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Tuesday
Apr122011

Gold and oil to hold up as commodities enter late stage of the cycle

Mineweb logo.JPG

Gold and oil are likely to fall the least if the global economy slows down in the second half which, Deliberations on World Markets author, Ian McAvity, sees as a very real possibility.


Gold and oil are likely to fall the least if governments are unable to escape their continually growing debt burden.

Speaking on Mineweb.com's Metals Weekly podcast, Deliberations on World Markets author Ian McAvity said, "The debt numbers that are being created both in Europe and in the United States are absolutely frightening in an historical context and ultimately the perception is that they hope that they can inflate it away without having a deflationary crash in financial assets first."

"To me that's the major contest that's going on and I don't know whether they can pull it off or not."

One of the major reasons why he is doubtful of a successful end to the contest is his belief that the U.S. housing market is headed toward a double dip. this would have a significant impact on U.S. consumers and, by extension, Chinese exports. It will also, he says, see a return of the economic downturn that was reversed by all the bailout money pumped into the system in March of 2009.

"To me that was the first half of the downturn and I'm still looking for the economy globally to slow down in the second half.  That will pull off a lot of the commodity markets."

For McAvity in the event of such an outcome, gold and oil (largely as a result of the ongoing destabilisation of the Middle East) are likely to be the least affected.

"The gold price holds up even while other markets come off largely as the only place to hide...Gold will come into one of those periods where it loses the least on a sharp decline on the other markets."

Part of the reason behind gold's resilience in the face of a very high likelihood of further problems in the west is the monetary role that it has played and, is increasingly playing again.

As McAvity explains, " These guys are just continually depreciating the purchasing power of money and in fact what you're seeing in the gold market is gold coming back on stage as a final form of money.  I don't think that we're ever going to see a viable day-to-day operating gold standard kind of a system and nobody other than the US dollar is really going to replace the US dollar as a global reserve currency.  But the US dollar has lost a lot of status."

McAvity says, at the moment, given the state of the U.S. dollar, with the questions being asked of the euro zone and the yen, "there is a real need for an alternate currency to the U.S. dollar and gold is playing that role to an extent.

Asked about silver's role in all of this, given its strong showing so far this year, McAvity says, he does not believe that silver has a monetary role in any official sense because central banks have no vested interests in it but, he says, it has "an extremely long monetary role in the minds of people around the planet".

Adding,." It's is the high price on gold that's driving an awful lot of speculative money back into silver playing in the role of ‘poor man's gold' -which does tend to materialise in the later stages of strength in the gold market and that's a fairly material factor that's going on right now."
However, while he sees a little more upside to the metal in the short term, he does not believe that silver is likely to continue rising indefinitely. And, given its strong recent showing, is likely to fall further than its yellow sister.

"I wouldn't be surprised if silver doesn't get a little higher in the short term but we've had an awful lot of tops."

He says when the S&P 500 takes a 10% or better break, which would come as a result of the pressure exerted by all the money sloshing in the system, he suspects "the silver price will find that the forces of gravity still work."

He adds, that he finds it interesting that the copper price has already been stalling for several weeks even while gold and silver were making higher highs.

"That's a change of character and that tells me that most of the commodity money is in the very late stages of this run."

"There has been a lot of money falling into a lot of commodity type instruments that are largely based on or driven by what I would call anti-dollar sentiment, and I believe a lot of that is getting a bit stretched on the high side... Copper, platinum and palladium to me have been exaggerated by investment flows competing with physical demand flows and investment flows are probably going to cool off and if China is in fact going to slow down for a couple of quarters, then you weaken the demand side of the equation as well which could lead to some pretty startling size corrections."

.................................................................................



Over in the Options pit, our model portfolio has managed an average return of 40.85% per trade, 69 closed trades, 67 closed at a profit, or a 97% success rate. Average trade open for 42.32 days.

SK chart 11 April 2011.JPG


The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


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Tuesday
Apr122011

SK OptionTrader Banks 15% in 17 days From Treasuries Short

On March 20th 2011 SK OptionTrader sent an update to subscribers explaining that we felt the large rally in US Treasuries was overdone. We felt that yields, particular at the long end of the curve, were too low.

We then detailed how we intended to use options to modestly profit from a rise in yields/sell off in Treasuries in the coming weeks.

We then sent a signal confirming what trade we had placed and 17 days later that position was closed for 15% gain. This is the 67th winning trade we have recommended from a total of 69, with the average return per trade being 40.85% and the return since inception on our model portfolio is now 250.28%

US Yields

The following is an excerpt from an update we sent to SK OptionTrader subscribers on March 20th 2011:

We are also planning to take a short position on US treasuries. We hold the view that the recent rally in US treasuries has run its course and yields going out past 5 years are set to rise. With this in mind we intend to sell vertical put spreads on TBT (Proshares Ultrashort 20+ Year Treasury) and PST (Proshares Ultrashort 7-10 Year Treasury) this week, targeting April or May expirations. This will result in a short position since they are both inverse treasury ETFs. The trades should book a modest profit if the US treasury market falls or goes sideways in the next month or so.

Let us explain the basic mechanics at work in this trade. Firstly the price of a bond moves inversely from its yield. Therefore if yields are going to rise that means prices are falling. If prices rise, yields fall. Therefore when one refers to a selloff in the bond market that means yields are rising. When there is a rally in the bond market that means yields are falling.

TBT and PST are leveraged inverse ETFs, which means their price moves in the opposite direction of the underlying assets by a factor of 2. So if the underlying asset decreases by 1%, they should rise by 2%. We didn’t end up placing the trade on PST due to the large bid/ask spread on PST options that was observed that week, but we did place the TBT trade so we will focus on that.

US Treasuries had experienced a large rally in part due to safe haven buying in the aftermath of the tragic events in Japan. We felt this rally was overdone and yields were too low, especially on longer term US government debt. Therefore we wanted to benefit from a selloff in those bonds as investors unwound positions bought in the panic following the Japanese quake.

US 30s Price Chart

If we were correct that US Treasuries would sell off, that would mean that TBT would increase in price significantly. We therefore wanted to express our bullish view on TBT via options. We contemplated buying call options on TBT, which would have been the simplest way to play the move. However we decided against call options for two reasons.

Firstly we were concerned that the selloff in treasuries could be a gradual process, rather than a sharp snap back. In this case call options would not have performed very well since implied volatility would have been decreasing and the decay of the time premium in our call option would have eaten into potential profits. Secondly there was the possibility that the market could drift sideways for a couple of weeks, which would have decreased the value of call options again due to the decay of time premium and the reduction in volatility.

We therefore decided to execute a vertical put spread, a strategy whereby we sell a put with a high strike price and buy a put with a lower strike price, both with the same expiration. Since the higher strike put commands a larger premium, this transaction results in a net credit. We sold $35 April puts for $0.40 and bought $34 April puts at $0.24, giving us a net credit of $0.16.

The maximum loss on this trade is limited to the difference between the strikes; $1. So the maximum profit we could make on the trade was 16%.

The basic view expressed by the position is that TBT will rally, go sideways or simply stay above $35. If that happens then both put values go to zero and we get to keep our $0.16 net credit.

Trading signals are sent whilst the market is open and at prices that are available in the market at the time the email is sent.

On March 21st we sent the trading signal to subscribers saying:

Further to notice in our previous update, we hereby signal to Sell TBT Apr 16 '11 $35/$34 Vertical Put Spread at $0.16 with 10% allocated to this trade.


However profits can be realised more quickly if TBT rallies, since it becomes less likely that the $35 and $34 puts will be worth anything come expiration. Therefore the spread between them narrows as both prices move to zero. In the case of this trade, TBT did rally and the spread narrowed to $0.01 so we took our 15% rather than holding out for 16%.

