Saturday, December 31, 2011

Bearish on Gold and Silver? What Fools These Mortals Be!

Bearish on Gold and Silver?
What Fools These Mortals Be!

Mark J. Lundeen

30 December 2011

I’m having difficulty dealing with current market sentiment for gold and silver.   The idiot-box keeps pounding into my head that gold and silver are sensitive to downturns in the global economy, and precious metals are not a safe harbor from the storm during good times or bad.  What a frightening thought that is, when we consider that from 1980-2000, as the economy roared upwards, and the latest price quote for Microsoft or Intel was the price for peace of mind, gold and silver saw bear-market declines of 69% and 91%.  These idiot-box “experts” must be expecting even worse declines in gold and silver as the global bond and stock markets melt-down sometime in the next few years.

Maybe the real problem with gold and silver isn’t that the economy goes up or down, but as the Federal Reserve approaches its centennial, there still is an economy?  The problem with that theory is that it wasn’t until 2001, after the NASDAQ bubble crashed, and after the “Masters-of-the-Universe” began making $250K sub-prime mortgages to the chronically unemployed, that gold and silver finally responded positively to Washington’s bubble economics.  We should also note that it wasn’t until 2000 when gold and silver began their bull markets, as Congress was inflating the mortgage bubble (2001-07), though the precious metals continued to appreciate long after the mortgage bubble crashed (2008-09). 

That would suggest that gold and silver have appreciated for the past eleven years


the “policy makers” have grossly overburdened the shrinking global economy with backbreaking levels of unserviceable debt, and insanely inflated the global-money supply to such extremes that global currencies can no longer be said to be backed by faith in sovereign credit, but by the economic ignorance of the masses.  

Looking at the world in this light, it makes perfect sense to believe that gold and silver * MUST * continue appreciating as the US Federal Reserve and European Central Bank continue bailing out the select but powerful few, at the expense of the many.  But since this is undoubtedly true, why on earth is my idiot-box telling me to sell gold and silver, and buy financial stocks and bonds?  Yes indeed: why?

Well one thing is for sure, the economy is seeing difficult times, as recorded in Barron’s Pulse of the Economy.  Even government statistics have to deal with the fact that the economy has not returned to its pre 2007-09 Credit Crisis levels.  In fact, just looking at the chart below informs us that economic activity has not even returned to the levels of the 1990s high-tech bubble.

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\Cap Ulitzation.gif

Ah, but I hear that housing is on the rebound!  In fact, housing starts are up 41% over the past three years. That sounds mighty impressive coming from the talking heads in the idiot-box, until one examines the past forty two years of data in the chart below.  The fact is, the US housing industry was hamstrung, and will continue to be crippled for the next ten years, or more, because Congress with its Clinton era “affordable housing legislation” created unlimited inflationary funding in the mortgage market.  If the United States didn’t have a Federal election every other year, I suspect housing prices would have already declined by more than 50%.  It’s no secret that the banking system is holding years of supply off the market for fear of what this inventory would do to housing prices, and in the process, preventing the American people from having affordable housing.

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\Hous Perm & Starts.gif

The media and the government are not the only entities to supply defective economic information to a gullible public.  On December 21, 2011 the National Association of Realtors announced (in an article deceptively titled “Existing-Home Sales Continue to Climb in November”) that they were revising their figures to show that 3.54 million existing home sales since 2007 never took place!  That’s right, folks.  You thought the real estate market was bad already, how about now with the “benchmark revisions” the NAR was so kind to make promptly, years after the fact so as not to panic the public with the truth.

“The National Association of Realtors (NAR) corrected its estimates of existing home sales today (December 21st), and 3.54 million previously reported home sales vanished, in revision, since January 2007.  Put in perspective, the amount of sales wiped out was the total amount of seasonally-adjusted existing home sales that previously had been reported in 2011, through October.  Post-2006, 14.3% of existing home sales were eliminated, with sales in the Northeast taking a 30.9% hit, followed by a 14.2% reduction in the Midwest, 12.3% loss in the South and 5.3% loss in the West.

In revealing recognized reporting problems, the NAR has addressed issues not commonly taken on by trade groups that report industry data, or by the federal government.  Where the nature of some of the problems (overly optimistic underlying assumptions) are common with many government series, including payroll employment and retail sales, the government would do well to overhaul much of its reporting.

Reflecting adjustments for some double-counting, mis-estimates of homes for sale by owner, and some improper inclusion of new home sales, the revisions were structured in such a way as to preserve as much as possible of the previously reported month-to-month and year-to-year patterns.  Sales levels were reduced by 10% to 11% starting in 2007, hitting a peak reduction of 17% in late-2008, and averaging around 14.5% in the most-recent reporting.”
End of Quote

The sticky residue of the housing bubble (US mortgages) is still gumming up the world’s pension funds and insurance companies’ financial reserves.  It’s just not reasonable to expect any real change for the better until Mr Bear is allowed to scrub clean the global financial system’s balance sheets with an industrial-strength degreasing agent.  So who is stopping the furry fella from going to work?  The same “policy makers” who are responsible for the mortgage mess in the first place!  These geniuses have yet to discover the correct verbiage to explain to pension fund beneficiaries worldwide that hundreds of billions of dollars or euros they’re relying on for support in their old age are in fact mostly fictitious ledger entries. 

