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Monday
Jul112011

Are Gold Stocks The Real Barbarous Relic?

In 1924 John Maynard Keynes referred to the gold standard as a “barbarous relic”, but we think the new barbarous relic is using gold stocks as a trading or investment vehicle in an attempt to benefit from rising gold prices. This isn’t the 1970s. One can buy GLD call options from a laptop in bed or take a long position in gold futures with a few taps on a smart phone whilst in line at a coffee shop. The days of having to call a broker and hopefully buy some gold shares that will hopefully go up if the gold price goes up are over. There is no longer any need to take the risk that your gold stocks will not go up with gold.

First off let us say that the aim of this article is not to discredit any gold mining or exploration company, or the efforts of the industry. We are not saying there isn’t money to be made in the gold mining industry, we are simply saying that gold stocks are unsuitable for trading gold and unsuitable for investing in rising gold prices. Many companies may be worth a buy on their own merits, but we do not think they should be bought to gain exposure to rising gold prices. There may be many undervalued gold companies out there, but then the reason for buying them is more on a valuation basis and not as a ploy to profit from rising gold prices. A gold stock may be a good investment, but using it as a vehicle to benefit from rising gold prices is a poor trading strategy. We are not saying that there isn’t money to be made from investing and trading gold stocks, but that is a separate issue from using gold stocks to play upwards moves in gold prices.

Why do many people continue to think gold mining/exploration stocks are a good investment to play rising gold prices? Even investors with stellar reputations such as John Paulson have large holdings in gold equities as a way to play rising gold prices, which is puzzling to us. One may be able to defend holding gold stocks if one is managing a mutual fund where by the mandate may prevent you from investing in physical gold or trading derivatives, but with ETFs even this is a very weak argument. This makes Paulson’s choice all the more bewildering since he runs a hedge fund and so can trade futures, options or whatever he likes (and in fact he came to fame by trading credit default swaps).

Investing in gold exploration stocks built purely on the premise that gold prices are going higher is a poor reason to place a trade. The price of the exploration stocks depends far more on whether or not they have the gold, much more than the gold price. If a junior exploration stocks successfully finds a great gold deposit then their stock price will rise, whether the gold price is $1000, $1500 or $2000. In addition to this it might be 10 years before they actually get the gold out the ground to sell it and who knows what the gold price will be then. It may be the case that the gold bull market has come and gone long before the explorer gets to sell just one ounce of gold.

Picking undervalued stocks is a separate process and area of expertise from that of trading commodities such as gold. If one thinks one can pick gold exploration plays that are going to do well, then one can apply the same reasoning to silver, copper and other metal explorers. If one is good at this it doesn’t matter so much if the underlying metal price is going to rise in the next year, as if a company makes a great find it will usually do well regardless.

An argument often cited by those investing or trading gold stocks is that they could outperform the gold price. The argument goes something like if it costs the company $500/ounce to mine gold and the gold price rises from $1000 to $1500 then the company is making twice as much, whereas the gold price has only increased 50%. It sounds fairly logical. However in reality the costs of mining are most often rising too.

What most is important about this is that many of the costs of mining gold are actually often positively related with the gold price. For example oil prices and gold prices are somewhat positively related so if the gold price is going higher in coming years, chances are that oil prices may well be higher too, leading to increased fuel costs involved with gold production. Plus if you are holding gold investments as an inflation hedge, then holding gold stocks isn’t as good a deal as it first may appear as the gold miner’s costs base will be inflating too.

Oil versus Gold

On top of this gold is getting harder to find and more expensive to extract when it is found. This is one of the reasons why the gold price has been increasing, the supply side is constricted, and yet it is often cited by people who then go on to recommend investing in the mining industry.

It is somewhat ironic that one would believe gold prices would rise in part due to mining becoming increasingly difficult and more expensive, but then invest in companies that will suffer from those very factors. The same applies to explorers. If one believes that gold is getting harder to find and that will contribute to higher gold prices, why would one invest in companies that are trying to find gold? Why not just in gold itself?


Our biggest problem with owning gold stocks is this: Where is the compensation for the extra risks?


The follow list identifies just some of the risks involved in mining and exploration that we do not think are being adequately compensated for.


Where is the compensation for geo-political risk?
Examples: Nationalisation of mines, disruption of mining due to conflict


Where is the compensation for managerial risk?
Examples: Management may make poor decisions that have an adverse impact on the stock price, say by acquiring another company at an unfavourable price.


Where is the compensation for labour risk?
Examples: Labour costs may increase, work force may go on strike.


Where is the compensation for technical risk?
Examples: Difficulties mining, problems with the deposit, downwards revision of resources estimates


Where is the compensation for environmental risk?
Examples: Adverse weather or natural disasters affecting the project(s)


Where is the compensation for tax risk?
Examples: Changes in the tax structure of the country the project is in which reduce its profitability, such as higher taxes or mining specific royalties being imposed.


These risks are not properly compensated for by the performance of mining stocks. Therefore one should not take these risks and should not use gold stocks in an attempt to profit from rising gold prices.