TBT Vertical Spread

The graph above roughly shows how the spread narrowed during the duration that we held it. As one can see, the spread between the puts narrowed, from 16 cents to 1 cent, where we closed the trade.

The trade was then closed on April 8th when we said:

We hereby signal to close our short position on US Treasuries, and we have bought have the vertical put spread we sold at $0.16 for $0.01.
This trade has given us a 15% return in 17 days.

As we have previously mentioned, this does not reflect a change in our view on the US bond market. This merely means we do not think it is worth holding out for an additional 1% profit since there is still a significant event risk to the position. Event risk would entail risks such as the Japanese earthquake, a unpredictable event that caused a sharp rally in Treasuries in a flight to safety, which would hit our position particularly hard since the put spread we have sold is on a 200% inversely leveraged fund.


TBT Chart

At SK Options Trading our focus is to consistently make profits and identify trading opportunities in the options market that offer attractive risk-reward dynamics. Our trades are not limited to gold and silver, even though that is currently our main focus, so if we see opportunities in other markets we will certainly take them as we did here taking a position on long term US Treasuries.

After all even if one if is just trading one asset, such as gold, one must still consider the entire macro environment and the affects other markets could have on gold. Therefore if one sees opportunities in other areas as part of this study then it makes sense to seize those trading opportunities.

If you would like to sign up to SK OptionTrader then you can do so by clicking one of the buttons below.

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Thursday
Apr072011

Are ETFs Really Safe?

ETFs 08 April 2011.JPG

Casey Report interview with Dr. Andrew Bogan

Dr.Andrew Bogan is a managing member of Bogan Associates, LLC in Boston, Massachusetts. He has spoken at many international investor conferences – his specialty being global equity investing – and has been interviewed on live television for CNBC's Strategy Session.

In an attempt to understand the relatively new but wildly popular Exchange Traded Funds (ETFs), Dr. Bogan did extensive research into the structures used by ETF operators, with a special focus on the potential risks that might arise should they be faced with large and sudden liquidations. Given that there are about 2,000 ETFs in existence, with assets totaling over $1 trillion, we thought it appropriate to find out what Dr. Bogan has learned in his research.

David Galland: Our primary goal today is to give readers a better understanding of exchange-traded funds (ETFs) and the risks that come with them. Speaking personally, I've been in this business for a long time, and I find anything that grows as quickly as ETFs have a bit worrisome.

To begin, maybe you could just talk a little about the difference between an ETF and a traditional stock or bond mutual fund.

Andrew Bogan: Yes. Shares in a traditional mutual fund, whether it's an index fund or has a managed portfolio, don't trade in the open market. If you want to own shares, you buy them from the fund. If you want to get rid of your shares, you sell them to the fund.

A traditional mutual fund takes its shareholders' capital and invests it directly on a one-to-one basis in stocks or bonds and holds those securities in custody. Thus it's always 100% reserved, meaning that the securities it owns correspond exactly to the shares its investors own. If you want your capital back, the fund can deliver it to you either in kind or in cash, depending on market conditions.

That's not the case with an ETF. Shares in an ETF trade in the open market, which is where retail investors buy and sell them. An ETF also issues and redeems shares every day, like a mutual fund. But, unlike a mutual fund, it does so only through "authorized participants," which are brokers, market-makers and other institutions.

DG: Jumping right to the point, has there ever been a problem with an ETF?

AB: ETFs have operated pretty well historically, but the mechanics of share issuance and redemption also creates some unique differences that we believe may lead to unintended consequences.

There already have been a few problems with ETFs, some more significant than others. The Flash Crash on May 6 of last year showed some structural issues with ETFs and perhaps with our whole market system for equities as well. It's hard to decide where to draw the line, but a lot of securities departed from their perceived value during the Flash Crash by very large amounts. The reasons are still not completely understood, although the SEC has made a reasonable effort to understand what happened.

Another incident occurred in September 2008, when the Lehman and AIG mess was upon us. The commodity ETFs run by ETF Securities, Ltd., in London halted trading when AIG's solvency came into question. The funds were investing in derivative contracts, including swap agreements, some of which were with AIG. It was only the Federal Reserve pumping in tens of billions of dollars that prevented those products from going. Bailing out AIG averted a disaster for the funds, and they continued to trade the next day.

DG: So, the issue with the ETF securities fund was more around the derivatives the fund held, not the structure of the fund itself?

AB: In that particular case, it was around the derivative contracts that underlay the fund, although that kind of arrangement is very common with European ETFs. Even equity index ETFs in Europe tend to be structured that way, and that's also not uncommon with a lot of the foreign stock ETFs as well – including some of those traded here in the United States.
I think it's a clear example where you have a counterparty risk wrapped inside the fund that could be very significant in bad circumstances.

DG: In the case of the Flash Crash, your research paper pointed out that even though ETFs represent only 11% of the listedsecurities in the U.S., 70% of the canceled trades during the Flash Crash involved ETFs. Is there an explanation for that?

AB: Some clarity is starting to emerge from work done by the SEC and others. But from our perspective, those statistics are quite alarming. There's no good reason 70% of canceled trades would be in ETFs while only 11% of listed securities are ETFs. And even though ETFs trade more actively, they don't represent 70% of all trading volume. So any way you look at it, they were badly overrepresented among the canceled trades, i.e., overrepresented among the most extremely off-priced trades.

From the perspective of financial theory, that makes absolutely no sense. ETFs are meant to be index-fund trackers. They’re meant to represent a whole basket of shares, and yet these very securities that are meant to be diversified actually fell more than their underlying stocks during the Flash Crash, more often and more deeply.

That's quite worrisome; it tells you that in a crisis environment ETFs don't behave the way financial logic suggests they ought to, which suggests to me that the theory is incomplete. People haven’t really looked closely enough at what the unintended consequences of ETF issuance and redemption mechanics are, and what the realities are in stressful market conditions.

DG: At this point, more than half the American Stock Exchange's daily volume is ETFs, which is quite a number. These things have only been around for, what, less than 20 years. Yet from everything I've read, it seems they’re not very well understood, even by you guys. Which is saying something because you’ve spent a lot of time looking at them, and there are still blank spots in your knowledge about how they actually operate.

AB: Absolutely, and I think that's an important point. We understand the mechanics of how an equity trades and from where it derives its value and how it's priced in the market. The mechanics for mutual funds are well understood also. The challenge with ETFs is that the process of issuing and redeeming shares that also are trading is much more complicated than a lot of people want to talk about. It allows for some unintended consequences, particularly in connection with short-selling, which became an important factor only in the last decade.
DG: Let’s talk about the process of creating new shares. If I'm running an ETF that is designed to mimic the S&P 500 index and I have a lot of people who want to own my fund, I can simply issue new shares based upon the flow of stocks into my fund, right?

AB: Shares can be created at the end of any day if someone delivers a basket of underlying stocks to the ETF through an authorized participant. And shares that are not wanted in the marketplace can be redeemed in kind for the underlying stocks – or in some cases cash. That's all been carefully structured and works smoothly. The issue is what happens when short-selling dominates the trading.

People have been short-selling ETFs up to shocking levels, like 100% short, 500% short, sometimes over 1,000% short. That's in a world where stocks like Apple are 1% short, or IBM is 1.4% short, or General Electric is 0.5% short. You really don’t see traditional stocks with short positions anything like this, so clearly something is fundamentally different. The difference is that ETF short-sellers – including hedge funds, dealers and arbitragers – are confident they can always create the shares needed to cover, so they see less risk of being squeezed.

DG: But in a traditional short-selling situation, you typically have to borrow the shares before you can short them.

