Very scary assessment of the world economy.
Monday 27 October 2008
Friday 24 October 2008
Investment: The Calm Before The Storm
Financial crisis: demand for gold soars as price tumbles
Investors have rushed to buy gold bars and bought exchange traded funds, worth US$2.8 billion – the biggest inflow on record.
Good as gold: investor demand for gold remains high Photo: EDDIE MULHOLLAND
The onset of a global recession and falling stock markets have triggered a stampede for gold – the traditional safe haven during times of uncertainty.
According to the World Gold Council, exchange traded funds are the main beneficiary of the flight to safety. ETFs experienced their strongest quarterly inflow during the third quarter since SPDR®Gold Shares – the first gold ETFs - were launched in November 2004.
But the Council added that bullion dealers around the world reported an unprecedented surge in demand for coins and small bars. It said that there had been reports outright shortages of gold and high premiums over the gold spot price. The US Mint temporarily suspended sales of American Buffalo gold 1 ounce coins after its stocks were depleted, while UK, German and Austrian coin dealers have also reported an enormous increase in demand during the third quarter, it added.
The average gold price edged down slightly between June and September, to $870.88/oz, from $896.11/oz in the previous three months. Gold traded as high as $986/oz on July 15, the day after the US Treasury and Federal Reserve Bank announced plans for a joint bail-out of mortgage giants Fannie Mae and Freddie Mac, but fell sharply later in the quarter to a low of $740.75/oz on September 11. This proved short lived, however. By the end of the quarter, the gold price had rebounded to $884.50/oz.
Yesterday, gold was trading at $729.20 an ounce after hitting intraday low of $718.20 -- its lowest level since September 2007.
There is an increasingly wide range of methods available to investors wanting to buy gold or gain exposure to gold price movements – from gold coins to complex structured financial products
Exchange-traded funds
These are not technically funds because they follow a single security. ETF gold securities are traded on the London Stock Exchange. They essentially track the gold price and can be traded daily – all you pay is the dealing charge of around 0.4 per cent. They are also regulated financial products. Visit www.exchangetradedgold.com or www.etfsecurities.com for more information.
Unit trusts and investment trusts
These are few and far between, the most popular being BlackRock Merrill Lynch Gold & General, which invests in the shares of gold mining companies as well as other commodity businesses. Advisers reckon general commodity funds could also do the job for private investors as they dabble in gold-related stocks – JPM Natural Resources and ACDS Australia Natural Resources remain popular. Gold mining equities tend to be more volatile than the gold price.
Coins and small bars
Bullion coins and small bars offer private investors an attractive way of investing in relatively small amounts of gold and they are exempt from VAT. Bullion coins and small bullion bars contain a minimum of 99.5 per cent fine gold. Gold bars start at around pounds 39 for a 2.5g bar, rising to pounds 11,957 for a 1kg bar. Visit bullion dealers such as Baird & Co (www.goldline.co.uk).
Gold accounts
Gold bullion banks offer two types of gold account – allocated and unallocated. An allocated account is effectively like keeping gold in a safety deposit box and is the most secure form of investment in physical gold. The gold is stored in a vault owned and managed by a recognised bullion dealer or depository.
With an unallocated account, on the other hand, investors do not have specific bars allotted to them. Traditionally, one advantage of unallocated accounts has been the absence of any storage or insurance charges, because the bank reserves the right to lease the gold out.
Economics: Fed Funds Rate Vs Inflation
The Federal Reserve uses the fed funds target rate to implement monetary policy, raising the rate to curb inflation and cutting it to stimulate economic growth. The chart shows the Fed is having difficulty keeping the actual effective rate in line with its target, suggesting a half-point cut at next week’s FOMC meeting is likely.Aggressive Fed cuts have taken its target rate down to 1.5%, well below the official 4.9% inflation rate. Interest rates approaching zero and hundreds of billions of bailout dollars flying off the printing presses at the Treasury have only one implication… higher INFLATION is coming.
Tuesday 21 October 2008
Economics: Keyser Soze Returns...
With thanks to Knotty...
Deflation Scare the Perfect Camouflage | ||||
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It is said the market can sniff out prospective problems and price itself accordingly. If so, then someone needs to get this dog some nasal spray, lickedy-split!
The deflation scare currently hovering over the entire market, particularly in the metals and commodities sectors, has been brutal. But the key question today is whether this “scare” will evolve into a genuine deflation threat to the US and the world?
Inflation and deflation are monetary phenomenons. Monetary inflation occurs when the supply of money increases faster than the supply of goods and services. This is different from the concept of price inflation, which, depending on several variables that may impact inputs along a given production chain, can cause an increase in the price level for certain goods and services at any given time. Otherwise said, monetary inflation causes price inflation, but a price rise isn’t always a result of monetary inflation.
With monetary deflation you have the opposite effect, in that it relates to a contraction in the money supply. If the supply of money contracts, while the supply of goods and services either remains constant, increases, or contracts at a slower rate, then that can lead to price deflation. Otherwise said, a contraction in the supply of money will in most cases cause asset prices to fall, but falling asset prices are not always the result of a monetary deflation (the oil price can rise if the supply of oil is falling at a faster rate than a money supply contraction, for instance).
What we have today is falling asset prices in, specifically, real estate and stocks, and a rise in the value of the US dollar. This has led many to wrongfully conclude that we are not only experiencing a deflation scare, but that a depression brought on by a deflationary collapse is imminent.
