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Friday
Apr152011

Can You Pass The 2011 Gold Quiz?

Quiz.JPG


By Jeff Clark, BIG GOLD

CPM Group recently released their 2011 Gold Yearbook, an invaluable resource for us gold analysts. Mostly a reference book, even a gold enthusiast might find it dry reading. But I loved it, and as I studied it on a plane, I kept finding data that made me perk up.

To have a little fun with it, I thought I’d summarize what I read in the form of a quiz. See how many you can get correct. Regardless of your score, I’m sure you’ll agree with the ramifications each point makes for the gold market.

I’ll start off easy

1)      The main driver behind rising gold prices over the past decade is:
a)      Increased jewelry demand in India
b)      Greater industrial uses of the metal
c)       Investment demand

Worldwide investment demand for gold totaled 44 million ounces in 2010. Because of the growing demand by investors, prices have been forced upward.

→Five exchanges began trading gold contracts for the first time in 2010, and three more introduced mini contracts, collectively the largest number launched since the early ‘80s. There are now 24 gold vending machines in seven countries, with three more countries adding machines this year. Households in developing countries are now moving away from gold jewelry and buying coins and bars for their savings. I could go on, but suffice it to say that investment demand will continue to be very strong.

2)      True or false: recovery from gold scrap was lower in 2010 than 2009.

Scrap rose three consecutive years in a row – until last year. Gold supply from scrap fell 2.1%, to 42.2 million ounces.

→This is significant because gold prices were higher, which would normally increase the amount of scrap coming to market. One of the primary reasons scrap dropped is because investors are holding on to their metal, reportedly because they believe prices are headed higher. Isn’t that one reason you’re holding on to your bullion?

3)      There are many reasons investors have been buying gold over the past 10 years, but what is the #1 reason?

a)      Safe-haven asset

b)      Gold coins and bars have become more intricate, widespread, and beautiful

c)       Supply and demand imbalance

Global fears increasingly led investors to purchase large volumes of gold in 2010 for safe-haven purposes, despite record price levels.

→High levels of investment buying are expected to continue in 2011 because virtually none of the economic, political, and monetary concerns have been resolved.

If you got all three answers correct, you’re an investor who understands the basic reasons for owning gold and that those reasons are still in play.

Now let’s step it up a little…

4)      Gold represented what percent of global financial assets at the end of 2010?
a)      3.1%
b)      0.7%
c)       1.6%
d)      2.4%

The estimated value of investor gold holdings stood at $1.5 trillion at the end of last year, about 0.7% of global financial assets.

→While up nine years in a row and triple what it represented in 2001, gold is still a miniscule portion of the world’s private wealth. It represented 2.8% of global assets in 1980, four times what it does today.

5)      How many central banks increased their gold holdings in 2010?

a)        9
b)      12
c)      15
d)      19

Russia, Thailand, Belarus, Bangladesh, Venezuela, Tajikistan, Ukraine, Jordan, Philippines, South Africa, Sri Lanka, Germany, Kazakhstan, Mexico, Greece, Pakistan, Belgium, Czech Republic, and Malta = 19. Central banks as a group are expected to continue to be net buyers of the metal for the foreseeable future.

→It’s interesting that most purchases were from developing countries, unsurprising when you consider they’ve accumulated over $5 trillion in foreign exchange reserves just since 2002.

6)       Compared to 2009,U.S. Mint gold coin sales in 2010 were:

a)      Down 12%
b)      Up 8%
c)       Up 5%
d)      Up 3%

The U.S. Mint sold 1.43 million ounces last year, down 12% from the 1.62 million ounces sold in 2009. You might think this is negative until you realize that global coin sales rose 21% last year, reaching 6.3 million ounces. Makes you wonder what other countries know that many North Americans don’t.

→Supply problems continue to plague the U.S. Mint, evidenced by the fact that Buffalo sales were suspended for half the year.What happens when the greater population begins to clamor to buy gold? Bottleneck, meet desperation.