AB: Yes, and that's true here too. But if you look at the Securities Settlement Failure data, ETFs are very oddly overrepresented, so it does look like there is some short-selling that happens before the shares are borrowed. But that's a small matter. The problem is that there is no limit to the amount of short-selling you can theoretically do while still having borrowed the shares. It simply requires the same share to have been borrowed, short-sold, borrowed from the new owner and short-sold again down a daisy chain. That's how you get these arbitrarily large short interest figures.

The short-selling involves new buyers coming in without the shares being created at all, and that's the fundamental asymmetry in the short-selling that we're most concerned about.

DG: Let's get to that, because you have retail investors, for lack of a better word, and you’ve got the hedge funds. I suppose they could both own the same fund, but for completely different reasons; a hedger to hedge another bet, and a retail investor to pursue a certain goal, but the net result is that the short interest is still way out of whack from what you'd expect to see in a traditional stock. I suspect this is something that most of the retail investors are unaware of. So, where is the potential for the ETFs to get into trouble?

AB: The trouble could come from a number of different angles.

One concern is that the huge short interest building up essentially leaves the ETF as a fractionally reserved stock ownership system. If you have a fund, for example, that is 500% net short, then for every one holder of an actual share there are five other investors who own IOUs for the shares. Their real shares have been lent out and short-sold to someone else – usually without the original owner's knowledge, unless they read and still remember the margin agreement they signed when they opened the account 10 years ago.

For the ETF itself, it means that the fund holds only 15% of the underlying securities implied by the gross number of fund shares that investors think they own. The other 85% isn't totally missing, it just isn't held by the fund.

Morningstar commented that the money is all there, it's just in hidden plumbing in the financial system, and we agree with that exactly. The question is, how many investors understood they were storing their money in the hidden plumbing?

DG: So walk us through what might happen if there were large-scale redemptions. Let's just say that for whatever reason, people decided this was the time to get out of a particular fund. How do things get unwound?

AB: Redemptions have to flow through an authorized participant, which is usually a broker or market-maker, and it's only that institutional layer that can actually redeem. If for some reason a significant portion, say, half or 80% or so, of the total fund ownership wanted to redeem and get the underlying stocks from the ETF through the authorized participant layer, you would fundamentally have a crisis in a fractional-reserve system.

The ETF could not deliver the underlying stocks to all the would-be redeemers. The investors who really owned just an IOU on shares that had been lent to short-sellers wouldn't have a direct claim on the fund, so their demand to redeem would force an unwinding of the short-sales.

DG: So it seems that it's not so much the fund that might have a problem. The fund is only liable for the shares it has issued. The risk seems to lie in the counterparties – the brokers or the investors that brokers lent shares to.


AB: Right. Essentially you have just that. You have quite a bit of counterparty risk here, because if you think your shares can be redeemed and then the fund halts redemptions because they’re running out of the underlying stocks, you're stuck. Normally ETF shares are redeemable through the authorized-participant channel, but an ETF or any other institution that issues something that is redeemable but fractionally reserved could be hit with a run, like a bank run.
Now the big question is, in practice, would this happen? It's up to everyone to form their own conclusion, but interestingly the first argument we heard when we began looking into ETFs was that this was just a theoretical topic and that there would never be a really big redemption in a large ETF. But we have since learned that's actually not the case, because a giant redemption in IWM, one of the largest ETFs, occurred in 2007.

Now we think that 2007, being one of the best markets for equities since maybe the late ‘90s, was a pretty forgiving time to test the crashworthiness of an ETF that runs into a massive, unexpected redemption. But IWM was redeemed from millions of shares outstanding down to something on the order of 150,000 shares, and in one day, and that's because somebody tried to crash the fund.

DG: Was that a really lousy fund, and somebody just said, "Enough, I'm going to punish you guys and get out of it,” or –

AB: Oh, no, no, IWM is one of the largest and most liquid ETFs in the entire market. It's the Russell 2000 iShares ETF. It is the poster child of why ETFs are great. But even so, what's interesting is that the first argument we got from industry insiders was that our misgivings are nonsense, growing out of some theoretical conversation about what might happen but is never going to happen, and now we're being told it already has happened and nothing broke too badly, so what are we worried about.

DG: Let’s stick with this potential problem of a huge bunch of redemptions. People say, "Oh my god, I've got to get out of my ETFs," and there is a wholesale run on the funds. Because of the way ETFs are structured, it would seem that if they post net redemptions for a day, that the broker that had lent fund shares to short-sellers would just force the borrowers to buy back and cover their obligations.

AB: That's exactly right, but remember, for an ETF to create units requires someone to deliver the underlying stocks, so there's somebody who's on the hook to buy those stocks en masse all at the same time.

DG: No matter what has happened to the price in the interim.

AB: Yes, which gives rise to the question of who's on the hook and what's their creditworthiness when they get put on the hook. Have their prime brokers really been keeping appropriate track, as they’re required to do and on most days have done, of the creditworthiness of those, say, hedge funds or other kinds of short-sellers?

DG: Because you're not talking about small amounts of money.

AB: No. In fact, in one ETF, IWM again, short positions recently amounted to 14 billion dollars. That's not an enormous amount for the capital markets, but it's a pretty significant amount with respect to 2,000 small stocks. If there were a run, actually doing that unwind and getting those 14 billion dollars' worth of extra ETF shares would require buying 14 billion dollars’ worth of Russell 2000 stocks. If you didn’t want to be more than, say, 10% of volume, it would take 40 trading days to buy all you needed.

So we think that if you actually had a very sudden redemption run on IWM, there is a real likelihood of a short squeeze occurring in the Russell 2000. We don’t expect that at any particular time, it's just something that could happen if enough things went wrong.

The short position in an ETF like IWM being over 100% means that a large amount of the money investors think they have placed in Russell 2000 stocks has in fact been lent to hedge funds and other short-sellers. You take that across the entire ETF industry and you're looking at about 100 billion dollars in short interest – money that did not go into the underlying shares or gold or whatever the ETF represents. It was instead lent to hedge funds. It has been deposited in a shadow banking system where ETFs allow short-sellers to borrow money from institutional and retail investors.

DG: And what are they doing with that money?

AB: Well, no one knows. Presumably they invest it in what they think is going to make a better return than what they shorted, because you can't score the 10% or 20% those guys are all trying to make every year by buying the index. So it's anybody's guess.

DG: One question that Terry Coxon asked as I prepared for this interview was whether there is any way for the marketplace to let the fund's share price deviate for long from NAV?

AB: The tracking of an ETF's price with the fund's NAV, which historically has been extremely close, is totally dependent on an arbitrage mechanism. The arbitrager can make money by continuously pushing the price of the ETF toward its NAV. The question is... what NAV? What they mean by NAV is a value per share outstanding of the fund's underlying stocks. But of course you have this huge implied ownership through short-selling, and the short-sellers' shares are not being counted in the shares outstanding number.

DG: A lot of our readers have money in GLD, which is the ETF that invests in physical gold. You've looked at GLD, and it's based upon the premise that as investors pour money in, the operators of GLD turn around and buy physical gold and store it. And likewise with redemptions, they just sell the gold. My understanding is that there isn't anywhere near the same level of short interest on GLD.

AB: The short position in GLD isn't nearly as large as it is for some equity funds – but we have looked at GLD, and it has the same structural issues, just to a lesser extent, at least for now. The short interest in GLD has fluctuated around 20 million shares. Now, GLD is a pretty big fund. With 20 million shares short, it is roughly 95% fractionally reserved. So for all the investors who think they own the underlying physical gold, the fund actually has 95% of it in the vaults.

But GLD does not have to stay at 95% fractionally reserved. If there were a massive wave of short-selling in GLD, you could end up with a very significant fractional-reserve situation. If that were followed by heavy redemptions, you'd have the same kind of problem I described earlier – not enough gold to redeem all the shares.