I don’t see it that way. Stocks and real estate are collapsing because the US was on a debt binge for many years. Given that real estate purchases are mainly financed by debt, and that many have used margin in stock portfolios, as well as, in the cases of hedge funds and others, dangerously high levels of leverage, the deleveraging that was forced upon the market following the collapse of debt instruments tied to bad loans is what is causing the dramatic declines in these asset prices today.
In a fiat money world with governments controlling the money printing presses you can be sure those governments will do everything in their power to fight off depressions. Anyone who continues to doubt this must have been living under a rock the past couple of months.
With much of the world holding the same toxic instruments and in similar, but not as horrific shape as the US, the ability of the US Treasury to tap its foreign creditors and borrow its way, to the tune of trillions, out of this mess has been severely impacted. On the domestic front, the savings rate is approximately zero, and increasing levels of unemployment will cause tax receipts to collapse. The only alternative will be the printing of money.
The US is the world’s greatest debtor. Money printing will bring on monetary inflation, which will wipe out those debts, savings, as well as the US dollar. That is the real scare that markets today, as well as foreign creditors, should be pricing in. It is only a matter of time. To borrow a line from the classic film ‘The Usual Suspects’: The greatest trick the Devil ever pulled was convincing the world he didn't exist.
Christopher G. Galakoutis
CMI Ventures LLC
Westport, CT, USA
Monday 20 October 2008
Investment:Swimming Against The Tide By Gareth Milliams
In every great crisis there is great opportunity. Two weeks ago we bought UltraShort ETF's and returned 40% within a week. Whilst fortunate, it wasn't luck. It was judgement. Judgement based upon probability.
As you may have seen in a previous post, we succesfully shorted the Russell 2000 Value Index and the Dow Jones Basic Materials Index. We went in, made a profit and left. Veni, Vidi, Vici. We came, we saw, we conquered. On to the next thing.
My point is this; because a market is negatively volatile and over emotional, it doesn't mean that you have to be part of its collective defeatism.
One of the reasons why I have not posted for 11 days is that there has been so much incorrect and misleading information in this event driven market, that the smart thing was to not commit to any particular position. I was predominately in cash, so therefore my market view was neutral. I wanted to observe.
It was only when the Chicago Board of Exchange Volatility Index which considers above 30 as volatile started registering 55+ that we shorted the Russell 2000. I believe that in a credit crunch, mid-caps will always have greater liquidity issues than the big corporations. So we went in with (depending on the clients wishes) between 10 & 20% of total portfolio value.
The trick was to sell whilst the market was still going down. A weekend is an eternity in this toxic environment, so Friday seemed apt. It also proved fortuitous.
There are going to be other times to make money in this recession. Again, we will refuse to get caught up with market hysteria and will look for opportunities that present themselves rather than chase that which cannot be caught.
As you may have seen in a previous post, we succesfully shorted the Russell 2000 Value Index and the Dow Jones Basic Materials Index. We went in, made a profit and left. Veni, Vidi, Vici. We came, we saw, we conquered. On to the next thing.
My point is this; because a market is negatively volatile and over emotional, it doesn't mean that you have to be part of its collective defeatism.
One of the reasons why I have not posted for 11 days is that there has been so much incorrect and misleading information in this event driven market, that the smart thing was to not commit to any particular position. I was predominately in cash, so therefore my market view was neutral. I wanted to observe.
It was only when the Chicago Board of Exchange Volatility Index which considers above 30 as volatile started registering 55+ that we shorted the Russell 2000. I believe that in a credit crunch, mid-caps will always have greater liquidity issues than the big corporations. So we went in with (depending on the clients wishes) between 10 & 20% of total portfolio value.
The trick was to sell whilst the market was still going down. A weekend is an eternity in this toxic environment, so Friday seemed apt. It also proved fortuitous.
There are going to be other times to make money in this recession. Again, we will refuse to get caught up with market hysteria and will look for opportunities that present themselves rather than chase that which cannot be caught.
Friday 10 October 2008
Investment: How My Clients Make Money In the Worst Market In History By Gareth Milliams
It takes a combination of research, timing, client and advisor trust as well as balls to make profits in this market environment. But we are doing just that right now.
The portfolios are simple:
Cash
Gold Bullion
Short ETF's
The weightings vary according to client. But thats of little import. What matters is that my clients are making money.
Ultra Short Russell 2000
Purchase Price Of Ultra Short Russell 2000: $94.53
Purchase Date: 6/10/2008
Price as of 9/10/2008: $129.00
Return of 36.46%
Ultra Short Basic Materials
Purchase Price of Ultra Short Basic Materials: $76.20
Price as of 9/10/2008: $90.50
Return of 18.77%
I am tempted to sell but with a major recession looming, I feel that Basic Materials and the mid cap Russell 2000 can continue to be shorted for a while yet...
The portfolios are simple:
Cash
Gold Bullion
Short ETF's
The weightings vary according to client. But thats of little import. What matters is that my clients are making money.
Ultra Short Russell 2000
Purchase Price Of Ultra Short Russell 2000: $94.53
Purchase Date: 6/10/2008
Price as of 9/10/2008: $129.00
Return of 36.46%
Ultra Short Basic Materials
Purchase Price of Ultra Short Basic Materials: $76.20
Price as of 9/10/2008: $90.50
Return of 18.77%
I am tempted to sell but with a major recession looming, I feel that Basic Materials and the mid cap Russell 2000 can continue to be shorted for a while yet...
Sunday 5 October 2008
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