Are Gold Stocks The Real Barbarous Relic

In order for gold stocks to be worthy of an investment, they must outperform the gold price to compensate for the extra risks the investor is taking on. Outperformance is very different from leverage. Gold stocks must increase more when gold prices increase and decrease by less when gold prices decrease. At present even if the gold stocks manage to squeak out larger gains than gold when gold prices increase, they fall far further than gold when prices decrease. This isn’t outperformance, this is simply leverage and in this modern financial world leverage is cheap and easy. One doesn’t need to take the additional risks that gold stocks bring to get leverage to the gold price; one can buy an ETF using margin, buy a leveraged ETN or even a leveraged ETN on margin that will track the gold price almost exactly with a large degree of leverage. Not to mention one could use futures and options to add leverage too.

Of course there are some star performers in the junior sector and talented, experienced veterans of the industry may be able to pick some great winners. However overall as a sector it has severely underperformed in our opinion, especially on a risk adjusted basis. Having a few juniors that rise tenfold isn’t good enough for us, since if one is investing in gold explorers, you should own more than a few in order to diversify your risk. Also if you hold less exploration stocks, you have less chance of holding the one that hits the mother lode. One cannot have it both ways.

This bull market started in 2001, so perhaps there were periods of outperformance by gold stocks. Actually gold stocks stopped outperforming around 2002-2003. The only other period that one would have enjoyed some outperforming is measuring from the 2008 financial crisis low to date, but virtually every stock has done well measuring its performance from then.

We cannot understand why many people will still insist on gold stocks as a viable vehicle for gaining exposure to rising gold prices. Maybe the reasoning was sound 30 years ago, but it isn’t now. A possible reason is that gold stocks are interesting to talk and write about. Well something being interesting doesn’t interest us; we are interested in maximising our profits – even if we do not produce reams of research on a myriad of junior explorers for our subscribers. We use options to trade gold, options on GLD which are easily available and viable for the majority of investors. Our model portfolio has grown at an annualized rate of 117% and we have only used options on gold stocks twice, both of which were bearish and profitable trades. Through using options we can create the leverage we require and through our own efforts at timing the market we believe we offer outperformance as well, since options can allow one to profit if the price goes up, down or even sideways..

In conclusion we do not think gold stocks are a suitable vehicle for trading gold and we also do not think gold stocks make a suitable investment for those wishing to profit from higher gold prices. Gold stocks do not offer adequate compensation for the extra risks involved. They do not outperform. They barely offer leverage and even if they do, that is not enough. Of course there will be exceptions and opportunities for savvy investors to make money in this industry. However as a whole the entire premise of investing in gold stocks as a way to gain exposure to rising gold prices is flawed, outdated and quite frankly a “barbarous relic”.


Our SK OptionTrader model portfolio is up 338.11% since inception and our average return per trade is 40.41%, including losses. In total we have closed 81 trading recommendations with 78 closed at a profit. A one year subscription costs just $349 and a six month subscription costs $199, just $1.10 per day. Autotrading is now available with SK OptionTrader, made possible by Global AutoTrading. For more information or to sign up, please visit www.skoptionstrading.com


Return on SKOT Port 040711

Subscribe for 6 months - $499

 

Subscribe for 12 months - $799

 

Sunday
Jul102011

Home Prices vs. Home Values

Home prices in gold 08 July 2011.JPG

By Charles Vollum, BIG GOLD
On June 3, Standard and Poor’s issued the latest update to its Case-Shiller Home Price series.

The press release begins, “Data through March 2011 ... show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010.”

Then comes the key statement: “Nationally, home prices are back to their mid-2002 levels.”

This means that on the average, a home in the U.S. that was purchased for $200,000 in mid-2002 would have sold for about the same price two months ago. So after owning the home for almost nine years, you could sell it and break even – no capital gain nor loss, and all of the cash you originally invested would be returned to you.

But the dollars returned are not the same dollars that were invested! The U.S. dollar of mid-2002 could buy a lot more than the spring 2011 model... A barrel of crude oil cost $27 then, but about $100 now. A gallon of gasoline was $1.43 then, but $3.90 now. To purchase a shopping basket of food totaling $88 in mid-2002 would now ring the register for $232. An ounce of gold was around $315 back then, but over $1,400 at the end of Q1 2011!

So that house may have the same dollar price, but it does not have the same value.

The price distortions caused by a depreciating currency play havoc with investors' efforts to decide what price to pay for assets, as well as making it difficult to tell when to sell. After all, our goal isn't just to build an account with big numbers in it – we want to be able to afford a better life for ourselves and our families.

One approach to solving this problem is to price things using a more stable form of money – one that cannot be created and destroyed at the whim of a central bank. Gold.

In July of 2002, one dollar would buy 100 mg of gold – a penny was a milligram. In March of 2011, one dollar bought only 22 mg of gold – and at the end of May, just 20 mg. Some things are more expensive today in gold terms, but many are not. For instance, it takes less gold to buy a barrel of crude today than in 2002 (2.0 grams instead of 2.7 grams), but it takes a bit more gold to buy a pound of coffee (54 mg instead of 50 mg). And yet, both coffee and crude oil are several times more expensive in dollars than they were nine years ago. The same goes for silver, food, copper, gasoline, postage, college tuition... almost anything you can think of.
Except houses.