These “policy” dudes are mostly former college professors, so they aren’t stupid.  I’m sure the “best-and-the-brightest” in “public service” long ago figured out that if they said nothing, pension beneficiaries would eventually discover their retirement problem on their own.  So why draw the current attention and future wrath of the masses by bringing up the subject now?  That is how these people think!

On this one issue (private and public sector pensions), we’ve barely begun seeing the earliest signs of the current economic upheaval that hangs over everyone’s head.  Everything these people touch dies.  So, until Professors Twiddle Dumb and Twiddle Dee, and their big ideas are driven from the halls of power, nothing will ever change.

Well, isn’t unemployment improving?  It is according to the US Department of Labor.  The only problem with this data is that it comes from the US Department of Labor, who employs plenty of college level Ph.Ds to their dirty work.  With a presidential election coming in 2012, it’s a political necessity that unemployment comes down.  So, I have great doubts we are looking at the real world in the chart below, rather than a new method of statistical manipulation required to keep incumbent politicians, and the US Secretary of Labor in office.  If the Dept. of Labor claims that unemployment is below 9%, I suspect it’s actually above 20%.

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\US Unemployment.gif

Come on Mark; give us a glimmer of hope.  Well you can forget about that from anything I write, at least until Mr Bear finishes his cleaning duties, at which time I’ll become a roaring bull!  But as Obama offers you hope, from me you’ll get charts; like electrical power consumption (EP) which not only refuses to return to its highs of August 2008, but has completed a fourteen month inverted-bowl pattern to the downside.  Unlike the government’s funded data, EP in December 2011 is measured in the same exacting engineering unit used in August 1930; the kilo-watt.  This makes variations in EP invulnerable to the whimsical and ever changing statistical methods used by dubious government statisticians.    

One look at EP’s long-term chart below should tell you that our current economic situation really * IS * different.  Not since the post WW2’s retooling of the American economy, from wartime to peace time production, has EP declined so drastically.  Not since the Great Depression has so much time passed from one BEV Zero (new all-time high in electrical power consumption) to the next.  But what in the economy isn’t powered by electricity?  Unsold condos, shut-down assembly lines in darkened factories; stuff like that.  As goes the economy, so goes EP.  And right now, EP is once again contracting.

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\Electrical Usage BEV 1930-12.gif

Below is EP’s chart from 2000 to 2011, and I direct your eyes to the red circle.  In Barron’s 26 Dec 2011 issue, EP has broken below its BEV -1.5% line.  A week later (Barron’s 01 Jan 2012 issue) EP slipped to -1.90%. We’ve had a warm winter so far, so maybe this decline is due to seasonal factors.  However, when I consider the idiots, morons and moral reprobates in charge of “economic planning” of our “free enterprise system”, I can’t rule out the possibility that we are witnessing the beginnings of an economic downturn that will eventually rival the -17.32% EP decline seen in 1933. 

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\EP 2000-2014.gif

Okay, the economy is in decline, but why isn’t that bad for the price of gold and silver?  Well it might be if the “policy makers” were attempting to cause the current decline in economic activity, as they’ve done many times in the past to eliminate the “excesses” in the economy.  In the past, they induced recessions by raising interest rates, forcing banks call in business loans.  This would result in a contraction in the Fed’s monetary aggregates; M1 and M2.  In other words, they raised interest rates to contract the money supply, knowing that economic activity would slow down.  However; that is * NOT * the case today! 

Since October 2008, at the peak of the Credit Crisis, as our Congress held hearings on live TV, and Hank Paulson (then Secretary of the Treasury) told Congress he needed a bazooka to battle the beams of deflationary radiation directed at the US mortgage market from an unknown, possibly inter-galactic source, the Fed Funds rate has been held below 1%.  Okay, I’m making up the bit on deflation rays from outer-space, but today’s “0% Fed Funds Rate” (actually below 0.10% per annum) indicates the “policy makers” are frantically attempting to re-inflate the economy with absolutely no success.

One look at the Fed Funds Rate chart below tells us that Doctor Bernanke is riding on the back of a tiger.  He doesn’t dare raise the Fed Funds Rate back above 1% because he knows if he does, the monetary monster he and his predecessors created will consume him, and his precious Federal Reserve System.

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\Fed Funds 1954-2014.gif

But if the good doctor can’t raise short-term interest rates, he sure can print dollars and “inject” massive volumes of cash into the economy.  And since he became chairman of the Federal Reserve in 2006, that’s exactly what he’s done.

