Friday, September 23, 2011

Net Asset Value of Precious Metal Trusts and Funds.... Europe's utter Indecision continues....

Net Asset Value of Precious Metal Trusts and Funds...Europe's utter Indecision continues....No one really knows where real power happens to be......

Although it is slightly less visible to those who only look at US equity markets, there is a liquidation sell off in the world markets especially Europe. This is helping to steepen the correction in the metals markets.

Notice from this chart that the gold/silver ratio is back over 50 again. And so I have become interested in silver again today for my short term interests.

It is important to keep this re-tracement in context, as alarming as it might be even for those who hold positions for the long term but watch their portfolios in the short term.

Comex expiration is next week. This is always an occasion for mischief, and I think the metals were hit particularly hard because of the delivery situation shaping up on Comex.

But the key driver is the European sell-off and the search for liquidity amongst traders and funds. So if you wish an indicator of the future watch how that situation develops.

Once the short term players have raised their cash, the selling will abate and reverse, even if the situation does not remarkably improve. That is how markets work in their different time frames. Treasuries are getting bought to insanity as investors seek to flee European related risk.

And this is why I have two sets of portfolios: short term and long term. And I use two very different sets of strategies and tactics in them. And truth be told, despite some amazing ups and downs in the short term, I make most of my lasting gains in the long term portfolio where I sit and wait on the fundamental trends.

So I have to ask, 'is the gold bull market over?' And so I have added the second chart which shows the market in a longer term context. So far we have had a fairly typical Fibonacci re-tracement, and the longer term trend lines are intact.

If Europe 'collapses' then we might see a greater sell-off similar to that of the Lehman moment in the US. Will Europe collapse in a liquidity panic even deeper than we have seen thus far? I cannot forecast the unknowable, except to say that it is possible, but not probable unless the currency war intensifies and both North America and Asia begin to beat the Europeans while they are down. And if Europe falters, then the UK is next, and then Asia. The financiers have no loyalties, but they need the US dollar at least for now.

Talk is cheap. Europe has to find itself, and decide to DO something. This is one of the darkest hours in their ongoing identity crisis. And the financial wolf packs are taking advantage of their indecision....

The Price of Gold in 2160 - Stats-guy and James Kwak

I had to read this essay twice to make sure it just was not satire. I can summarize my reaction by saying that finding gold in outer space with assumed technologies speaks to supply, but the author does not present any assumptions about population, economics structures, and of course future demand.

The method by which gold is formed in relatively rare supernova events is fairly well known, and its distribution relative to other elements and compounds is not completely eccentric, at least not as random and eccentric as pseudo-scientific economic theories might become these days.

The author's premise of the discovery of new bullion supplies in outer space is analogous to the discovery of the New World by Europeans, and the remarkable finds of gold and silver on those two vast continents.

And yet here we are today.

Some might say that the author was merely saying in a cute way that commodity based currencies always fail, with an example being salt or Yap stones as Mr. Buiter had argued to greater effect.

And I would say that all currencies do go in and out of favor in their time, since there is an element of relativism in value that can be enforced by ruling authorities, who themselves tend to come and go, even if in their time these authorities might seem invincible, their empires intended to last for a thousand years.

But some stores of value, not based on passing utilitarian criteria or force, do tend to be resilient, and come back again and again, and retain an element of value from generation to generation. Or as some might with a more profound understanding of money might say, they maintain the confidence of their steadfastness that is a pre-requisite of sound money that is difficult to maintain by mere force of will.

As some historians of money have pointed out, the Federal Reserve was initially set up to emulate this type of external immutability of value in what later became a purely fiat currency. As men like Andrew Jackson would have predicted, they failed in exactly the same ways and for the same reasons that every other attempt at this has failed throughout history.

All systems are prone to corruption and decay, but none so much as those that rely exclusively on the goodness and wisdom of small groups of powerful men, especially when acting in secret.

It does seems quite cheeky for a modern economist to criticize a natural store of value with a 5000 year history, while standing on the platform of a purely fiat currency, given the short half life of every fiat currency throughout history. They may be recreated and devalued, but they never retain much of their value and character, with the only remnant their name.

I hear the sounds of printing presses over the horizon. Get ready for Quantitative Easing European style, and massive European bailouts, and increasingly absurd arguments from the econo-sphere as they avoid the subject of justice for the sake of expediency.

I have some limited sympathy for the dilemma facing the increasingly desperate western central banks, and understand their rationalizations. But they are doing something that is the very epitome of moral hazard, and abuse of power, in their attempts to stabilize the unsustainable, without allowing for meaningful change and reform.

The heart of the issue is that the existing monetary and financial system is becoming increasingly arbitrary and corrupt. A relatively small group of interconnected crony capitalists wishes to create a digital money out of nothing, and distribute it increasingly as they will, to whom they will.

And this is the basis of my resentment with this policy abuse, and the irritation with the assault on reason by those in the financial demimonde engaging in what might be politely called perception management.

This self-serving arbitrariness, even if done for 'good motives,' is the very reason why all fiat currencies fail. No matter how you want to rationalize it they are going to create money out of nothing, and give it to whom they will, while corrupting the political system in the process.

And the cumulative results of this abuse of power are corrosive to society. Lawless example by a ruthless few brings out the worst in all the people, always. And that is a shame.

"Our government teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.”

Louis D. Brandeis

“A year from now the dominoes will be falling in Europe. The world is going to be a more destabilized place….The risk free rate isn’t risk free any more. We’re not growing as we should be because there is a diminishing rate of return for each additional dollar of debt. In a year, we’re going to be in recession again,”

Use the Spike to Trash the Euro. Some 25 minutes before the Thursday opening, news hit the tape that the largest European central banks would pool funds to provide short term liquidity for European banks. Shares rocketed, with most bank shares rocketing 10% or more in minutes. More importantly, the Euro popped as high as $1.3940 in the futures market.

I prayed that the European currency would levitate for a few more minutes. Then, when the options market opened, I hit the market as fast as I could, loading up on puts on the Currency Shares Euro Trust ETF (FXE).

I think that the central bank move was at best a temporary Band-Aid designed to staunch the capital pouring out of the continent’s largest financial institutions. Many US banks have been boycotting European borrowers in the money markets in recent days, so governments are stepping in to provide crucial short term liquidity.

I have been arguing vociferously that the Euro was about to break out of the $1.40-$1.45 range that prevailed all year into a new, lower $1.35-$1.40 range . However, I didn’t expect the Euro to make the entire move down to the bottom end of the new range in a single day, which it did.

This move does absolutely nothing to address the European Community’s long term structural problems, which will continue to be a recurring investment theme for years to come. Not only does Europe lack the mechanisms and the institutions to implement an American style quick fix, like the TARP, it is also missing the will to enforce them. History in Europe is measured in millennia, and solution of the current debacle could take as long.

So I have to take this morning’s hot money short squeeze back up to the top of the new range as a gift. If the Euro continues to appreciate all the way back up to $1.42, I will double up. If we make it as high as $1.43, and unlikely event, I will stop out of my short positions. I’ll be taking a profit on the options the next time we close in on $1.35, which should give me a 60% profit.

Notice that I went out to the December expiration (12-16-2011) with this trade. I think that we could get a further year end liquidity squeeze that could break the Euro out of this new range all the way through $1.30. Would that be a nice way to get into Christmas, with one more home run?

Those who are unable to play in the options market, there is an excellent ETF that gives you a 200% short position in the Euro against the dollar, the (EUO). You should be buying this on dips to capitalize on this trend, since this is an inverse ETF.

What is my longer term goal for the Euro? Parity against the dollar....

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