Using gold as the standard of measure shows what is really happening with home values:

Home values haven't just rolled back to their 2002 levels – they have been making new all-time lows every quarter for the last year!
This chart by itself can't tell you whether it is time to buy a house, or if it is too late to sell that second home. Prices could keep falling, or they could stabilize and begin to recover; that will be determined by the supply of homes on the market, the needs of buyers, and the strength of their finances.

One thing is certain: in the aggregate, home values will never go to zero. People need to live somewhere, and real property has real value. But in the coming months, the dollar price of housing may stabilize, and even rise if QE3 is launched or massive amounts of new fiat money are created to bail out Europe or to contain some other emerging crisis – even as real values are stagnant or falling. Take a look at 2001-2006 and 2009-2011 in the chart above for examples of this.

Yet the Home Price Index only goes back to 1987... Just how low are home prices compared to the decades before these records began?
U.S. Census Bureau data show that in 1963 the median price for a new home was $17,200, or 15.2 kg of gold. In April of 2011, the median new home price was $217,900, or 4.4 kg of gold – 71% less than in 1963!

But let’s peer back even further, to the cyclical low of the last century – the Great Depression.

Comparing today's prices to those of the 1930s is a bit harder, as back then most houses were smaller and lacked many of the features we now take for granted. According to The People History, in 1930 the average new home sold for $7,145 or 11.1 kg. By 1935, at the bottom of the Great Depression, the price of a new home had fallen to $3,450 or 3.1 kg – 30% less than the April 2011 price.

However, in the 1930s, the size of an average home was around 1,000 ft2, while today's average home is about 2,169 ft2. So homes now cost about 2 grams/ft2 – 35% less than the 1935 cost of 3.1 grams/ft2. This is even more amazing when one considers that today's homes include central heating and air conditioning, vastly improved insulation, and many other features and conveniences not found in a typical 1930s home.

So home prices today are not just the lowest in the last 25 years, they are actually lower than at the bottom of the Great Depression!
The Greater Depression isn't just a possible future that we might encounter – we are deep in it right now. The truth about our situation is being masked by the massive quantities of money being created by central banks around the world.

The key to surviving and thriving is to have your savings out of reach of the government currency manipulators by keeping it in gold, and to ensure that your investments are growing in gold value, not just showing illusory funny-money gains.

If you are not yet invested – or underinvested – in gold and silver, it is high time to take a look at the precious metals and large-cap precious metals stocks to protect your assets from runaway inflation. For only $79 a year, BIG GOLD helps you find the best deals on gold and silver, as well as the best stocks, ETFs and mutual funds for prudent investors.Try it risk-free for 3 months, with money-back guarantee.]


Regarding www.skoptionstrading.com. We currently have a number of trades on the drawing board, two of which have been placed as they met our selection criteria and are currently showing a profit. Patience is the order of the day as it is very important to trade only when the set up is in our favour.


Our model portfolio is up 338.11% since inception

An annualized return of 117.00%

Average return per trade of 40.41%

81 closed trades, 78 closed at a profit

Average trade open for 46.27days


sk chart 22 May 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.

SK logo 26 May 2011.JPG




Thursday
Jul072011

Apologies for any disruption to our service

Team,

We have received a number of emails regarding an inability to access our sites and read the posts. We have contacted our Web Master in London and hope to have these issues resolved shortly.

Thank you very much for your patience in matter its very much appreciated.

Bob
Wednesday
Jul062011

Whistleblower Maguire - This Will Destroy Gold & Silver Shorts

China gold coin.JPG



Good Day Team, I know that we drag you around the web to read various articles from time to time, but it is important to read as widely as you possibly can. Today we are popping over to King World News to for this commentary on the launch of a new gold and silver exchange in China.


This morning London whistleblower Andrew Maguire told King World News that the launch of the new gold and silver exchange in China will destroy the remaining gold and silver shorts.  Maguire stated,

 “The launch of this new gold and silver exchange has flown under the radar, but certainly has my attention.  I firmly believe we are marking a pivotal point that will in very short order affect current precious metals price discovery dynamics.  We now have an additional factor to be vended into the supply demand equation.  This factor will ultimately destroy the remaining short positions in both gold and silver.”

The Agricultural Bank of China has over 320 million retail customers and 2.7 million corporate customers and has integrated its customer account information system with this platform.

By creating the first ever rolling spot contract, Chinese bank customers will for the first time have ease of access to 10 ounce gold contracts in Renminbi directly from their bank accounts and with the click of a mouse.  To give a further idea of scale, if just 1% of their customers bought a single 10 ounce contract, that would equate to 1,000 tons of physical gold being drawn down....

We can only add our two cents worth regarding Andrews calculations in that he uses 1% of the customers which we would agree with, but, we are not sure that 10 ounces is within their reach, after all that's $15000.00. However, the opening of this exchange has to be a game changer and if the banks in the western world seize the opportunity and offer similar services then we can only imagine just how many customers would divert some of their wealth into the precious metals sector.