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\US CinC 1920-2012.gif

The dollars Doctor Bernanke creates may no longer be backed by ounces of gold and silver, but instead by something more socially scientific, and so much better for “policy”: US Treasury debt.  The wisdom of the debt-backed dollar and the folly of the gold standard had been beaten into the defenseless minds of college students since the days when tuition for college could be financed by the efforts of students themselves, (maybe with some help from their relatives).  But the quality of college education, instruction that provided actual economic benefits to the student didn’t last long after government began its guaranteed student loans program, even though the college professors and administrators of higher education prospered as never before. 

It’s not surprising that our educational elite present a united front in opposing the return of the gold standard.  When gold was money, costs for college, like everything else were set by market forces.  This was actually beneficial for students, as colleges kept their expenses down, and they actually cared that their students could go out into the world and become financially successful.  Grateful graduates had a way of becoming alumni, generous to their Alma Mater. 

But this superb system no longer exists. With the debt-backed dollar, a dollar managed by this same educational elite, the only factor limiting the price increases for tuition and text books (written by professors) is how much “aid” their colleagues in government are willing to extend in the form of student loans.  And as we all know, Washington has been very generous to “education” with its student loan program.  Today, any institutional interest colleges formerly had in the financial success of their graduates has been short circuited by the current college system’s direct connection to the hose of “liquidity” from the Federal Reserve.  Educational standards for both professors and students in our college system have been drastically cut to facilitate enrollment expansion, because that is how the big bucks in education are made.  And today, education is all about the big bucks.  That many, if not most of our educational system graduates struggle with crippling debt for many years, is something not discussed in polite academic society.

And in 2011, exactly how much “liquidity” has the college system injected into our youth?  I haven’t a clue.  But I’ll stick my neck out and guess that in 2011 alone,
the school loan program “injected” more inflation into their students than the total national debt of the United States in July 1938: $37 billion.

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\US Debt 38-11.gif

Well, now that I have all that off my back, let’s see just how bad things really are for gold and silver as 2011 draws to a close.  No better chart than a Bear’s Eye View to illustrate how bad things really are, and after taking a quick look at how little success Mr Bear has had in clawing down the price of gold since 2001, all I’ve got to say to you “men” out there (and I use the term loosely) is: you’re pathetic!  As the year 2011 came to its close, the “policy makers” have done their worst in the gold market and they failed to get the price of gold to break below its BEV -20% line.  That is correct, since gold’s highs of August this year, on a daily closing basis, gold’s maximum decline in this correction was only 18.47%

If this is all the worst they can do, then the end of their reign of terror in the gold market draws nigh, and all I hear is boo-hoo-hooing from people who should know better!

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\Gold BEV 69_10.gif

Let’s take a good hard look at the price of gold since 1969 with the Bear’s Eye View (BEV).  In a BEV chart, every new all-time high is converted into a zero percent, because to Mr Bear, that’s all a new high is worth to him – nothing!  Mr Bear is only interested in how large a percentage he can claw back from the bulls’ profits.

Geez Louise, look at the corrections Mr Bear inflicted on the gold bulls between 1969 and 1980!  From 1969-75, gold seldom saw more than a few new all-time highs before Mr Bear gnawed 20% from the bull’s gains.  And from 1969-75, did the gold bulls begin blubbering like a gaggle of girlie-men when gold declined over 20%?  THEY DID NOT!  Like men, real men, they kept a steely eye on their compass; and an iron hand on the tiller, even as gold declined 48% from an all-time high in August 1976.

Now compare the 1969-80 bull market with ours. Gold clawed its way back from the dead with barely a pause in its advance, and ONLY ONE PRICE CORRECTION in the past twelve years that might be compared with something from the 1970s, and that less than 30% correction DID NOT HAPPEN in 2011!

Last week I listened to Eric King’s interview with Jim Sinclair.  Mr Sinclair, has blood-shot eyes manning a 24 hour gold-bug suicide hot line, because the “policy makers” failed in their attempt to get gold to decline below its BEV -20% line.  Well it’s true, so-called gold bugs are in an emotional state of panic, keeping poor Mr Sinclair up all night because the former “Masters-of-the-Universe” failed to whack gold down 20% from its highs of August.  Funny, Wall Street’s Masters-of-Disaster could do a plus 20% whack-job on gold in 2001, 2006 (twice) and 2008. 

Let’s look at the next chart, with the BEV series beginning at the absolute low of the 1980-99 bear market.  What’s wrong with you gold bugs?  We are seeing the fourth deepest correction from 1999 to present, a correction of less than 19%, and you’re ready to run to the tall grass like a pack of poltroons!

And what’s wrong, New York and London; is this less than 19% decline all you got?  Of course not!  The GLD ETF must still hold a few bars of gold you can still lend, swap or somehow collateralize and entangle in the open market.  Hey, it’s what banks do with other peoples’ assets; they take a deposit of one and lend it to ten, or more people.  We would be foolish to believe the big banks haven’t maximized their own profits, by risking the assets of other people held in any precious metal ETF they control.