DG: Could they just say, "From here on, we're not issuing any more shares"? Would that stop the short-selling?

AB: Not necessarily, because, you know, the short-sellers are selling – in fact, it would probably exacerbate the short-selling. So as long as a fund is issuing shares, aggregate buying demand can be satisfied by expanding the fund. If they stop issuing shares, aggregate demand would get satisfied by short-sales of existing shares. So, if anything, closing the issue window should make the problem worse, not better.

DG: Working through the mechanics of this, let's say gold drops by a few hundred bucks. Say, for instance, that there is some major change in the market along the lines of when Volcker raised interest rates back in '79-'80. And at that point a lot of short-sellers say, "Okay, this is it for gold," they pile on, they start shorting the hell out of GLD, and now all of a sudden you’ve got a real problem because the fractional aspect of it balloons, if you will.

AB: Well, you don’t necessarily have an immediate problem. It depends on the market conditions and the level of panic. You certainly would have a ballooning fractional-reserve situation, meaning that the reserves held in actual gold versus the implied ownership by people who think they own GLD (even though the shares have been hypothecated by the broker) will shrink.
Those investors may believe they are still entitled to the metal, but the reserve of gold held on their behalf starts to shrink very quickly under those conditions.

The bigger challenge might be if there were an actual redemption wave. If that happened when GLD was already substantially fractionally reserved, then you're back to an 1800s gold bank problem. Fractionally reserved banks can be hit with a run.

DG: Right. Is there anything else that would make this whole "house of cards" collapse? Suppose a highly visible ETF stumbles and is unable to meet redemptions, or they just have to postpone redemptions. That might be the sort of trigger that could really send people off.

AB: You know, one of the big risks, by the way, that no one has really discussed much, is if an ETF were to have a big redemption run in panicky market conditions and halted redemptions. Halting redemptions is a complicated decision, because it breaks the symmetry that allows the arbitragers to go long or short both the basket of stocks and the ETF shares to move price toward NAV.

So it's quite possible that if redemptions were halted for any length of time, the arbitragers wouldn't be keeping the share price in line with NAV. We already know from the Flash Crash that significant price departures from NAV are quite possible for ETFs.

DG: Knowing what you do, I mean, obviously you deal on an institutional level with your money-management firm, do you own ETFs personally?

AB: We do not. We do not own any ETFs either personally or on behalf of the funds we manage.
DG: Is it because of the research you’ve done or just because it's not what you guys do?
AB: I would say it's primarily because it's not part of our strategy, but obviously we did the research because we were interested in understanding the product better.

DG: So, any advice for readers? Is there a short interest over which a person should be concerned about his holdings?

AB: Well, I don’t know if I could set a threshold, but I would certainly encourage people to make sure they know what the short interest is in any fund they are considering. That's a metric that is starting to become more accessible. Since we published in September, some of the ETF sponsors, like BlackRock, have begun reporting on ETF short interest, which I think is terrific – kudos to those guys. We would like to see better transparency and disclosure, so that institutional and retail investors alike are aware of the counterparty risks that are "hidden in the plumbing," to use Morningstar's term, and are aware of the actual and somewhat complicated mechanics of the products that they’re buying.

DG: Do the ETFs with a mandate to magnify an index 2 or 3 times (e.g., RSW) have an elevated level of risk, due to the additional leverage? 

AB: The underlying "assets" from which these funds get their NAV are derivatives to begin with, which introduces another layer of counterparty risk – one that has already experienced serious problems. We find it surprising that packaging complex derivatives in an exchange-listed security (the ETF) seems to remove all of the sophisticated investor standards usually applied to derivatives trading by SEC, CFTC, etc.  

One ETF recently launched in the U.S. is PEK, the Market Vectors China A Shares ETF. This is another great example of where the industry is headed.

It is illegal for most foreign investors – except a few licensed global institutions – to buy A shares on Shanghai or Shenzhen, China's two mainland stock markets, and Market Vectors is not one of the exceptions. So instead of owning A shares, the ETF owns swaps with brokers that are licensed in China to own A shares. The fund holds the swaps as its underlying "assets." So PEK is an NYSE-listed China A shares ETF that does not own a single Chinese A share.

If PEK were to become significantly short in the secondary market, it would mean a fractional-reserve ownership of a derivative representing a basket of stocks that would be illegal for nearly all of the ETF's investors to own directly. More confusing still is what it means to be short PEK in the first place, since it has historically been illegal to be short A shares in China at all.

In essence, ETFs are being used to package and securitize products that are at best poorly understood and in some cases are used to circumvent securities regulations. An example closer to home is when the SEC briefly banned short-selling of essentially all financial stocks in 2008. The financial-sector ETFs were not on the list, so many hedge funds kept right on shorting financials using those ETFs.  

DG: Certainly a lot to think about here. Any other questions I forgot to ask about, but that I should have?

AB: No, I think that was a pretty good coverage of a little bit of work we've done.

DG: Is there a good publication that would help people better understand the mechanics of the ETFs, because it is obviously very complicated, something that people might want to be able to study?

AB: Always the best place to look is in the fund's prospectus. The prospectuses are long and impenetrable, because they’re written by the legal team, but they really do have a tremendous amount of information. If you can float through one of them, I think it's definitely to your advantage.

DG: Thank you for your time.

[Successful crisis investing requires that you see the big picture… and know where it’s leading in the near future. That is the forte of The Casey Report, with its editorial team of two economists and two investment pros, among them Doug Casey himself. While it’s hard to make enough money in today’s markets to beat inflation, it is possible… learn how in our free report Your Bank Account Is Slowly Bleeding to Death.]


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In today's trading session we have just closed another winning trade and will do a post about it shortly and also update our charts.



SK Chart with profits re-invested 29 March 2011.JPG


The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.






Wednesday
Apr062011

Portugal Request a Bailout

Portugal cracked flag 07 April 2011.JPG


Ireland, Greece and now Portugal, who's next – Spain! The PIGS are coming to the borrowing bowl one by one as members of the European Union slide down the slippery pole of horrendous debt.




LISBON — Portugal’s caretaker government gave in to market pressures on Wednesday and joined Greece and Ireland in seeking an emergency bailout. The decision came after the government was forced to pay much higher rates to sell more debt.

José Sócrates, Portugal’s prime minister, said in a televised address Wednesday night that he had requested aid from the European Commission after recognizing that borrowing costs had become unsustainable.

“I had always considered outside aid as a last recourse scenario,” he said. “I say today to the Portuguese that it is in our national interest to take this step.”

He did not, however, specify the timing of any bailout.

Portugal will probably need about 75 billion euros ($106.5 billion) in assistance, according to a recent estimate by Jean-Claude Juncker, the prime minister of Luxembourg, who presides over meetings of euro zone ministers. Some analysts have suggested that the amount could be as much as 100 billion euros.

A Portuguese bailout has long been expected, but the speed with which things moved Wednesday appeared to have taken European officials in Brussels by surprise, leaving the timetable unclear. European leaders have been working to keep the financial contagion from spreading. Lisbon’s move now puts pressure on Spain, which has undertaken major economic reforms, budget cuts and a banking clean-up to stay out of danger.

In a statement the president of the European Commission, José Manuel Barroso, said Portugal’s request “will be processed in the swiftest possible manner, according to the rules applicable.”

If the pattern of previous bailouts is repeated, a team of officials will be sent to Lisbon to discuss the conditions of a bailout, which will then need to be agreed upon by European finance ministers. That, however, will probably not happen for several weeks.

Caught in a political crisis and facing tough refinancing hurdles, Portugal has also been hit by repeated downgrades by credit-rating agencies, sending yields this week on Portuguese government debt to their highest levels since the introduction of the euro.