Regarding www.skoptionstrading.com. We currently have a number of trades on the drawing board, two of which have been placed as they met our selection criteria. Patience is the order of the day as it is very important to trade only when the set up is in our favour.


Our model portfolio is up 338.11% since inception

An annualized return of 128.07%

Average return per trade of 40.41%

81 closed trades, 78 closed at a profit

Average trade open for 46.27days


sk chart 22 May 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.

SK logo 26 May 2011.JPG




Monday
Jul042011

The Downside In Gold Is Limited

Despite some calling for an explosive summer rally in gold, prices fell again this week on the back of easing concerns over Greek sovereign debt as the Greek parliament successfully passed the austerity legislation required to access additional bailout funds. This was due to the erosion of what we call gold’s “Eurozone Debt Crisis Premium” and, as explained in our article last week; gold prices were not likely to rally in any sustainable manner. However the question is where are gold prices heading from now and how should one go about trading or investing in this environment.

The summer doldrums are in full flow, so seasonal weakness is to be expected. However it is during this period that the most money can be made, since it can be used to establish positions in anticipation of the next major move in gold. As the great Chinese General Sun Tzu said “Every battle is won, before it is ever fought”. The big money in the last major move wasn’t really made as gold hit $1425 in November or $1550 in April, it was made during the summer weakness of July and August when gold traded at less than $1200. The trades that are placed and investments that are made over this period can bring fantastic returns when the more exciting time of year comes around.

Having fallen roughly 6% from its highs around $1577, we now think that the downside for gold is limited. Technically speaking we are seeing some important support lines and the 150 day moving average converge around $1445 and we therefore think it is unlikely that gold prices will fall past this level.



In addition to this, the Relative Strength Index for gold currently stands at 36.76. Historically speaking, if the RSI falls to 30 it is a screaming buy signal. We aren’t seeing that screaming buy signal just let, but it could be just around the corner.

Looking to the fundamentals that drive gold, we think fears over the Eurozone crisis will continue to subside (despite the longer term underlying problems remaining unresolved). In additional to this, money markets are now fully pricing in a hike by the ECB in July and the December Euribor interest rate futures indicates that there is roughly a 70% chance the ECB will hike again in 2011. These two factors signal to us that the Euro is likely to go higher, the US dollar lower and gold priced in dollars to increase. Keep in mind that the ECB’s main objective is price stability, ie to control inflation, as opposed to the Federal Reserve’s dual mandate to strive for full employment as well. Therefore the ECB can be considered more likely to hike relative to the Fed, leading to some possible interest rate differential induced strength in the Euro against the Greenback.

Taking a technical look at the USD Index, the 76 level appears to be offering significant resistance. This is also the same level that the USD bounced off in November 2010.

USD Index Chart 040711

Whilst some choppy lateral motion is possible in the short term, we think the dollar will endure a serious decline in the medium to long term, coupled with the next major rally in gold prices.

Another factor being discussed that could possibly cause a large move higher in gold prices is that of a possible QE3. At present we do not see much likelihood of a QE3 program, at least not in the same nature as the previous quantitative easing programs. However we do think US monetary policy will continue to be supportive of higher gold prices, with the Fed keeping rates at zero and the TIPS yielding negative rates for multiple maturities (Please see our previous article: The Key Relationship between US Real Rates and Gold Prices).


Equally as important as devising what the move in gold will be and when it will occur is how one trades the move. This is a point that is often not given enough emphasis. As we have stated before, we think options are the best way to trade these moves. No other instrument can offer opportunities that options offer. Using options one can create a position that exactly matches one’s view on the market. Suppose one agreed with the views expressed above, that gold would not fall significantly. Using options one can be rewarded for the exact scenario. Gold stocks, futures or ETFs cannot offer that flexibility or adaptability, they simply offer the investor the chance to bet up or down.

It is for these reasons that options trading offers up many attractive opportunities from a risk-reward viewpoint. We specialise in indentifying these opportunities and executing trades to take advantage of them. We have executed 81 trades since inception, with 78 closed at a profit and an average return of 40.41% per trade including losses. Our model portfolio is up 338% since inception but over the same period gold is up only 55%, the 200% leveraged gold ETN (DGP) is up 115% and the HUI gold stocks index is up 40%.

In conclusion, if one has a long term bullish view on gold then this is the summer shopping season so try not to get too tied up in the day to day market action. Keep the big picture in mind. This gold bull has a while to run yet. We are not perma-bulls and do not consider ourselves “gold bugs”, we simply see market conditions as bullish for gold in the longer term. Recently we sold all our positions in gold banking profits and more than doubling our money, just before the May correction took prices down as low as 1461. If you would like to subscribe to our options trading service, SK OptionTrader, then you can do so at www.skoptionstrading.com. Our service offers market updates and both buy and sell trading signals on US options, with a strong focus on gold. We also run a model portfolio and give suggested capital allocations with each trade.