Description: C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 221 (No 219 or 220)\Gold BEV 1999-2014.gif

Hey you Big Shot Bankers; maybe one more huge margin increase would do the job, sending the price of gold towards its BEV -30% line.  But you’d better not take any chances, so you guys will need to whack another commodity futures trading firm, and then send the poor souls whose lives you’ve ruined into regulatory purgatory at the CFTC, exactly as you did with MF Global.  Hey!  Do you know what would really be funny?  Have your willing-tools at the CFTC send an official letter to all your future victims informing them they have to personally appear at the offices of the Commodity and Futures Trading Commission to be photographed and take a number for service.  Have the number series start at some odd number over a million. 

Who is there to stop you?  I’ll tell you who: Mr Bear.  When I think of all the dollars of currency and debt you’ve created with your debt-backed dollar since 1980 (the end of gold last’s bull market), I know that you are growing weaker, as Mr Bear grows stronger.  That’s why since 1999 you’ve been * UNSUCESSFUL * in dragging the price of gold down a full 30% from a new all-time high even once.  To my way of thinking, that makes Mr Bear is the biggest gold bug in the market, and he is someone Washington and Wall Street can’t stop out!

That’s enough free “financial advice” for the malignant narcissists community; let’s move on to the table below and see just how good the markets have been to people who were wise enough to buy and take delivery of their metal, and refrained from playing the devil’s favorite game at the COMEX: trading paper metal.

Look at the cumulative gains in gold and silver since 2000, and then tell me that precious metals haven’t been a safe harbor for investors during the financial turmoil of the past decade.  As always, for thousands of years anyways, gold and silver have been the investment of choice during times of economic trouble.

Against my better judgment, I was listening to the idiot-box (CNBC) with the volume turned up as their “experts” were making their predictions for 2012.  Guess what; they made the same predictions they’ve been making since 2000, and once again gold and silver didn’t make the cut.  Well; stupid is what stupid does, year after year.  So I’d like to recommend a New Year’s Resolution for my gold and silver buddies: in 2012 we will all turn down the volume on the idiot box, we will not leverage our positions, and most importantly, we will all grow some guts.  Come on, let Mr Sinclair get a little sleep!

Mark J. Lundeen
30 December 2011

Wednesday, March 23, 2011

Aggressive Retirement Portfolio For the Next 3 Years

Yesterday I put up an article on a simple retirement portfolio for the next three years, and described the results of the picks I had made three years ago (with much less market knowledge than today).

This was an exercise to illustrate how well a simple portfolio of just ten equities could perform compared to a widely diversified portfolio constructed using standardized financial planning principles. The idea was to show how identifying a long term fundamental market trend and investing to capitalize on that trend would outperform a portfolio designed on fixed percentage allocations in various asset classes.

The major issue to be debated is how much extra risk is involved with this strategy. Certainly, if you misidentify the long term trend on which you base your portfolio choices, the risk would be greatly magnified. This article assumes that you correctly identify a market trend, in this case, the extreme underpricing of silver based on years of price suppression and exhaustion of above ground inventories, and closing of primary silver mines which were no longer economically viable. Also, the long term uptrend in food and oil prices driven by population growth and peak oil.

In the year 2000, a median priced home in the USA cost about $225K. Silver was about $5 an ounce. The average home would have cost you 45,000 ounces of silver.

Today, a median priced home in the USA costs about $175K, and silver is currently at $37.35 an ounce, so today the average home would only cost you 4,685 ounces of silver.

If you sold your home in 2000 and bought silver, today you could buy nine identical houses with the proceeds and still have $105,000 left over.

I will not be going into the supply and demand fundamentals of silver here. For those unfamiliar, here is an incredibly well written, well researched series of articles by Jeff Nielson to use as a starting point:

History of Silver, Part I: the Metal of the Moon – Jeff Nielson

History of Silver, Part II: the great "build" – Jeff Nielson

History of Silver, Part III: inventories gone! – Jeff Nielson

The Silver Price-spiral, Part I: today – Jeff Nielson

The Silver Price Spiral, Part II: paper "inventories" – Jeff Nielson

The Silver Price Spiral, Part III: tomorrow – Jeff Nielson

Fifty Years of Suppressing Silver – Jeff Nielson

Before posting the more aggressive model portfolio, I need to emphasize that I would NEVER recommend for ANYONE to put 100% of their investment capital into equities of ANY kind. Depending on your age and personal situation, I would recommend for EVERYONE to have at least 50% to 90% of your investment capital in physical silver and gold bullion kept IN YOUR OWN POSSESSION. This is because of the MANY layers of counterparty risk involved with ANY investment in equities. For the uninitiated, I will list a few of them here:

  1. Currency collapse
  2. Bank closures (euphemistically called "bank holidays")
  3. Insolvency of or mismanagement by your brokerage
  4. Changes in government taxation policy
  5. Government confiscation or forced annuitization of retirement accounts
  6. Dilution of common stock equity by secondary share offerings
  7. Mismanagement, embezzlement, fraud by company management (think Enron)
  8. Large scale internet outage (think you'll be able to get your broker on the phone?)
  9. Interest rates will likely double soon, causing ALL bonds to lose 50% of their principal
  10. Temporary or permanent closure of stock exchanges
Don't think your stock exchange can close up shop? The NYSE closed for one week after the 9-11 attacks, and lost 7% of its value on the next trading day. It also closed for 4 ½ months at the onset of World War I and the US was not yet even a combatant. The Egyptian stock exchange closed yesterday, and when it reopened today, it was closed again after just one minute of trading. No investment strategy is without its risks. I am just highlighting here the risks involved in holding equities, that most people never even consider.


    Aggressive Retirement Portfolio For the Next Three Years

Ticker            %Holding        Sector      Equity___________________

PSLV            20%            PM        Sprott Physical Silver Trust ET

SIVR            20%            PM        ETFS Physical Silver Shares   

PHYS            5%            PM        Sprott Physical Gold Trust ETV

GTU            5%            PM        Central Gold Trust

CEF            5%            PM        Central Fund of Canada Limited

SLW            10%            PM        Silver Wheaton Corp

EXK            5%            MINING    Endeavour Silver Corp

GPL            5%            MINING    Great Panther Silver Limited Or

GDXJ            5%            MINING Market Vectors Junior Gold Miners ETF

BPT            5%            OIL        BP Prudhoe Bay Royalty Trust

CAG            5%            FOOD        ConAgra Foods, Inc

KFT            5%            FOOD        Kraft Foods Inc

RGR            5%            WEAPONS MFG     Sturm, Ruger & Company


This new model portfolio was prepared quickly with very little analysis of the individual stocks. The purpose was not to be reckless, but to illustrate how quick and easy it is to improve on the returns of standard investment strategies. This time I expanded the portfolio from ten to thirteen different equities, and once again it includes no bonds. I wanted stocks in well established companies that were in industries with good prospects for the next few years, in either good or bad economic times. I also added a couple of junior precious metals miners to add some leverage to the precious metals play. I will be coming back 1, 2, and 3 years from now to gloat, or possibly, to eat crow. Time will tell. I wouldn't be surprised to see this portfolio double in the next one to two years.

Once again, the aggressive model portfolio is heavily concentrated in precious metals (80%) and heavily overweighted in silver, with 10% in food, 5% oil and 5% in a weapons manufacturer. All 13 equities in the model portfolio will be purchased at today's closing price. Clearly, I'm not looking for diversification here, I'm looking for profits, and to beat the major indexes and standard portfolio allocations, without taking any excessive risk. There are no inverse funds and no leveraged funds, or funds of any kind other than precious metals and miners. Out of the seven individual common stocks of corporations, four have respectable dividend yields, and the three that don't are two junior miners, and Silver Wheaton, a unique company with all the benefits of a silver miner and few of the risks. There are a lot of other investments with excellent prospects over the next few years, but these were eliminated to minimize portfolio risk. Such investments include a dollar depreciation play (UDN), a rare earths play (MCP) and an inverse bond play (TBT). I'm sure all will do quite well based on current trends. The only way I can see that this portfolio losing money over the next three years is if the primary trend in precious metals were to reverse, but it is clear (if you've done your homework) that we are still quite early in the precious metals bull.

Disclaimer: Do not use this model portfolio as investment advice. Your own portfolio should be customized for your individual situation. Always consult a financial professional, but avoid the 98% of financial professionals that don't think for themselves, and don't have a thorough knowledge of the fundamentals and long term trends in the precious metals markets.

Disclosure: I hold none of the equities listed in the above article, and have no intention of purchasing any in the near future. I am long physical precious metals.

Tuesday, March 22, 2011

Simple Retirement Portfolio

Three years ago I designed a simple retirement portfolio to illustrate to a close friend how poorly his professional investment advisor was handling his investments. This was a man in his early eighties who had no desire to manage his own investments. At that time, I had far less market knowledge than I have now and I was just starting to get a glimpse of the big picture.

I decided to limit the portfolio to a total of ten equities for simplicity, and admittedly it was very concentrated and not "well diversified." It contained no bonds. There was no trading over the three year period, just ten picks that were bought and held with no fine tuning. If actual money had been invested, I would certainly have unloaded the two inverse funds at some point, and if that had been the only two trades, would have significantly improved the three year portfolio return.