7)      CPM estimates that the fiscal and monetary imbalances, especially in developed countries, could take how long to resolve? 

a)      1 year
b)      Decades
c)       5 years
d)      2 years

Rigid social contracts are so deeply ingrained, especially in the developed world, that it will take decades to resolve the monetary imbalances.

→This sobering fact means gold will likely be in a bull market for many years to come. There are very few options to deal with the overwhelming debt burden in most of these countries: raise taxes, cut spending, increase growth, or print money. Guess which one is most likely? Inflation from currency dilution is baked in the cake and will spur further gold demand and light a fire under the price.

If you got these four questions correct, I think it means you’re an astute investor who doesn’t worry about day-to-day price fluctuations and instead focuses on owning enough ounces to protect your assets from the huge and intractable fiscal problems that still have to be faced.
Now here are some questions for those of you who love gold stocks…

8)      What was the industry-average cash cost to produce an ounce of gold last year?
a)      $509
b)      $498
c)       $544
d)      $474

Cash costs have tripled since 2002 and rang in at $544 last year. They will certainly be higher again this year.

→In spite of higher costs for the producers, margins actually rose due to higher gold prices. Margins in 2010 averaged $680, and were only $114 as recently as 2002.

We’ve got some of the most profitable companies in BIG GOLD, along with a number of producers that have big growth coming online over the next one and two years. Buy these stocks before that growth happens; if you shell out the bargain basement price of $79 now, I think your portfolio will be very happy when it comes time to renew.

9)      The average grade of gold mined on a worldwide basis last year was how much?
a)      5.11 grams/tonne
b)      3.54 grams/tonne
c)       2.96 grams/tonne
d)      1.83 grams/tonne

The second lowest level on record – 1.83 grams per tonne – occurred in 2010. While not entirely negative since higher gold prices allow producers to go after lower-grade deposits, this leads to higher costs for both discovery and production. It is undoubtedly true, though, that one of the main reasons grades are lower is because the easy fruit has been picked in many regions around the world.

→This is bullish for those explorers that can find and develop higher-grade deposits and is where much of our speculative dollars should be focused. Our mining exploration advisoryInternational Speculator tells you which companies are the best of the best, outperforming the S&P by 8.4 times last year. So if you’re not reading the International Speculator yet, you’re missing out on some spectacular profits.

10)   The most popular region for exploration spending is where?
a)      Latin America
b)      Canada
c)       Nevada
d)      China

Roughly 25% of all global exploration money is devoted to Latin America. The biggest beneficiaries are Peru, Mexico, Brazil, Chile, and Argentina.

→If you’re investing in gold and silver explorers, make sure you have exposure to this region, as odds are high there will be a number of major discoveries made here.

If you got these three questions correct, you’re well in touch with the gold stock market, and I hope you’re taking advantage of the picks we offer in BIG GOLD and International Speculator.  

This data clarifies and confirms why many investors own gold and continue buying it. It paints a decidedly bullish picture for the metal, in spite of record price levels. Monetary issues are far from over, won’t be easily resolved, and will take years to play out. Banks continue buying, and investors aren’t selling. The U.S. Mint can’t keep up with demand, and yet gold is underowned when compared to other major asset classes. Costs are rising for the producers, but margins are rising faster for the better-run companies.

When looking at the big picture for gold, I for one draw comfort from knowing I’ve got some ounces tucked away. I hope you, too, see gold for what it is – protection against unsustainable fiscal imbalances and massive currency debasement, and a profit center for years to come.


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

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.


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
Apr142011

Is the HUI about to embark on a major rally?

HUI Chart 15 April 2011.JPG


We have been patiently waiting for the Gold Bugs Index (HUI) to take off to the upside on the back of record gold prices, however its performance has been sluggish at best and the rallies have been short lived.

Now, putting on our positive glasses there is an argument for some catch up play by the gold producers. Taking a quick look at the chart we can see, at a bit of a stretch, it looks as though the HUI has formed a number of higher lows, which is usually a positive sign on most charts. The RSI at 57.01 still has room to move to higher ground before becoming seriously oversold. The 50dma is close behind the HUI and the 200dma is also following along in support, so the downside should be fairly limited from this point.