Mr. Sócrates, who had been governing without a parliamentary majority, resigned last month after lawmakers rejected his latest austerity package. To break the political deadlock, Portugal is set to hold a general election on June 5.

In a separate televised address, Pedro Passos Coelho, the leader of the main Social Democratic opposition party, said that he backed the decision to seek outside help.
Adding to the pressure on the government, Portuguese banking executives warned this week that they did not want to take on more sovereign debt, urging the government to negotiate a bridge loan with its European partners.

Alongside that of Portuguese banks and companies, “the rating of the country has fallen like never before,” Mr. Sócrates said. “This is a particularly serious situation for our country.”
European ministers agreed last May to provide 80 billion euros in loans to Greece over three years as part of a package in which the International Monetary Fund provided an additional 30 billion euros. In November, they also agreed to a rescue package worth up to 85 billion euros for the Irish government.

Last month, leaders of the euro zone countries agreed to cut the interest rate charged Greece to help ease its debt burden. No such agreement was made with Ireland because of Dublin’s refusal to accede to French and German requests to raise its low corporate tax rate of 12.5 percent.

For Portugal, the emergency financing will ensure that it can meet its 20 billion euros of borrowing requirements for the year. But it is likely to set off debate over what conditions will be tied to any rescue package, at a time when Portugal struggles with record unemployment and an economy that is likely to contract 1.3 percent this year, according to a recent forecast from the Bank of Portugal.

Further, the government’s recent effort to push through an austerity package combining more spending cuts and tax increases prompted Portuguese residents to take to the streets last month in a sign of rising social unrest.

“Outside intervention will be positive for our treasury but could be a disaster for our economy,” said Diogo Ortigão Ramos, a specialist on fiscal legislation at a law firm, Cuatrecasas, Gonçalves Pereira. “Whoever forms the next government, our creditors will have the final word.”
Mr. Sócrates said that the decision to seek help was taken amid expectations that market conditions would continue to worsen for Portugal.

Analysts suggested that markets would respond cautiously on Thursday given the uncertainty surrounding the terms of any bailout.

“I expect that the news will bring only limited relief” to the yield spread between Portuguese bonds and those of Germany, the reference securities in the euro zone, said Tullia Bucco, economist at UniCredit, adding that “it will not refrain the European Central Bank from delivering a 25 basis point interest rate hike” this week.

Earlier on Wednesday, Portugal sold Treasury bills at a much higher cost than last month. It sold 455 million euros (about $646 million) in one-year Treasury bills at an average yield of 5.9 percent, compared with 4.33 percent yield when Portugal last sold such bills on March 16.

The national debt agency also sold 550 million euros of six-month bills at an average yield of 5.12 percent, compared with a yield of 2.98 percent at a previous auction on March 2.

The Treasury bill sale came after Moody’s on Tuesday cut the sovereign rating of Portugal for the second time in a month. On Wednesday, Moody’s also downgraded by one or more notches the senior debt and deposit ratings of seven Portuguese banks.

New York Times 07 April 2011.JPG

Sooner or later the PIGS will leave or be ejected from the European Union for their own good and the good of the remaining members. However, we are still of the opinion that the European Union will disintegrate completely before long.

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Over in the Options pit, our model portfolio has managed an average return of 41.23% per trade, 68 closed trades, 66 closed at a profit, or a 97% success rate. Average trade open for 42.76 days.

SK Chart with profits re-invested 29 March 2011.JPG


The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.






Wednesday
Apr062011

High River Gold Limited 06 April 2011

HRG Logo 31 July 2009.JPG

Always appreciated we now have an update from Chris Charlwood who has very kindly sent us this missive updating us on the current state of play over at High River Gold Mines Limited (HRG) which we hope that you find interesting and informative.


To HRG Shareholders/Potential Investors,
 
HRG released its Q4 and year end results last week and following are some important data points:
 
Existing
1)    Gold revenues 2010 of $435.61M , Q4 of $123.3M ($493M annualized).
2)    Cash flow 2010 of $155.9M , Q4 of $49.3M  ($197.2M annualized).
3)    Net income 2010 of $114.9M, Q4 of $22.3M ($89.2M annualized).
4)    2010 notable expenses – Mine Amortization & Depletion $60.7M, Exploration $15.5M
5)    Gold production 2010 of 329.9K oz, Q4 of  87.9K oz. (351.6k oz annualized).
6)    Liquid Assets of $263.5M ($153.9M cash and $109.6M third party stock).
7)    Debt (& interest) of $25.2M
8)    Liquid Assets net of debt - $238.3M
9)    CIM Classified gold reserves (Proven & Probable) of 3.75M oz, CIM Classified gold resources (Measured and Indicated) 5.1M oz and Inferred of .7M oz. Silver resources of 103M oz (Measured & Indicated) and 102M oz of Inferred. HRG owns 50% of the silver property Prognoz. 50% in gold equivalent = 2.8M oz (@ 73 to 1)
10) Proven operational management team.
 
Potential
1)    2M oz of additional gold at Bissa.
2)    50% of 363M oz of additional silver at Prognoz (4.9M oz gold equivalent).
3)    Severstal is built in buyer of minority shares.
4)    Gold likely to trade at $1500-$1600 oz in 2011.
5)    Zun-Holba and Irokinda mine lives likely to be extended.
 
HRG is trading at 3.7 times Q4 cash flow (net of  liquid assets and debt). 840M shares @ $1.14= $958M market cap - $238.3M net liquid assets / $197M annualized cash flow).
 
It has been two years since we minority shareholders realized that Severstal (which had just made a controlling investment in HRG), was strategizing to buy us out. The signal for us was the string of extremely negative press releases put out by HRG management (Severstal employees). Our hunch was correct. The first proposal  came in at $.18/share. 90% of us knew the underlying value of the business and did not tender our shares. It’s now 2 years later and the above results prove our point. Today, many of us remain invested with full resolve to see the fair value of this company. What is the fair value?  Anyone would be hard pressed to find another gold producer that trades at HRG’s low cash flow multiple. By any comparisons, HRG should be trading at double to triple the current price. If Prognoz value is released, then even that would be conservative.
 
Those that invest now or remain invested will be rewarded. At some point, Severstal/Nord Gold will have to realize its value on its 72.64% ownership in HRG. Q1 results will come out on May 15th.  If production remains the same as Q4, we will see $51M of cash flow (avg. gold price up $25 from Q4) -  but we may get surprised with increased production from the second ball mill at Berezitovy. In the Nord Gold prospectus, Management said they spent $9.8M in the first 9 months of 2010 on drilling and exploration works at Irokinda and Zun-Holba. They also stated that  they are “planning to invest US$23.2 million in 2011 on modernisation of the underground site within exploration projects and US$14.9 million on purchasing new production equipment and other mine fixed assets." As Irokinda and Zun-Holba mines are running low on gold, we look forward to the drill results due by the end of June.
 
Also, we look forward to a resolution between the battling parties that own Prognoz 50/50. Prognoz is ranked as the world’s 10th largest silver property but actually ranks first in grade at up to 704 g/ton. We hope that these 50/50 owners can come to some equitable agreement soon. They did have an agreement that fell through in 2008. Although shareholders at the time did not like the proposed structure, I would think something like the following would make sense in today’s market:
 
1)    HRG could spin out its 50% holding in Prognoz into a new Canadian listed Pubco.
2)    Pubco would then issue an equal number of shares to other party to gain 100% ownership.
3)    Each party would elect 4 Board members.
4)    Pubco should then secure a large financing with a third party who gets 3 Board seats.
5)    The Board then hires a management team that does not work for either party.
 
Such a transaction will immediately unlock the value of Prognoz for all parties. This would  leave HRG as a pure play gold producer and give Pubco the ability to get started with development of the Prognoz property.
 