Here are the holdings and three year returns of that portfolio, really only an exercise to illustrate a point:

Equity     % holding     Sector                      3 yr gain/loss

GLD             30%          PM                              +47.16%

SLV             30%          PM                               +87.05%

BPT              5%          OIL                               +37.39%

PGH              5%          OIL + GAS                    -27.89%

ERF              5%          OIL + GAS                     -26.74%

XLE              5%          ENERGY                         +0.34%

JJA               5%        AGRICULTURE                 -8.59%

DBA             5%        AGRICULTURE                   -19.91%

SKF              5%        INVERSE FINANCIAL        -44.33%

SRS              5%        INVERSE REAL ESTATE    -84.47%

Total        100%                                                 +35.55%

So, overall, the model portfolio was 60% invested in precious metals, 20% in energy, 10% in agriculture, and 10% in short positions. Yes, this would generally be considered very speculative holdings for a retiree, but looking at the results, it still outperformed any standard asset allocation recommended by professionals, with a relatively low level of risk.

Diversification for the sake of diversification may limit the amount of loss in a portfolio based on the generalization that some investments go up as others go down, so holding many various investments will average out to limit total losses. By this same exact reasoning, diversification will also limit total gains.

From February 24, 2008 to today, March 22, 2011, this portfolio returned 35.6% in capital gains, and roughly 40% total return including cash distributions over a 37 month period, resulting in a total return of approximately 1% per month.

These total portfolio returns were realized even though four of the ten picks had negative total returns, and six of the ten picks had capital losses.

During this same period, the S&P 500 index lost 3.75%

During this same period, ten year US Treasury yields declined from 3.53% to 3.33%, so holding ten year US Treasuries would have yielded about 10% in total interest and 5.67% in capital gains.

This three year period included the sharpest market decline since the Great Depression of the 1930's, beginning with the market collapse in October 2008 which ultimately bottomed in March 2009.

This exercise was designed to illustrate the benefits of identifying a long term market trend and making simple, undiversified bets on that trend, with no short or medium term trading. Even though many of the choices did not perform well, the portfolio did well based on the identification of the long term primary UP trend in precious metals, and concentrating in that area.

This next model portfolio is based on the same principle, along with an incredible amount of market knowledge gained through thousands of hours of reading over the last three years.

It is even more concentrated (less diversified) than the first portfolio, but that is based on market trends and fundamental changes I observed over the last three years. The question here is not, "do you want to allocate according to established principles and standards of investment professionals?" The relevant question is "do you want to make money/protect your savings against inflation?"

I designed this next portfolio without much analysis of the individual holdings, spending only about half an hour total on Sunday, March 20th, 2011, using the closing prices from the Friday, March 18 trading session. Once again, I limited the portfolio to a total of ten equities for simplicity. Once again, no bonds or bond funds are included, even though interest rates are clearly headed higher, and an inverse bond fund would clearly be a good investment at this point in time for a long term hold. I just decided to go with a slightly more conservative approach. Silver has been greatly overweighted compared to gold, as the supply and demand fundamentals are far stronger. The overall portfolio is even more concentrated in precious metals than before (80% vs 60%), but is now diversified into six separate holdings instead of just two.

3/20/2011 - Portfolio for the next three years:

Equity     % holding     Sector    

PSLV            30%           PM

SIVR            30%           PM

PHYS            5%            PM

CEF              5%            PM

GTU             5%            PM

SLW             5%            PM

BPT             5%            OIL

K                 5%            FOOD

CAG             5%            FOOD

KFT             5%            FOOD

This portfolio is already up 3.74% at close of trading today after only two days, but I don't intend to check it regularly. I will come back to analyze the progress after one year, two years, and three years.

Disclaimer: This is only an exercise to illustrate a point: that standard portfolio allocations by most investment professionals are FINANCIAL SUICIDE! I would NEVER in real life recommend to have 100% of your investments or retirement portfolio in equities (of ANY kind). I would recommend that most people keep 80% of more of their precious metals holdings in PHYSICAL BULLION (bars and rounds) and pre-1965 US 90% silver dimes, quarters, and half dollars (junk silver). The main purpose of holding physical metal is to eliminate the MANY layers of unnecessary counterparty risk involved with holding ANY kind of equity. I recommend against holding numismatic coins, or ANY kind of "collectible" as an investment. Owning one small piece of real estate to use as a primary residence would be advisable for many, preferably with no mortgage, or a small, fixed rate mortgage.

Do not use this model portfolio as investment advice. Your own portfolio should be customized for your individual situation. Always consult a financial professional, but avoid the 98% of financial professionals that don't think for themselves, and don't have a thorough knowledge of the fundamentals and long term trends in the precious metals markets.

Disclosure: I hold none of the equities listed in the above article, and have no intention of purchasing any in the near future. I am long physical precious metals.






Friday, January 7, 2011

Method, Means, Motive, and Opportunity – The Mechanism of Chinese Silver Accumulation

January 7, 2011 - I was gratified to see how well my recent article (Is China Behind The Big Silver Short Dec 25th, 2010) was received, when over 50 websites worldwide picked it up in the first 24 hours. But I am afraid that a fair bit of confusion was created by that article, which I want to clarify here.