Return on SKOT Port 040711

Subscribe for 6 months - $499

 

Subscribe for 12 months - $799

 

Thursday
Jun302011

Economic Armageddon and You

Economic Armageddon JS 01 July 2011.JPG

Good Day Team,

This morning we received this video clip from Jim Sinclair which if you can find the time, is well worth watching.

Dear Friends,

Wondering about the American economy? This animated video explains 
 
Here is the entire story. I would suggest spreading the truth to offset the lies.

Jim Sinclair.


Please click here.






Taxes in the US 01 July 2011.JPG




Regarding www.skoptionstrading.com. We currently have a number of trades on the drawing board, the first of which has been placed as it met our selection criteria. Patience is the order of the day as it is very important to trade only when the set up is in our favour.


Our model portfolio is up 338.11% since inception

An annualized return of 128.07%

Average return per trade of 40.41%

81 closed trades, 78 closed at a profit

Average trade open for 46.27days


sk chart 22 May 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.

SK logo 26 May 2011.JPG




Wednesday
Jun292011

The Great Nugget Scam

Gold nugget.JPG

By Doug Hornig, Casey Research

You know an asset class is hot when the scam artists start coming out of the woodwork. Such was the case during the real estate bubble of this century’s first decade, as those selling mortgages packaged them in ever more complex vehicles, many of which are now known to have been utterly fraudulent.

Is gold where real estate was?

No, not quite. But the notion that we are approaching the same ballpark seems borne out by one of the more creative scams we’ve seen recently. And we’re not talking about all those hucksters now trying to separate you from your old jewelry for a fraction of its value.
We’re talking about the great nugget scam.

Some readers who follow all things gold may remember the story. In February of 2010, a California landowner named James Grill was walking his property near Washington in Nevada County, California. Using a metal detector, he unearthed a 98-ounce gold nugget in an unmined ancient stream bed adjacent to the south fork of the Yuba River.

It wasn’t the biggest nugget ever discovered – the largest known from California weighed a whopping 54 pounds and was found in 1859 in Butte County – and good-sized ones have turned up in Australia in recent years. But nothing similar had been found in the Golden State in a very long time. And the older biggies have almost all been melted down and sold. The Smithsonian’s top sample weighs 80 ounces.

This find caused quite a stir, leading to a frenzy of speculation as to what would happen to it, and what price it might fetch if sold. The nugget could be expected to command a premium from a collector who wanted to own the biggest pristine hunk of California gold still in existence.

All questions were answered on March 15 of this year, when the Washington nugget was auctioned in Sacramento. After a short but frantic bidding war among a half dozen anonymous buyers, the piece went for $460,000, well over three times melt value at the time.
Now we have to revise that last paragraph. All questions were answered but one: where did the nugget come from?

The answer to that one is now up for grabs. On June 4, a Melbourne prospector named Murray Cox came forward after seeing a photo of the Washington nugget in a mining magazine, and claimed that it is actually the Orange Roughie nugget (for its fish-like shape), an exact match at 98 ounces, which he discovered in Australia and sold in 1989. He provided a Stockton TV station with a 1987 newspaper article from the Melbourne Sundetailing the find. In side-by-side photographs of the two nuggets, they appear to be identical.

(Of some further suspicion is the fact that after the original “discovery,” a website appeared seeking investors to help develop a commercial mining operation called the Lost Scotchman Mine, on the 180-acre property. The nugget was prominently displayed, with the suggestion that it might be just the "tip of the iceberg." The property is landlocked, and federal court documents show that Grill has been involved in a long-running legal battle with the United States Forest Service to gain road access.)

At first, Reno auctioneer Fred Holabird, who handled the sale of the Washington nugget, stood by its authenticity. Now he says, “I got taken as bad as anyone,” although he expressed surprise that no one recognized it while it was on public display for three months prior to the auction. He’s still willing to pay for scientific testing that’ll definitively verify the nugget's origin, but hopes to avoid the expense and effort by encouraging Grill to come clean.

How the buyer will take all this is unknown at the moment. Holabird said he has contacted the Irvine-based Spectrum Group International, a precious metals broker that represented the anonymous buyer, but he has not yet heard back from the company. Legal wrangles are almost certain to ensue.

As we said at the beginning, this apparent scam is indicative of the exploding interest in gold. It won’t be the last, you can be sure. But we prefer the straight dope on the subject,which you can get monthly here.

BIG GOLD subscribers aren’t fooled as easily as these hapless men. Every month, Editor Jeff Clark explains the ins and outs (as well as ups and downs) of the gold and silver markets—and recommends the best large-cap stocks and funds, as well as how, when and where to buy the physical metal. For only $79 per year, you can get an education and handsome portfolio gains at the same time. Details here.




Regarding www.skoptionstrading.com. We currently have a number of trades on the drawing board, the first of which was placed last night as our selection criteria had been met. Patience is the order of the day as it is very important to trade only when the set up is in our favour.