Whether to pile in or not is still something that we are wrestling with. We do own a number of gold producers and maybe its just our lack of patience but with gold as high as it is we did expect the stocks to be moving up the gear box by now. We still have some 'opportunity cash' on the sidelines and are looking to invest, but you know just how stingy we can be when it comes to spending money.

You may also recall that we made a major change to our investment strategy last August when we reduced our exposure to such gold producers as AEM, AUY, etc, in order to increase our exposure to silver and the silver producers, in particular SLW. Since then gold prices have improved by around 25% and silver prices have been on a tear improving by around 130% and so we feel reasonably vindicated by this re-positioning of our portfolio.

Now, if silver has run its course for the near term look ahead, then maybe its time to go into reverse and move our cash back again. The silver market is still tiny even when compared to gold and the demand does appear to be relentless at the moment so we are staying with it.

We maybe trying to be a tad too cute by trying to pick such turns in the market so we thought that we would throw it over to you guys and gals, our trusty team, in order to get your input – so come on and make an effort to fire in a few words, thanks, Bob.

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

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.


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
Apr132011

Precious Metals Update as of 14 April 2011

USD Chart 14 April 2011.JPG
The United States Dollar


Since early January 2011 the USD has lost 7.4% of its value and needs to manage any further decline or stabilize at this point in order re-assure holders of this currency, that all is not lost. As we see it there will be short rallies on the way down but the '74' level will soon be breached and then its down the '72' level. The technical indicators are firmly in the oversold zone so a short rally is possible at this juncture, however, as the chart shows we have a had a number of rallies already this year that have amounted to nothing.

If '72' fails then we are in for a very rough time as individual investors, states and countries, implement damage limitation strategies in order to protect whats left of their wealth. One of the stimulants for the dollar could be the European debt crises which is a long way from being out of the woods with Portugal lining up for help and Spain peering through curtains hoping that there will be something left for them. As the Euro comes under pressure investors have to go somewhere and the dollar is regarded as the best of a bad bunch. The gold and silver markets are way too small to accommodate their needs, however, if and when they do transfer a small portion of their wealth into the precious metals sector, for safe keeping, then new price levels will become the stuff of dreams for the metals bulls.

It remains a puzzle to us as to why anyone would want to hold a paper contract that promises to exchange it for you with another paper contract. Maybe its the fear of the unknown or the fear of change that makes some of us behave like frightened rabbits when confronted by a cars headlights. The inability to assess a situation, recognize that there is a bull market in full flow and then take a position is astonishing to us, but, as my Dad use to say “You cannot talk sense to a twit” enough said.

Gold Chart 14 April 2011.JPG
Gold Prices

The $1440/oz resistance level has been pierced and now becomes support for gold prices. As gold consolidates the technical indicators become less overbought, setting up the next rally. Gold is a class act and has its eye on the next hurdle which is $1500/oz, which in our humble opinion will fall shortly.

silver chart 14 April 2011.JPG
Silver Prices

A 30% increase in silver prices so far this year has rewarded the silver bugs and hammered the shorts. Both the 50dma and the 200dma are moving up in support, however, we would like to see the gap between the 200dma get a little closer to silver prices. A period of consolidation at or around the $40.00/oz would help, however, the demand for silver as an investment is growing along with the many industrial and medical uses for silver, pushing prices ever higher. As this demand continues to rise, silver prices will be forced to higher levels, in turn the shorts will have to cover sooner or later, so don't be surprised if we have a record week with a stunning move to the high side in the very near future. Silver has been our favourite investment vehicle for some time now and our intention is to stay with it.

Our strategy remains the same in that physical gold and silver in your very own possession is the first step to take especially if you are new to this market. Secondly, investing in a short list of quality producers has generated handsome rewards, particularly in recent times when their value has been recognized. Finally a few well thought out options trades can add some spice with a boost to your returns on the back of the current volatility in these markets. Do remember to go gently with your investment choices and ensure that you are able to fight another day, no matter how good an 'opportunity' appeals to you. Otherwise keep building your position as this is the best game in town and today's metals bugs will be handsomely rewarded in the future.