In terms of unlocking HRG’s value -  if and when Severstal decides to do so – the following actions would build investor confidence:
 
1)    Hire an IR company.
2)    Put out more detailed news releases on financials comparing quarters and years.
3)    Give guidance as to future productions levels and resource growth.
4)    Hold investor conference calls.
5)    Meet with analysts in Canada and Europe to start coverage on HRG.
6)    Attend mining shows and make presentations.
 
Based on recent low trading volume, there are very few sellers of this stock. Any significant demand should help us eclipse the $1.50 high.
 
HRG Q4 and 2010 results
http://finance.yahoo.com/news/High-River-Gold-Reports-2010-ccn-4024813489.html?x=0&.v=1
 
Prognoz potential – pages 4 & 6 of “The Summary”
http://www.hrg.ca/i/pdf/TechRpt_Micon_Prognoz_080627.pdf
 
Interesting excerpts from 2010 year end Financials and Annual Information Form
http://freepdfhosting.com/dd696431ad.pdf
 
HRG’s Third Party Investments
http://freepdfhosting.com/676b9c324f.pdf                                  
 
Chris Charlwood
Investor – own 5M shares of HRG
Rainerc7@gmail.com – to be added or removed from this e-mail list.
604-718-2668
www.stockhouse.com – ongoing HRG investor communication



.................................................................................

Over in the Options pit, our model portfolio has managed an average return of 41.23% per trade, 68 closed trades, 66 closed at a profit, or a 97% success rate. Average trade open for 42.76 days.

SK Chart with profits re-invested 29 March 2011.JPG


The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.






Tuesday
Apr052011

Gold Prices Update 06 April 2011

gold chart 06 April 2011.JPG



This is a super chart, months of consolidation followed by a strong breakout by gold prices to another all time high. During this period of consolidation both the 50dma and 200dma have moved up to support gold providing gold with a solid foundation on which it can build the next leg of this rally. In the short term the RSI still has room to move higher so hopefully we can consolidate at these new levels for a week or so and then blast off to higher ground.

We now need to take a serious look at the HUI as many of the gold producing stocks have performed poorly over recent times so this breakout should hit the ignition button at least on the quality stocks to begin with. At this point you need to be clear about your objectives. If it is exposure to gold via the producers then you need to focus on the quality stocks in that group. If you are more of a speculator and plumb for the explorers, do bear in mind that many of them will never discover any precious metal whatsoever, so you will have missed out on golds move. If you have access to very good data and advice then you may bag the occasional big move and have cause for celebration. However, stay focused on the 'return on capital' that you achieving as this is all that really matters. A few big winners and a hundred losers wont do much for your investment account. As for your 'stash' of physical gold and silver, this is not for sale, you acquired it for the long haul which is only just getting started. If you have a monthly purchase plan then keep it up, make cuts elsewhere, in a few years time these prices will look ridiculously cheap.

We will be back shortly with what we see as opportunities in this sector.

Now, this is a piece from a missive that we received from Jim Sinclair this morning which says it all:



Dear Friends,
 
I am writing to you from the Irving Farm Coffee and Internet cafe in Millerton NY. Our internet carrier went down today and is showing no promise of revival in the near future. I have a great coffee and a raisin bran muffin by my side so overall I have no grounds to complain.
 
Gold linked to the dollar today certainly has taken down $1444 for the count on three taps. That lights up Angel $1521 as the next to be captured.
 
Expect the Round Number Effect at $1500 for gold, but less severe than the battle at $1400. Angel $1650 is quickly coming into focus.
 
If we have learned one thing, it is not to get short term focused on this market. Stay focused on what is important and not the noise.
 
Think for a moment if Armstrong and Alf are right on gold. That would mean the following prices are coming:
 
$1650
$3000
$5000
$12,500
 
Those prices are possible because the balance sheets of the entire western world financial entities are based on false assumptions yielding valuation that pass auditing (FASB) but will never come to fruition. It is the mark to maturity method that not only used the BIS but other institutions that give comfort to the masses that are not looking at self protection here and now.
 
The financial system of the entire western world is FUBAR and there is no intention anywhere of fixing the problems at the level of its cause, OTC derivatives. The EU outlawed naked credit default swaps which is a clear comment on their ability to work if put under pressure. This is regardless of whether they were margin or naked in my opinion.
 
To say this is it is to be very late to the game.
 
Realize that the system has already failed.

Realize that there is no champion in a power position with the will to fix it.

Realize that even if there was a true fixer there are absolutely no tools to apply that would not in a short time cause more severe pressure than before applied.

Realize then that there is no PRACTICAL means to get the western world financial economy back on its feet

Realize that since the entire western world financial entities are based in sand there can be no sustainable economic recovery anywhere in that group.

Realize that a third war of any degree is madness.

Realize that our actions in the Middle East will cause increased hatred of the West.

Realize that the problems in the Middle East are not pro West or pro democracy.

Realize that gold is going to some degree make my long term price objective, given you ten years ago, look so low it will be silly.
 
Hold on to your insurance because you need it now. Pity the anti gold hedge funds short gold and gold shares based on, in my opinion, egomania, for they are very short lived now.
 
It is not a question of if we will prevail. We have already prevailed. Now our holdings are on the march to discount the hyper-inflation that is already written for history books to come.
 
Respect the fact that the same forces driving gold have historically driven equity market in past similar historical situations.
 
Respectfully yours,
Jim

Our intention is to hold onto our core positions and look to acquire more of our favourite stocks and options as and when we consider them to be bargains.



Smile you are gold bug!



..................................................................................

Over in the Options pit, our model portfolio has managed an average return of 41.23% per trade, 68 closed trades, 66 closed at a profit, or a 97% success rate. Average trade open for 42.76 days.

SK Chart with profits re-invested 29 March 2011.JPG


The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.






Monday
Apr042011

Sprott Physical Gold Trust: Update

Sprott gold logo 05 April 2011.JPG

Hot off the press today we have this news release from Sprott Asset Management regarding their Physical Gold Trust, which we hope you find both informative and enjoyable.


TORONTO, ONTARIO--(Marketwire - 04/04/11) - Sprott Physical Gold Trust (the "Trust") (TSX:PHY.U - News)(NYSE:PHYS -News), a trust created to invest and hold substantially all of its assets in physical gold bullion and managed by Sprott Asset Management LP, announced today that it has launched a follow-on offering of transferable, redeemable units of the Trust ("Units") in an aggregate amount of up to $340 million at a price of $12.54 per unit (the "Offering"). Certain lead investors, including certain funds managed by Sprott Asset Management LP, have agreed to purchase no less than $115 million of Units in this Offering.

The Trust will use the net proceeds of this Offering to acquire physical gold bullion in accordance with the Trust's objective and subject to the Trust's investment and operating restrictions described in the prospectus related to this Offering. Under the trust agreement governing the Trust, the net proceeds of the Offering per unit must be not less than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the offering.

The Units are listed on the NYSE Arca and the Toronto Stock Exchange under the symbols "PHYS" and "PHY.U", respectively. The Offering will be made simultaneously in the United States and Canada by Morgan Stanley and RBC Capital Markets.

Copies of the U.S. prospectus related to this Offering may be obtained by contacting Morgan Stanley & Co. Incorporated, 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474) or by e-mailingprospectus@morganstanley.com, or RBC Capital Markets Corporation, Attention: Prospectus Department, Three World Financial Center, 200 Vesey Street, 8th floor, New York, New York 10281-8098 (telephone: 212-428-6670, fax: 212-428-6260). Copies of the Canadian prospectus related to this Offering may be obtained by contacting RBC Capital Markets, Attention: Distribution Centre, 277 Front St. W., 5th Floor, Toronto, Ontario M5V 2X4 (fax: 416-313-6066) or Morgan Stanley & Co. Incorporated 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474)

or by e-mailing prospectus@morganstanley.com. The offering in Canada is only being made by the Canadian prospectus, which includes important detailed information about the Units being offered.