Our model portfolio is up 338.11% since inception

An annualized return of 128.07%

Average return per trade of 40.41%

81 closed trades, 78 closed at a profit

Average trade open for 46.27days


sk chart 22 May 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
Jun282011

Trading Gold and Its Eurozone Crisis Premium

Recently gold challenged it’s all time highs, being propelled largely by renewed concerns over the Greek debt crisis and the possible ramifications a default could have on global financial markets. Whilst fears of a possible default in Greece are supportive of gold prices in the short term, it is important to understand that such pressures are largely temporary in nature and they do not significantly change the underlying market dynamics in the longer term. We feel the best way to describe this is by way of visualising that there is a premium built into the gold price that varies with regard to how prevalent fears over the Eurozone crisis are. Just to clarify, we are considering the effect that fluctuations in fears over the Greek situation have on the gold price, not the effect that an actual default would have on the price. When fears escalate, the gold price increases and when fears subside, then so does the gold price. It does not necessarily significantly alter the overall direction of gold prices over the longer term.


We think it is important to understand how changes in this “Eurozone debt crisis premium” impact the gold price. Distinguishing between price swings caused by fears over Greece and price swings that occur when a true fundamental or structural change has taken place in the market is imperative for valid and reliable market analysis.

For instance the quantitative easing programs implemented by the Federal Reserve are examples of events that truly changed the market fundamentals for gold and triggered a significant and sustainable rise in prices. Fears over the Greek crisis may cause the gold price to move, often significantly, but once fears subside the price will come right back. This is because the degree to which people are afraid of turmoil in Greece has not changed significantly, the underlying structure of the gold market.

To demonstrate this point we will take a look back to around this time last year, when the Greek issue was dominating the headlines and there was plenty of fear in the market around a possible default. Then the bailout package came though, fears subsided and gold prices fell back. The chart below illustrates the accumulation and erosion of the “Eurozone debt crisis premium” in gold prices at the time.

Eurozone gold premium may 2010

Gold had undergone a correction from December 2009 to February 2010 and was in a consolidation phase during a seasonally weak time of year when concerns over Greece began to make headlines. This caused an increase in the “Eurozone debt crisis premium” and therefore an increase in gold prices. However, it did not trigger a major rally as it did not alter anything fundamental in the gold market.

The market dynamics at work here are as follows. Traders and investors were concerned over the Greek situation and therefore gold was bought as a safe haven or hedge against the financial turmoil that could follow a Greek default. As the bailout package came through, the probability of a default decreased and therefore those who were long gold as a hedge against a crisis began to unwind their positions. This is what we are defining as the “Eurozone debt crisis premium” and the erosion of this premium contributed to the 8% fall in gold following the bailout. Without the fears over Greece, we think that gold prices would have likely followed a path similar to the blue dashed line on the chart above.

Just as an increase in the premium did not signal a new major rally in gold, a decrease in this premium did signal a downtrend. Changes in this premium do not significantly affect the overall trend or market fundamentals.

Another way to picture this is to presume that fears over Eurozone debt can be measured on a scale of 0-100%, with 100% meaning that the market is as fearful of a default as it can be and 0% being equivalent to the market not having any fears of a default. When this measure is at 100%, the “Eurozone debt crisis premium” is fully priced into gold and when it is 0% it is not priced in at all.

Without the “Eurozone debt crisis premium” gold prices would still follow on the path set by the fundamental factors that move gold significantly and sustainably over the longer term, such as quantitative easing.

Eurozone Gold Premium Diagram

This is obviously a large simplification, but we are merely trying to make the point that changes in fears over the PIIGS and the subsequent “Eurozone debt crisis premium” is more like changing the intercept of the gold bull market trend than the gradient.

So why is this important? After all changes in the price of gold, whether due to changes in the “Eurozone debt crisis premium” or any other factor, are still changes in price and so impact our gold positions. Well we think this is important for two main reasons.

Firstly a rise in gold due to an increase in the “Eurozone debt crisis premium” is not necessarily sustainable and therefore can impact the validity of technical analysis. An example of this was seen last year, when a rise in the gold due to Eurozone concerns sent prices to a new all time high. However shortly after this breakout prices retreated and therefore we consider this a “false breakout”. Trading this breakout from a purely technical perspective could have led to losses since gold did not go on a run after this break out. This emphasises the importance of understanding the fundamental dynamics of the gold market and combining them with technical analysis to reach a more reliable conclusion.

False Breakout Gold 2010

We noted the similarities in recent market action and the situation last year in an update to SK OptionTrader subscribers on June 21st, just a day before gold prices topped out and fell over $50, saying:

“The Greek crisis and fears of contagion have prompted a fair amount of safe haven buying and have kept gold prices reasonably well supported. However should the situation in Greece improve with say another bailout (or be perceived to improve) then these safe haven hedges could begin to unwind, creating a downward pressure on the gold price.

“We saw a similar scenario unfold in 2010 when gold prices gradually ticked upwards, even setting a new all time high at $1265 before falling back to around $1150 shortly afterwards. Given that the 2010 spring rally was also driven by Greek debt concerns, we are getting a feeling of déjà vu when we observe the markets. Therefore although a new all time high in gold would cause us to seriously consider taking a long position again, any technical breakout to a new high would have to be supported by some fundamental reasoning as to why gold was about to embark on a major rally. This is important as there is a big difference between a breakout that signals the start of a major move and a breakout that is caused mainly by a lot of safe haven hedge positions in gold that could be easily unwound should the Greek crisis subside.”