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



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.


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
Apr132011

Keeping Capital in a Depression

Depression 14 April 2011.JPG


By Doug Casey, The Casey Report

Nothing is cheap in today’s investment world. Because of the trillions of currency units that governments all over the world have created – and are continuing to create – financial assets are grossly overpriced. Stocks, bonds, property, commodities and cash are no bargains.

Meanwhile, real wages are slipping rapidly among those who are working, and a large portion of the population is unemployed or underemployed.

The next chapter in this sad drama will include a rapid rise in consumer prices. At the beginning of this year, we saw the grains – wheat, corn, soybeans and oats – go up an average of 36% within one month. In the same time frame, hogs were up 30.7%. Copper was up 29.1%. Oil was up 14%. Cotton was up 118%. Raw commodities are the first things to move in an inflationary boom, largely because they’re essential to everything. Retail prices are generally the last to move, partly because the labor market will remain soft and keep that component down, and partly because retailers cut their margins to retain customers and market share.

We are in a financial no-man’s land. What you should do about it presents some tough alternatives. “Saving” is compromised because of depreciating currency and artificially low interest rates. “Investing” is problematical because of a deteriorating economy, unpredictable and increasing regulation, rising interest rates and wildly fluctuating prices. “Speculation” is the best answer. But it may not suit everyone as a methodology.

There are, however, several other alternatives to dealing with the question “What should I do with my money now?” – active business, entrepreneurialism, innovation, “hoarding” and agriculture. There’s obviously some degree of overlap with these things, but they are essentially different in nature.

Active Business

Few large fortunes have been made by investing. Most are made by creating, building and running a business. But the same things that make investing hard today are going to make active business even harder. Sure, there will be plenty of people out there to hire – but in today’s litigious and regulated environment, an employee is a large potential liability as much as a current asset.

Business itself is seen as a convenient milk cow by bankrupt governments – and it’s much easier to tap small business than taxpayers at large. Big business (which I’ll arbitrarily define as companies with at least several thousand employees) actually encourages regulation and taxes, because their main competition is from small business – you – and they’re much more able to absorb the cost of new regulation and can hire lobbyists to influence its direction. Only a business that’s “too big to fail” can count on government help.

It’s clearly a double-edged sword, but running an active business is increasingly problematical. Unless it’s a special situation, I’d be inclined to sell a business, take the money, and run. It’s Atlas Shrugged time.

Entrepreneurialism

An entrepreneur is “one who takes between,” to go back to the French roots of the word. Buy here for a dollar, sell there for two dollars – a good business if you can do it with a million widgets, hopefully all at once and on credit. An entrepreneur ideally needs few employees and little fixed overhead. Just as a speculator capitalizes on distortions in the financial markets, an entrepreneur does so in the business world. The more distortions there are in the market, the more bankruptcies and distress sales, the more variation in prosperity and attitudes between countries, the more opportunities there are for the entrepreneur. The years to come are going to be tough on investors and businessmen, but full of opportunity for speculators and entrepreneurs. Keep your passports current, your powder dry, and your eyes open. I suggest you reform your thinking along those lines.

Innovation

The two mainsprings of human progress are saving (producing more than you consume and setting aside the difference) and new technology (improved ways of doing things). Innovation takes a certain kind of mind and a certain skill set. Not everyone can be an Edison, a Watt, a Wright or a Ford. But with more scientists and engineers alive today than have lived in all previous history put together, you can plan on lots more in the way of innovation. What you want to do is put yourself in front of innovation; even if you aren’t the innovator, you can be a facilitator – something like Steve Ballmer is to Bill Gates. It will give you an excuse to hang out with the younger generation and play amateur venture capitalist.

This argues for two things. One, reading very broadly (but especially in science), so that you can more easily make the correct decision as to which innovations will be profitable. Two, building enough capital to liberate your time to try something new and perhaps put money into start-ups. This thinking partly lay in back of our starting our Casey’s Extraordinary Technology service.