….........................................................................................

Over in the Options pit, our model portfolio has managed an average return of 41.23% per trade, 68 closed trades, 66 closed at a profit, or a 97% success rate. Average trade open for 42.76 days.





SK Chart with profits re-invested 29 March 2011.JPG


The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.






Friday
Apr012011

The Lesson from Japan for PM Investors

Japanese gold 02 April 2011.JPG



By Jeff Clark, BIG GOLD
It feels a little callous writing about Japan with respect to precious metals after the country suffered such a terrible tragedy. However, I think it’s worth discussing because there’s a lesson in it for all of us. In fact, I think the moral could be couched in terms of a warning.

Japan’s Background with Precious Metals

It’s commonly known in Japanese culture that citizens harbor gold to protect against unforeseen events. The gold isn’t sold unless it’s needed for an emergency. With respect to the Japanese government, the country’s central bank is the 8th largest holder of the metal (including the IMF and GLD). Beyond investment, Japan represents about 6% of worldwide gold fabrication (excluding investment demand), the majority of which is in electronics. Scrap recycling has been heavy in recent years, while jewelry demand is low.

Regarding silver, the tiny island represents about 9% of global demand. Industrial uses comprise the biggest part of that, which includes the automotive industry, construction, medical uses and solar. Jewelry and silverware have minimal end-use, and photography, like most everywhere else, has been falling heavily.

Japan’s Trend with PMs

While the percentage of Japan’s buying to worldwide demand won’t drastically change in reaction to the recent disasters, they, like several other countries, are pursing another tactic to get minerals. The government is considering revising its mining law, specifically when it comes to seabed mineral exploration and extraction. This is noteworthy because Japan hasn’t touched its mining law in 50 years. To be sure, revisions will be stricter for permitting and monitoring, but the process will be streamlined for Japanese companies.

Why now? As an executive at Mitsubishi Materials put it, “it’s an issue of national interest” because China, Russia, and South Korea are already exploring parts of the country’s exclusive economic zone. They are undoubtedly feeling the pressure of not only wanting what they think is rightfully theirs, but also of wanting to capitalize on high metals prices.

The Lesson from Japan

Premiums for gold and silver there have risen in response to the disasters, which isn’t surprising. Japanese investors scrambled for physical metals after the earthquake, immediately pushing premiums to three-year highs. And it wasn’t just buyers in the earthquake, tsunami and nuclear-plant zones; those in less affected parts of the nation have been rushing to buy precious metals, too. The end result is that available supply has been glutted.

The reactionary buying in Japan could not just support metals prices, but push them higher. This is certainly due to the draining of supply, but also because it’s complicating delivery and exacerbating fabrication problems. The country is a net gold exporter, but there may not be many planes and boats loaded with bullion leaving ports anytime soon, given that many modes of transportation are down and the distribution of more urgent food and other supplies is complicated.

This could dry up gold supplies elsewhere in Asia, as Japan exported 2.7 million ounces last year. While this is only roughly 2.3% of global supply, these ounces are concentrated in Asia, a region that has already seen many countries’ citizens hoarding precious metals. If supply becomes scant across Asia, it’s easy to see how this could light a fire under prices.

As Mark Pervan, head of commodities research at ANZ, said, "This is a buy-on-the-dip opportunity. Investors, not just Japan but globally, have been looking for a trigger to get back into the market. The rise in premiums in Japan could be it."

The lesson is this: When disaster strikes, it’s almost certainly too late to buy. Not only will you pay a higher premium, you may have difficulty getting your hands on bullion. You have to purchase your insurance before adversity hits.

And the warning is this: We saw how supply dried up and premiums skyrocketed during the market meltdown of 2008. Europe saw the same result when Greece imploded. We’re now seeing it happen in Asia due to Japan’s woes. We keep seeing this picture repeat. While no one wants to bet on calamity, is the U.S. really immune from trouble? Are you?

Even if no natural disaster strikes North America, there’s a certain hazard that’s inescapable at this point. The abuse being heaped upon the U.S. dollar has not fully played out. Sooner or later the decline of the mighty greenback will affect almost every area of your life. In fact, what does your day involve that doesn’t require money? Eating, showering, driving, working, shopping, entertainment – all of these will be grossly impacted by the demise of the currency unit used in this country.

The monetary base continues to explode. With no fanfare, it set another new record last week – $2.35 trillion. It’s up 18.7% just since New Year's eve, and 39.2% since December 2008. These actions will have consequences. They will lead to a monetary earthquake.

Your heart went out to the people of Japan when you saw the pictures of the devastation from the earthquake. Will you be ready when the currency earthquake hits here? One of these days it’ll strike, and then it will be too late to buy.

I hope you have sufficient asset protection to withstand the monetary storm that’s building off our coast.

[That asset protection is easy to come by – by loading up on gold, silver and large-cap precious metals stocks that can weather any economic storm. And in the meantime you’ll make handsome returns… like the 90.4% gains Jeff secured for his mom’s IRA, and his subscribers’ portfolios. Read more on how he does it and how you can profit.]






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Over in the Options pit, our model portfolio has managed an average return of 41.23% per trade, 68 closed trades, 66 closed at a profit, or a 97% success rate. Average trade open for 42.76 days.


A gentle reminder for those of you who are still thinking about it, prices will double as of 2nd April 2011, but will remain 'as is' for existing subscribers, join us now while this bargain lasts.


SK Chart with profits re-invested 29 March 2011.JPG


The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.






Friday
Apr012011

Gold, silver coins now officially legal tender in Utah

Gold coins 01 April 2011.JPG


This is an interesting article by Dorothy Kosich of Mineweb regarding gold and silver coins becoming legal tender:

Utah Gov. Gary Herbert last week quietly signed a law which has made Utah the first U.S. state to recognize federally issued gold and silver coins as legal tender.

However, the governor chose not to make any public statement about the Utah Legal Tender Act.

Utah's state tax code now considers U.S. Mint gold and silver coins as currency, which means no capital gains or other state taxes will be levied when the coins are exchanged. However, the gold and silver coins are still only worth their face value despite record gold and silver prices.
A person only identified as close to Herbert told CNN, "If somebody is stupid enough that they want to buy a Snickers bar at 7-Eleven with a gold coin worth thousands of dollars, they will be able to do that."

Larry Hilton, an attorney and insurance salesman who authored the Utah Sound Money Act, said eliminating taxes on the exchange of the gold and silver coins places them in the same playing field as paper currency. However, federal taxes still apply. The law also does not apply to foreign minted gold coins.

He told the Salt Lake Tribune last December that the Utah Sound Money Act is "not intended to be compulsory in any way. The state is offering to taxpayers, "If you want to pay your taxes in gold and silver, we'll accept them."

James West, publisher of the Midas Lettter, Wednesday called Utah Sound Money Act "a shot at the Federal Reserve. And Utah isn't alone. A few other states are considering similar bills."

"Conservatives fret that the central bank has permanently damaged the value of the dollar by pumping trillions into the economy, drawing down the greenback's buying power," he observed.

"And Utah - where the Tea Party has a powerful presence - is leading the charge against Fed Chairman Ben Bernanke."
 
The Utah Sound Money Act was also promoted by Washington-based American Principles in Action, which is backing the Gold Standard 2012 program.

Interesting move, we wonder who will be next to follow this action and introduce gold and silver coins as legal tender.









….........................................................................................