The second important reason for indentifying and understanding why gold prices are rising is that it should affect what type of vehicle one uses to trade or invest in gold’s movements. This mainly affects whether gold stocks should play a part in your position or not. Whilst we tend to avoid gold stocks (for reasons that will require a separate discussion), many investors use them to benefit from gains and falls in the price of gold.

Using gold stocks to benefit from a rise in gold prices may be a decent idea if the anticipated price movement is due to a fundamental change in the gold market that will cause a sustainable increase in prices, such as the implementation of quantitative easing programs. However it is not a good idea if the movement is due to something like the Greek debt crisis.

The logical reasoning why gold stocks have performed poorly in the recent run up in gold prices is as follows. Suppose there were two outcomes from the situation in Greece. One is that some form of bailout package is given and fears over the sovereign debt situation subside. The other is that Greece defaults on its debt and financial markets go into turmoil.

Whilst it may be debatable how gold prices will behave under each scenario, neither outcome is positive for gold stocks. The first would probably see gold prices rally temporarily and then subside as fears abated. How much more valuable are gold stocks if the gold price is higher for a month or so? Chances are it doesn’t have a great impact on how much money the companies are going to make and therefore the stocks aren’t worth that much more under this scenario. With the second outcome, it is likely there would a massive flight from risk assets across all markets and a scramble for liquidity. That means gold stocks would be sold, as after all they are still equities and therefore would be dumped in a dash for cash.

Therefore if one wishes to trade gold on the back of fluctuations in fears over a Greek default, gold stocks should play no part in that strategy. In fact one could even make the argument that the best trade for that type of situation is a long gold/short gold stocks position, but we digress.

In conclusion our main point is that we think it is important that one understands how the “Eurozone debt crisis premium” impacts the gold market and the ramifications that price movements caused by the changes in this premium have on how one analyses and trades gold. This is an example of the analysis that we undertake at SK Options Trading, pass on to subscribers of SK OptionTrader via trading signals and market updates. Gold is a major focus of our trading and we use options on US equities such as GLD in an attempt to profitably trade gold. SK OptionTrader has recommended 61 gold related trades since inception and 60 of those have been profitable, a success rate of 98.36%. Overall our model portfolio is up 338.11% since inception and we have an average return of 40.14% per trade including losses. Our full trading record is available at www.skoptionstrading.com so feel free to visit the site for more information and to sign up.

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An investment of just $1000 in the average trade would have more than paid for an annual subscription fee of $349
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Thursday
Jun232011

Death by a Thousand Cuts

The political landscape:

The Greeks need even more boat loads of cash to stay afloat and its richer European partners are scrambling to put a package together. The German government are desperately trying to enlist more contributors and the UK is an obvious target. So the question is will David Cameron rollover or stand firm. One of the reasons for keeping the pound was to avoid such nonsense. This bailout is good money after bad, all in aid of keeping the Eurocrats in highly paid jobs rather than helping the Greeks solve their debt problems. Taking on more debt is not a cure for debts, it is akin to giving smokers another cigarette as they try to kick the habit.

The Greeks would be far better off walking away from the euro and starting again with their own currency and a clean slate. The thought of living through a twenty year austerity programme and enduring a fire sale of state owned assets is too high a price to pay as the riots in Athens clearly demonstrate.

Business taxation in Greece amounts to around 52%, about four times more than it is in neighboring states such as in Romania. In Turkey there is a five year tax holiday to entice new businesses, so the outlook for inward investment looks bleak. That being the case, the possibility of Greece paying its debts via internal growth is zilch.

Yes a default would mean that the banks would be in for a haircut, but as we see it, its one they truly deserve.

However, we will still be subjected to the pain of the political system as those who attend the 'G' meetings, with the best of intentions, do not employ one brain between them and have been wrong footed a number of times by economic reality, as frequently highlighted by Nigel Farage in this clip entitled: Your euro-predictions have been 100% wrong, Mr Barroso.

Nigel Farge 23 June 2011.JPG
Nigel Farage of UKIP


Unfortunately those who run Europe are no brighter than those who have taken the United States to the very edge of the abyss, where there will be more quantitative easing albeit in a disguised form, as they to continue with their 'extend and pretend' policies.

Going back to the UK we can see that Gold has been making new highs in the GB Pound as shown on the chart below:

Gold chart  vs GBP 24 June 2011.JPG

One ounce of gold now costs in the region of nine hundred and fifty pounds, thought of as a ridiculous possibility only a few short years ago.

We could bring in other countries such as Spain, as their time in the bailout spotlight is drawing ever closer, however, we think you have got the drift.

As advocates of honest money just what does this mean to us?

We need to realize that our political masters are devoid of ideas other than the printing of even more money. The debasement of currencies will gather pace as each of the sovereign states smile sweetly, while devaluing their own currency in the now frantic race to the bottom. As an asset class the folding stuff generates very little in interest payments and buys less each year as prices for commodities, goods and services, power, etc, become more expensive.