First, I am not presenting this as fact. I am presenting this as a theory that explains the observable facts.

With no transparency in the banking industry, we will never get a chance to see the swap books of JP Morgan or HSBC to find out which of their clients are shorting silver, or how much of the money behind silver shorts comes from JPM's own proprietary trading desk, and this is how it SHOULD be. But the presumption IS that the CFTC is monitoring these books, and would perform their duty to investigate any clearly manipulative and excessively large short positions not being held by legitimate hedgers of mine production. Sadly, we cannot depend on the CFTC to put fair, realistic position limits in place, or even to enforce the unrealistic position limits already in place, which are far too high compared to annual silver production and compared to above ground silver inventories to actually succeed in limiting anything.

Since the CFTC is just another captured "regulatory agency" like the SEC and there will never be any transparency in the shady operations of the mega banks, let's look at the circumstantial evidence available to us and build a case against them, just as any criminal investigator would: using method, means, motive, and opportunity.

Last week's article never intended to state that China had a NET SHORT POSITION IN SILVER. The title of the article was in question form, and the body of the article explained my theory that the Chinese have both long and offsetting short positions in silver, which may result in combined net position of zero. I stated that the Chinese were using these opposing positions, in which China may hold the same exact same number of long COMEX future contracts and short COMEX future contracts resulting in no net long or short position, AS A MECHANISM WHO'S PURPOSE IS TO ACCUMULATE SILVER METAL AND DISPOSE OF EXCESS US DOLLAR RESERVES, which are constantly accumulating in the Chinese Central Bank month after month as a result of the persistent trade deficit. The brilliance of this mechanism is that it could allow the Chinese to secretly drain physical silver metal inventory away from the COMEX without spiking the market price of silver, which would hurt their producers and exporters. They merely need to hold their long contracts to maturity and take delivery of the physical silver, while selling their short contracts before maturity for cash, and using the proceeds to buy more short contracts with maturities further into the future (roll their shorts forward for longer dated shorts). The money they lose on the shorts (paper) as the silver price gradually climbs can just be considered additional acquisition cost on the longs (silver bars).
We Americans have been accumulating Chinese produced goods for many years now, about four times the amount of American goods being consumed by the Chinese. We settle the difference in US dollars, a good deal for the US: we trade freshly printed paper for scarce resources and labor. The Chinese already pay for all the American goods they require by exchanging a greater quantity of their own goods, so they are constantly accumulating US dollar reserves in the Chinese Central Bank, and want to find a way to use or invest these dollars so they don't sit idle. As these dollars continue to build up in China, the Chinese have accumulated nearly a trillion dollars worth of US Treasury bonds, and another trillion dollars worth of US Agency bonds (bonds of Fannie Mae, Freddie Mac and Ginnie Mae). All these bonds pay a below market rate of interest because they are implicitly or explicitly guaranteed by the US government, but it still amounts to more than allowing the reserve dollars to remain idle in the Chinese Central bank.

But now the Chinese realize that:

  1. The principal returned on their maturing bonds is worth less and less every time because of the incessant quantitative easing (money printing) by the federal reserve, which is a form of gradual default
  2. Fannie Mae, Freddie Mac, and even the US Treasury may default outright on their bonds at some point in time
  3. Hard assets and commodities represent a safer store of value than fiat currency
One measure that the Chinese have taken is to reduce their purchases of US Treasury Bonds, even though the trade deficit with the US continues at high levels. In January 2008, China was the single largest buyer of US Treasury Bonds, with purchases totaling $153 billion. In September 2008, the Chinese became the largest holder of US Treasury bonds, surpassing the Japanese for the first time.

By June 2009, China became a net seller of US Treasury bonds, and their purchases have continually moved to the shorter maturities. According the US Treasury Website, Chinese holdings of US Treasury bonds have declined by about 4% year over year from October 2009 to October 2010, even though they have been steadily accumulating treasuries since July 2010.

According to a recent Bloomberg article, China imported 209 metric tons of gold during the first ten months of 2010, compared to 49 tons imported in all of 2009. Even though they are the world's biggest gold producer, they exported zero tons in 2009. Only India consumes more. Although India's gold consumption is mainly in the form of jewelry, this is deceptive. The Indians may wear it around their necks and wrists, but they use it as more of a savings account, especially in rural India. The savings of Chinese citizens amount to about 40% of their personal income, so what more perfect vehicle than gold bullion to protect their savings from inflation and government instability?

In April 2009, China's Central Bank announced that they had covertly accumulated 454 tons of gold since 2003, raising the official figure on Chinese gold reserves from 600 tons to 1054 tons in one day, after remaining unchanged for six years.

Since the Chinese are wisely accumulating gold, why not silver? We have no public announcement by the Chinese Central Bank to go by, or any official figures of their silver holdings (if any), so we need to see if we can base a theory on the available facts.