Over in the Options pit, our model portfolio has managed an average return of 41.23% per trade, 68 closed trades, 66 closed at a profit, or a 97% success rate. Average trade open for 42.76 days.


A gentle reminder for those of you who are still thinking about it, prices will double as of 2nd April 2011, but will remain 'as is' for existing subscribers, join us now while this bargain lasts.


SK Chart with profits re-invested 29 March 2011.JPG


The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.






Thursday
Mar312011

The Five-Million-Dollar Reason for Going Offshore

Offshore Banking 01 April 2011.JPG


By Terry Coxon, The Casey Report

Terry Coxon, co-editor of The Casey Report, is president of Passport Financial, Inc., and for over 30 years has advised clients on legal ways to internationalize their assets to optimize tax, wealth protection and estate planning goals. Read here how you can take advantage of a U.S. tax act and save a lot of money in the process…

Just when you thought there was nothing more the U.S. government could do to motivate you to ship your financial life offshore, they came up with another one. And if you have a sizeable net worth, it’s a big one; you could save your family $2.2 million in taxes by acting on the opportunity during the next 21 months. A husband-and-wife effort could save twice as much.
Included in the 2010 Tax Act passed by Congress late last year are gift and estate tax rules that apply only in 2011 and 2012. Compared to the rules they replaced, and compared to the rules that will take effect in 2013, they are especially permissive. The tax savings come from exploiting those interim rules before they expire.

For this year and next, you are granted a $5 million exemption from gift tax. If your bank account can handle it, you could write a check today for $5 million to someone in the next generation and incur no gift tax.

But it’s a use-it-or-lose-it opportunity. Starting in 2013, the exemption from gift and estate tax drops to $1 million, and the top tax rate on gifts and estates rises to 55%. (That’s substantially a reversion to the rules in effect in 2002.) So if you do nothing, you lose a free opportunity to reduce your taxable estate by a net amount of $4 million – which, at a 55% tax rate, means your family loses an opportunity to avoid $2.2 million in estate tax.   

Impediments

Estate tax has always been an avoidable levy. Regardless of the level of wealth, for those who planned well and planned early, the tax eventually incurred was trivial. The 2010 Tax Act doesn’t change that fact, it just makes it easier, until the end of next year, to exploit the fact. Even so, most people will let the $5 million opportunity slip by, as people always do with estate-tax saving opportunities. Because I hope you won't be one of them, let’s look at the practical impediments to effective estate planning, the things that get in the way and eventually cost the survivors so much in unnecessary tax.

Haven’t Gotten to It. Estate planning is not the kind of topic that draws most people in. And it’s generally about the far future, so it’s easy to tell yourself there will be plenty of time to deal with it later. If that sounds like you, maybe the $5 million opportunity that Congress is offering for just the next 21 months will spark some action.

Already Did It. If you’ve already done your estate planning homework, you probably don’t want to reopen the matter. But if you have a large estate, making that effort could save your heirs $2.2 million in estate tax.

They’ll Waste It. The thought of your 16-year-old grandson touring America on a $50,000 motorcycle likely does not live up to your highest hopes for posterity. Many wealthy individuals hold back from making gifts to younger generations because they don’t want to see the money wasted. Concern that gifts would remove capital from the control of the family’s most astute investor and cunning financial manager also discourages gifts. But such concerns are easily dealt with by using a trust. You can make a gift to an irrevocable trust of which you are the trustee. The property escapes the reach of estate tax, but you continue to decide how the money is invested and when it turns into spendable cash for the beneficiaries.

I Might Need It. You don’t want to do such a thorough job of estate planning that you plan yourself into the poorhouse. It’s pleasant to contemplate the financial head start you can provide for future generations, but not if you see yourself at the margin of the picture signing up for food stamps.

Offshore Solution

Those are the four reasons the government is able to collect billions of dollars in otherwise avoidable estate taxes every year. There's a way to shrink every one of those reasons and keep your family from eventually contributing to the government’s annual take: use an offshore trust. Here's what happens when you put an offshore trust at the center of your financial planning.
Haven’t Gotten to It. For reasons I’ll touch on, an offshore trust is the optimal environment for estate planning. But that’s really just a footnote.

An offshore trust is a cornucopia of benefits you can enjoy now. It provides unbeatable protection for your assets – protection from aggressive lawsuits, protection from lightning asset seizures and protection from the possible gold confiscation and currency controls that have many investors worried. It gives you entry to all types of foreign financial institutions, most of which no longer want to deal directly with Americans. That means more and better opportunities for profit and for truly effective diversification, and it means access to tax-efficient investment products you can’t get in the U.S.

Because those benefits begin right from the start, they counter the psychology of procrastination. And once you’ve established an offshore trust to gain those benefits, it only takes about 5 minutes of your attention to use the trust to capture the $5 million advantage I’ve been discussing.

Already Did It. An offshore trust can accommodate every estate-planning strategy your lawyer has told you about. You won't need to reinvent your estate plan, you'll just need to relocate it. And while you're doing so, you can bring it up to date to exploit the opportunity that was handed to you by the 2010 Tax Act.

Moving your estate plan offshore achieves an additional, highly attractive advantage. After your lifetime, the trust completely disconnects from the U.S. tax system. Distributions to your survivors will be reportable and partly taxable, but no one will be subject to U.S. tax on earnings the trust accumulates. The trust needn't be in anyone's taxable estate ever again. And no one will have a U.S. reporting obligation for the trust itself. That's as out of town as money can lawfully get.

They'll Waste It. An offshore trust can do as well as a domestic trust in dealing with the spendthrift problem, and maybe a little better. It has an edge because it provides better protection from the creditors some of your heirs someday might attract. In the meantime, it allows you to continue to manage the underlying investments just as you do now.
I Might Need It. Here is where an offshore trust shines for anyone who wants to exploit the $5 million opportunity.

If you transfer money to a trust, whether offshore or not, and you include yourself as a discretionary beneficiary (one who is eligible to receive a distribution but who has no fixed right to demand a distribution), and you later discover that you need the money for yourself, the trustee will have the power to give it to you. But if the trust is formed in the U.S., the money in the trust probably will remain in your taxable estate, because courts in the U.S. generally will tap into such a trust to satisfy your creditors.

By the standards of U.S. gift tax rules, if something is still available to your creditors, you haven't really given it away. (A few states have passed laws that attempt to protect such a trust from the grantor's creditors, but those laws can't protect a trust formed in the U.S. from lawsuits against the grantor in federal courts. The money is still available to at least some of the grantor's creditors, so it is still in the grantor's estate.)

The situation in some offshore jurisdictions is different. You can include yourself as a discretionary beneficiary of your trust, and if you later have a problem with a creditor, the courts there will tell your creditor to go away. Because the trust is protected from your personal creditors, your transfers to it move the money out of your taxable estate – even though the trustee has the authority to give the money back to you if you later need it.

With an offshore trust, the money's continued availability for your own support makes it far easier to exploit the $5 million opportunity that Congress has handed to you. And if you are married, it's a $10 million opportunity, but it runs out at the end of 2012.

 [The editors of The Casey Report – among them investing legend Doug Casey – leave no stone unturned to inform investors of the profit opportunities hidden in today’s volatile markets. While the U.S. dollar is losing more of its value every year and the economic crisis continues unabated, there are strategies to stave off the slow drip-drain on your bank account. Read the details here.]



….........................................................................................


Over in the Options pit, our model portfolio has managed an average return of 41.23% per trade, 68 closed trades, 66 closed at a profit, or a 97% success rate. Average trade open for 42.76 days.


A gentle reminder for those of you who are still thinking about it, prices will double as of 2nd April 2011, but will remain 'as is' for existing subscribers, join us now while this bargain lasts.


SK Chart with profits re-invested 29 March 2011.JPG


The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.