To stick with paper currency is akin to a death by a thousand cuts.

What to do now

Start by calculating your net worth and ascertain just how much of it is in cash and how much is in hard assets. Allocate a certain amount of cash to act as a cushion and cover your living costs for a period of time that will put you at ease. The portion that is your 'investment cash' can then be allocated to an asset class that you consider has value. The agricultural sector is popular, so is the oil sector and energy in general. Time is usually a constraint to gaining an understanding of all the possible sectors that are vying for your cash, so focus on what suits your investment goals and criteria and then learn everything that you can about it, before making an actual purchase.

In our case its the precious metals sector where we have invested and traded for many years and have gained a 'feel' for how it performs. Our strategy has been to acquire both physical gold and silver along with a select few of the associated stocks and when the opportunity arises we also utilize the options facility to add some leverage to a particular trade.

Protecting your wealth and self preservation is the name of the game. Whether you like it or not you have a position and no matter how small it is you have to get your head up and think, is this the best that I can do, if not, then get your skates and put some effort into it, after all its your financial future that is on the line here.

Regarding www.skoptionstrading.com. We currently have a number of trades on the drawing board which will be executed once our selection criteria has been met. Patience is the order of the day as it is very important to trade only when the set up is in our favour.


Our model portfolio is up 338.11% since inception

An annualized return of 128.07%

Average return per trade of 40.41%

81 closed trades, 78 closed at a profit

Average trade open for 46.27days


sk chart 22 May 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.

SK logo 26 May 2011.JPG




Wednesday
Jun222011

The UK to be sucked into the Greek Bailout by the Germans

Merkel and Cameron 23 June 2011.JPG
David, got a quid for the Greeks....
Sorry Pet...



The German government signalled yesterday that Britain would need to contribute to the new EU bailout being negotiated for Greece despite David Cameron's repeated assertions this week that the issue is a "red line" for the government.

The conflicting messages from Berlin and London paved the way for a likely clash between Germany and Britain at an EU summit opening in Brussels on Thursday and will unleash howls of protest from the eurosceptic media and the prime minister's backbenchers if he is forced to pledge more for Greece's rescue.

The bulk of the new bailout – the second for Greece in just over a year – is to come from a €440bn fund guaranteed by the other 16 governments of the eurozone.

But a separate European commission-administered fund of €60bn, for which Britain is also liable and which is known as the European financial stability mechanism (EFSM), should also be used for part of the proposed Greek rescue, senior German government officials said.

Cameron told the Commons that the Greek disaster – which will dominant the Brussels summit – was an issue for the eurozone.
"We don't believe the European financial stability mechanism should be used for Greece. We have made it clear that's not appropriate, and I don't think it will happen," the prime minister said.

But a senior German official contradicted this. He said the Greek rescue, expected to amount to up to €120bn, would not be agreed by the EU until next month, but that under German law the EFSM needed to be involved.

"The German legal situation is clear," he said. "The EFSM should contribute." Asked whether the UK could veto such a move obliging it to guarantee billions for Greece, the official answered: "I don't understand the question because the decision is taken by qualified majority vote … Everyone is tied to a QMV decision."

Britain is also liable for more loans to Greece through its contributions to the International Monetary Fund, which is heavily involved in the Greek rescue.

This is not contested by the government. But its stance on the EFSM would be supported by the Czechs and the Slovaks, both reluctant to help Greece avoid a sovereign default. The Czechs, outside the euro, are in a similar position to Britain. The Slovaks are in the common currency.

British officials say that in the past 10 days of turmoil in Greece and acrossEurope, the UK has not been asked to make a contribution and that they have also received assurances from the French they will not be asked to take part. Furthermore, the key decisions on what to do about Greece have been taken by eurozone governments, reinforcing the British case for not being involved.

In the €110bn bailout of Greece launched in May last year, the EFSM and the UK were not involved, the British point out. But this is simply because the EFSM did not then exist. In the two bailouts since then, of Ireland and Portugal, the EFSM has been used and Britain has been exposed.

"This is a political battle between Germany and the UK," said a senior European commission official.

A German parliamentary resolution 12 days ago said that "the future aid [for Greece] may involve bilateral payments as well as from the EFSM."

The new bailout deal, which may not be finalised until September, has to go before the parliament's budget committee in Berlin for endorsement.

Despite the Berlin official's emphasis on the German legal position, senior commission figures in Brussels said there was no legal obligation for the EFSM to be used in the Greek crisis and that this was a political issue to be decided by the 27 governments of the EU.

Thanks to The Guardian for this piece.

Regarding www.skoptionstrading.com. We currently have a number of trades on the drawing board which will be executed once our selection criteria has been met. Patience is the order of the day as it is very important to trade only when the set up is in our favour.


Our model portfolio is up 338.11% since inception

An annualized return of 128.07%

Average return per trade of 40.41%

81 closed trades, 78 closed at a profit

Average trade open for 46.27days



sk chart 22 May 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.

SK logo 26 May 2011.JPG