The Chinese have a long established cultural affinity for silver. Silver began to be used as a currency in Guangdong, China in 1423 when it became legal tender for payment of taxes. Provincial taxes had to be remitted to the capital in silver after 1465. In 1914, the National Currency Ordinance established the Silver Dollar as the national currency of the Republic of China. In 1949 the incoming Communist regime took China off the silver standard, but there are still many Chinese alive today who can remember a time when silver was used as money in China. In 2004, China legalized private ownership of gold and silver bullion for its private citizens, and in 2008 they began actively encouraging their people to invest their retirement savings in gold and silver. The Chinese word for "bank" uses the same symbol as silver.

So the primary MOTIVE of the Chinese Central Bank in accumulating silver is to wisely transfer dollar reserves to tangible assets, as they have already admitted they are doing with gold, to protect themselves against the out of control money printing by the Fed.

Another MOTIVE is to start an asset backed currency at some time in the future. As the US dollar is continually overprinted by the Fed, its days as the world's reserve currency are numbered. The Chinese are just biding their time, trying to cash in as much of their US debt holdings (while they still maintain SOME purchasing power), before the day when the Yuan ultimately becomes the world's reserve currency by default. The first steps have already been put into place, such as the currency swaps and bilateral trade agreements with Brazil, Australia, Indonesia, Turkey and Russia. These countries all have natural resources that China needs, and are markets for exports of Chinese finished products. When the dollar, pound and euro implode from overprinting, the world will need a new reserve currency, and will not trust another one consisting of nothing but unbacked fiat paper. By accumulating a huge cache of gold and silver, the traditional, historical monetary metals, the Chinese will be ready to back the Yuan when the world's oil exporters will be demanding payment in hard assets. The level of gold/silver redeemability chosen for the Yuan will determine the value of all other world currencies from that day forward, by their free market exchange rate with the Yuan.

A third MOTIVE for the Chinese to be accumulating silver now is the increasing necessity of silver as a raw material for high tech goods produced in China. There is no substitute for silver in many applications, and the demand is the most inelastic of any commodity. China would like to dominate future production of solar panels, switches, flat panel TV's, computers, cell phones, GPS units, batteries of all kinds, especially hybrid car batteries, silver bearings, silver solder, and the list goes on. A ready stockpile of silver will protect the productive capacity of Chinese industry in the face of expected future silver shortages.

I now consider it much more likely that the Chinese Central Bank has it's short COMEX silver position with HSBC bank, the largest international bank in China and known to have a huge silver short position, (which is unlikely to be a legitimate producer hedge), and probably have their corresponding long COMEX silver position with JP Morgan, although this might also be with HSBC. I am just speculating that keeping the positions at two different banks, under two different names, would help to camouflage their strategy of accumulating precious metals and dumping US dollars. With all the global banking secrecy, there is never any shortage of opportunity to unload a bunch of US dollars. But their window of opportunity is closing because of the historically low inventory levels of silver at the COMEX.

This opportunity appears to be coming to an end with looming delivery defaults at the COMEX. In September 2010, there were 3002 silver contracts standing for delivery at the COMEX on first notice day, August 30, 2010. Of those, 84% of the holders (2519 contracts totaling 12.595 million oz) actually took physical delivery, In the next delivery month, December 2010, there were were 17,208 contracts standing for delivery on first notice day, November 26, 2010. Using the same 84% ratio of contracts that actually took delivery in September (presumably 16%, probably more, were talked into settling in cash, likely at a hefty premium to the contract's value based on spot), that leaves 72.3 million ounces of silver actually delivered to long contract holders by the COMEX in December 2010, more than six times as many silver bars as delivered three months earlier in September. As of January 6, 2011 the COMEX released inventory figures of only 48.9 million remaining ounces of silver registered for delivery.

There is an internet rumor going around that billionaire hedge funds (on the advice of former JP Morgan traders and in competition with the Chinese) settled their December long contracts at expiration for large cash premiums by posting the necessary cash and demanding (threatening) to take physical delivery on their long contracts. This would help explain the 9% gain in the price of silver during November, on top of a 14% gain in September and a 9% gain in October, never once having fallen below the 20 day, 50 day, or 200 day Moving Average during those three months.

SLV 6 Month Chart - 1-7-2011

Here is a link to a financial message board where an apparent market insider posted Wednesday that the participants were so happy with their easy COMEX silver profits in December, that they plan to make much larger purchases of COMEX silver long contracts in the last few weeks of February, 2011, and stand for delivery in March, the next delivery month for COMEX silver. I will be looking at the March COMEX silver delivery figures with great interest, and will not be at all surprised to see major gains in the February and March price of silver. The post also warns of a planned takedown of gold (and indirectly, silver) during the month of January in order to cover some of their silver shorts (scare investors into selling their silver) in time to minimize the banksters' pain in March. This is portrayed as a desperate, last resort tactic since there are enough existing gold inventories available for the banksters to work with, but no silver and buying silver on the open market would only spike the price.