Hoarding

In the days when gold and silver were money, “saving” was actually identical with “hoarding.” The only difference was the connotation of the words. Today you can’t even hoard nickel and copper coins anymore because (unbeknownst to Boobus americanus) there’s very little of those metals left in either nickels or pennies – both of which will soon disappear from circulation anyway.

We’ve previously dismissed the foolish and anachronistic idea of saving with dollars in a bank – so what can you save with, other than metals? The answer is “useful things,” mainly household commodities. I’m not sure exactly how bad the Greater Depression will be or how long it will last, but it makes all the sense in the world to stockpile usable things, in lieu of monetary savings.
The things I’m talking about could be generally described as “consumer perishables.” Instead of putting $10,000 extra in the bank, go out and buy things like motor oil, ammunition, light bulbs, toilet paper, cigarettes, liquor, soap, sugar and dried beans. There are many advantages to this.
Taxes– As these things go up in price and you consume them, you won’t have any resulting taxes, as you would for a successful investment. And you’ll beat the VAT, which we’ll surely see.
Volume Savings –When you buy a whole bunch at once, especially when Walmart or Costco has them on sale, you’ll greatly reduce your cost.

Convenience –You’ll have them all now and won’t have to waste time getting them later. Especially if they’re no longer readily available.

There are hundreds of items to put on the list and much more to be said about the whole approach. The idea is basically that of my old friend John Pugsley, which he explained fully in his book The Alpha Strategy. Take this point very seriously. It’s something absolutely everybody can and should do.

Agriculture

During the last generation, mothers wanted their kids to grow up and be investment bankers. That thought will be totally banished soon, and for a long time. I suspect farmers and ranchers will become the next paradigm of success, after being viewed as backward hayseeds for generations.

Agriculture isn’t an easy business, and it has plenty of risks. But there’s always going to be a demand for its products, and I suspect the margins are going to stay high for a long time to come. Why? There’s still plenty of potential farmland around the world that’s wild or fallow, but politics is likely to keep it that way. Population won’t be growing that much (and will be falling in the developed world), but people will be wealthier and want to eat better. So you want the kind of food that people with some money eat.

I’m not crazy about commodity-type foods, like wheat, soy and corn; these are high-volume, industrial-style foods, subject to political interference. And they’re not important as foods for wealthy people, which is the profitable part of the market. Besides, grains are where everybody’s attention is directed.

But there are other reasons I’m not wild about owning any amber waves of grain. Anything you want to plant will practically require the use of a genetically modified (GM) seed from Monsanto. I’m not sure I really care if it’s GM; all foods have been genetically modified over the millennia just by virtue of cultivation. And $1 paid to Monsanto typically not only yields the farmer $5 of extra return, but produces lots of extra food – which helps everybody. But I wouldn’t be surprised if someday the giant monocultures of plants, all with totally identical purchased seeds, don’t result in some kind of catastrophic crop failure. This is a subject for another time, but it’s a thought to keep in mind.

In any event, agricultural land is no longer cheap. But I don’t suggest you look at thousands of acres to plant grain. Niche markets with niche products are the way to fly.

I suggest up-market specialty products – exotic fruits and vegetables, fish, dairy and beef. The problem is that in “advanced” countries – prominently including the U.S. – national, state and local governments make the small commercial producers’ lives absolutely miserable. Maybe you can grow stuff, but it’s extremely costly in terms of paperwork and legal fees to sell, especially if the product is animal based – meat, milk, cheese and such. Niche foods are, however, potentially a very good business. Eternal optimist that I am, I see one of the many benefits of the impending bankruptcy of most governments as again making it feasible to grow and sell food locally.

Above all, though, this isn’t the time for business as usual. You’ll notice that “Working in a conventional job” didn’t occur on the list above. And I pity the poor fools working for some corporation, hoping things get better.

[Get more valuable advice on how to survive in a crisis in The Casey Report – a monthly newsletter brimming with top-notch analysis of U.S. and world events, economic research, trend forecasts and investment advice for the big-picture investor. Details in this free report.]






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



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.


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
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.


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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.

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

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.