

Market observers will shake this off as a one-off month before we resume back to home building happiness. I view it as a snapshot of what is to come.

I am involved in negotiations with some of the larger banks in the country with some of their smaller land deals. The real estate firm I work with uses creative strategies to try and help deal with some of their toxic positions.

In most of the land deals I see cross my computer screen today, the lots to build on need to be priced at $20,000 or below in order to make the deals work. That means they are essentially giving the land away in order to remove it from their books.

In some of these deals it is still not possible for builders to make a profit, with the land costs at zero!

The real estate market will reach a point in the future where the cost to build a new home will be above the price of a similar home in foreclosure or short sale right across the street. Those homes will provide the new market price.

It is at this point home building operations will shut down. These stocks do not represent the shorting opportunity they did back in 2006, but they are certainly not buying opportunities today. Many will shut their doors completely as we move forward.

Tuesday, December 22, 2009

Day 3: Losing Confidence In Paper

We live in a world today where all currencies around the world are backed by nothing. This is the first time in history that this experiment has taken place.

Currencies today are not valued against a tangible item, they are valued against each other. So while some weeks one currency may rise in value and other weeks fall in value, against their counterparts all currencies are losing value simultaneously.

Except One.

We received word close to two months ago that Dubai was in a debt crisis and most likely would have to default on a large portion of their sovereign debt without a bail out from neighbor Abu Dhabi. (They got the bail out)

Since then investors have essentially "woken up" to the possibility that it's not only states and corporations that can fail, but countries as well.

The Dubai news has recently calmed, and all eyes have turned toward the country of Greece which is suffering a fiscal meltdown. Greece is a fascinating story to watch because it is interlinked within the multi-country currency: The Euro.

Two of the major rating institutions have recently downgraded the government debt of Greece to BBB status. If Moody's, the last of the three rating agencies, were to downgrade the debt to BBB status it would cause a massive tremor in the world financial markets.

A BBB rating from all three institutions would then prohibit the European Union from stepping in and bailing out their sister country.

This would equal swift default from a large portion of their debt in the coming year. The implications of this in the currency markets would be staggering.

A similar scenario happened last fall when a company named AIG was downgraded by the three ratings agencies. You probably have heard that story.

Greece is not alone with debt problems. Many other small countries such as Lativia may soon follow if the first domino were to follow.

No country in the world, however, has fiscal problems that compare to the United States. We are so far beyond insolvency that it is almost laughable.

So why are we not hearing about a US default? Because we have a printing press and Greece does not. As I have discussed in great detail, Bernanke was a major buyer of United States government debt during 2009 and will continue to be as we move forward.

This global crisis has opened many investor's eyes to the problems associated with these paper currencies.

Only a few weeks ago, Dubai debt traded at 110 meaning investors priced it as if there was less than 0% chance that it would fail. Less than 2 weeks later the debt traded at 65 in the open market.

That is how quickly things can change. That is how quickly things will change as we move forward.

Gold has no counter party risk, meaning there is no one you rely on to pay you when its time to get your money back. As simple as this sounds, it will soon become its greatest attribute.

Housing Recovery

Monday, December 21, 2009

Day 4: The Public Has Not Entered

If you ask the average American how they have their retirement invested they will probably tell you something like:

30% stocks
40% bonds
30% real estate (their home)

If you asked them what percentage they had in gold they would probably walk away from you and shake their head.

Most Americans do not even know how to buy gold, nevermind actually own it.

It is considered "strange" to own such a thing.

Most mutual funds, pension funds, or hedge funds have 0% invested in gold and only a few have invested a few % points of their total portfolio.

When we crossed $1,000 we entered the third phase of the bull market: optimism. This is the longest phase of the four and it is the most volatile.

At the start of this phase you see the gods of the financial world enter with full force. Names like John Paulson, David Einhorn, George Soros, Julian Robertson, and Jim Rogers have been piling into the market over the last 12 months.

This is the group that was considered "strange" a few years ago when they were buying investments that shorted something called "subprime" debt. Paulson made $15 billion in 2007 shorting subprime, which was 15 times the legendary profit George Soros made shorting the British Pound back in 1991. Paulson personally made $4 billion in 2007, shattering all annual records. He now has 46% of his entire hedge fund in gold.

All investments move through periods of being under valued to being over valued. Gold went through a similar process back in the late 1960's -1980 and it has just started again. You can see where inflation adjusted gold currently stands from its previous peak back in 1980 by looking at the graph below.

It will follow the same pattern during this bull market again. The public will come rushing in at the end as they always do and push the prices to unimaginable levels.

John Paulson and the group above will then be ready to sell the gold they are buying today. At that point it will be time to move back into stocks, bonds, and real estate.

Sunday, December 20, 2009

Day 5: First Stimulus Failure Leads To Second

Back in March, Obama told us we needed to provide a $700 billion stimulus program that would bring us out of recession. He promised the program would create 3 million new jobs. A few weeks after the bill was passed, they passed another $400 billion supplemental stimulus bill.

All total was at $1.1 trillion for job creation.

As I said at the time, the failure of this bill would bring on another stimulus bill, then another.

We now have the ability to see the effects of the first bills. We have lost 3 million jobs, and our economy is mired in deep recession.

Last week the government announced a new stimulus bill that will begin at $145 billion. This bill has been tagged the bill for “main street,” since the money for the last bill mostly entered the hands of wall street.

Here’s my prediction for the bill: It will be an economic disaster.

Why do I think this? Do I just guess on how well they will use the money? No, it’s Econ 101. Austrian Economics that is. Texas Tea.

When the government creates a stimulus bill it means they take money from a productive sector of the economy through taxes. They then use the money to try and “stimulate” because they think they can utilize the money better than the free market. They take from one hand and give to the other.

Here is the secret: They NEVER will be able to run the economy as productively and efficient as the free market. It has NEVER happened in history and it NEVER will.

The most productive thing a government can do is shrink in size and become less damaging to the economy. This tactic has ALWAYS worked throughout history. It is also the exact OPPOSITE of the playbook the Bush and Obama Administrations have run.

With the failure of this stimulus bill it will bring another stimulus bill. The failure of that bill will need another stimulus bill.

We thus run up higher and higher deficits with each bill and weaker our currency further.

This is very bullish for the price of gold. The gold bull market is still young.

Weekend Radio, Reading, and Videos

Another good weekend for radio broadcasts while you enjoy the basketball and football.

Jim Puplava provided two great discussions about the year in review and where we go from here. The first can be heard here. The second continues the review and features a fantastic interview with Gerald Celente who reveals his trends for 2010 which can be heard here.

Eric King had an excellent interview with David Tice of the Prudent Bear Fund which can be heard here.

We also had the Friday night bank failure update, and the stream of news out of China from their Central Banker, the dumping of dollars, and the problem with treasury purchases.

The two big book releases for the holidays were "The Greatest Trade Ever," about the legendary hedge fund investor who bet against subprime, and "Aftershock," which focuses on where we go from here with the global economy.

I just finished reading both and they are fantastic.

Weekend Videos: