Will gold price go down if interest rates rise? I doubt this notion by Shan Saeed
This time is different. I have examined the likely impact of interest rates rises on the various principal economies and the likely effects on the gold price. Currency status to further boost gold as it breaks new records. Inflation to continue rising; gold to benefit. Definitively no bubble. Gold price could double over next five years. Real money gold is King of tangible assets, Silver is the Queen. Gold will achieve new record highs in 2011. Gold's key drivers remain in place i.e. low interest rates, debasing of currencies and low confidence in the global financial markets.
So frequently today investors rely on economically established perceptions that fail time and again, simply because the conditions in which they were established have changed. One of the economic clichés is that exchange rates will rise if interest rates rise. You can be sure that if there was still a Spanish Peseta or Greek Drachma and they were paying the sort of interest rates their sovereign bonds were
paying now, these currencies would still be falling, why? Many investors strongly feel that if interest rates rise, gold would automatically fall. But is that going to be true? There's a great deal more involved to this story than just interest rates!
INTEREST RATE RISES IN A GROWING ECONOMY
In an economy like China's [ $3 trillion in reserves], borrowers tend to be businesses enjoying the remarkable growth rates of around 10%. Their businesses in general are thriving and income is either steady or growing with the potential to grow more, or easily pay down debt. If you throw 5 and 7% inflation at them on certain items, their ability to absorb those costs is enormous. These items may include oil and food which do absorb a large portion of discretionary spending, but are accepted as one of life's burdens that we all must endure. Usually, they can pass them on to their customers without them being driven away.
In such an environment, interest rate rises then have the desired effect of tempering growth without stifling it. Overheating, at the risky end of the market, is restrained and that along with a remarkable cooperation with government objectives in the economy has the desired effect of keeping the economy growing without excessive strains in one part or the other. China has increased Interest rates 6 times in the last 8 months. China's GDP is set to grow at 9.6% in 2011
INTEREST RATE RISES IN A SHRINKING ECONOMY.
Where an economy is in recession and inflation starts to rise from food and energy inflation, the economy finds it extremely difficult to absorb such inflation, in all areas of the economy. Traditional economics would have central banks attempt to ensure that such inflation does not flow into other areas, but it can only use interest rates to do it. This is like a misdirected sledgehammer in so many
cases as it now imposes yet another burden on businesses that are struggling to survive and ensure minimum profitability.
The effect of interest rate rises in this climate is to curtail business activity even more. At its worst, it can eventually precipitate a depression. By damaging already weak consumer confidence, its impact is that much greater and that much more
difficult to recover from. If confidence is already undermined, then such further cost pressures send it spiraling downward. The U.K. may experience this situation in 2011 and 2012.
INTEREST RATE RISES IN A ‘STAGFLATING' ECONOMY
Now let's take a situation not quite as drastic as that above. There is little to no economic growth and the economy suffers from the impact of food and energy inflation. Energy inflation is imported, so there is usually no way to restrain such price increases. Food inflation in economies that are not self-sufficient has the same effect.
Now along the lines of traditional economics, inflation is the one factor that prompts rate increases. Whether it is a one-off spike, or a persistent rising of the oil price does matter, but these days there appears to be no respite from these, which now drive the price of oil to $123 per barrel as on 8th April 2011.
An interest rate increase, when it comes, becomes an additional drain of income, thus adding to the burden of a business that is struggling to survive and doesn't see any economic relief. The result is that the business now begins to suffer. It targets cost cutting, which in turn ensures the overall economy of the nation either continues to stagnate or declines into recession or worse.
IMPACT ON CURRENCIES WITH RISING INTEREST RATES
The theory that is usually accepted is that if you raise interest rates you raise the value of a currency internationally. This is true where an economy is growing in a sustainable way, provided exchange rates are not managed by the central bank or government. The "carry trade" has the function of borrowing money from a low interest rate nation and placing it on deposit in a high interest rate paying nation, so placing downward pressure on one exchange rate and upward pressure on the recipient currency. It is another source of gain if the prospects for the currency where the funds are borrowed are poor and it is declining anyway. This allows interest gains to be enlarged by a capital gain on the exchange rate.
Where interest rates are rising but inflation is higher there exists a ‘negative real' interest rate which will lead to an exchange rate decline. Where the decline is due to economic fundamentals, then rising or high interest rates may well not look attractive to outside lenders. This negates any benefits from interest rate hikes.
ILLUSTRATION
Take for instance an individual that is over-borrowed and his business declines to the point where he cannot service his loans. The bank would usually call in those loans and if unable to, will sell the clients assets in an attempt to cover the debt. If that man were to approach another bank for more loans with which to delay sequestration it may be that he gets the loan, but to what impact on his balance
sheet? He will, of course be forced to pay a higher interest rate. This will ensure the likelihood of repayment is reduced. The higher interest rate will by no means raise his credibility in the market place.
Greece, Ireland, Portugal and Spain have moved into that category. The U.S. debt situation has recently been likened to Greece's. Credit was 140% in 1970, whereas today it stands at 383% in the economy. The US economy has got worse in the last 27 years. So to attract more foreign capital, would higher interest rates add credibility to the U.S. debt position? In that case NO
THE U.S ECONOMY
If the U.S. were to attempt to ensure zero ‘real' interest rate levels by raising interest rates to that of internal inflation [including food and energy inflation], the impact would not be to make the dollar more attractive but to at best stave off the speed at which the dollar is falling in foreign exchange markets. US dollar has lost 50% its value against major currencies in the last 25 years according to Sam Zell-Real Estate billionaire. What would happen is that state and federal borrowing would have to offer higher interest rates. This would hammer the bond market and frighten off foreign lenders as well as cause the economy to move nto ‘stagflation.' Certainly, no such rate hikes will take place until the U.S. economy is able to maintain growth in the face of such rises. This may well take some time longer.
THE EUROZONE
The E.C.B. has let it be known that they will impose three interest rate hikes in 2011 in an attempt to rein in inflation primarily from food and energy. The E.C.B. is clearly of the opinion that the stronger Eurozone economies are able to bear these rises. Economic activity is concentrated in the stronger E.U. economies. Rate increased to 1.25% in euro-zone territory as on 8th April-2011
While the E.C.B. is aware that such interest rate hikes will hurt its southern embers, their relevance to the overall E.U. economies is not of significance. They are trading on the belief that the woes of these nations will not undermine confidence in the euro itself. In fact, the joy of having weak members in the Eurozone is that they help to keep the euro exchange rate down and the stronger members competitive internationally.
I strongly feel they [ European] may have miscalculated in that the confidence in the euro may well prove mercurial should any more members need financial assistance to meet their debt obligations[ Portugal and Spain are waiting for bail out]. Their inability to date, to finalize the composition and strategy of the bailout fund, may well lead to them being overextended on their balance sheet. Should the Eurozone subsequently slip into stagnation, they will be seen to be overextended.
WILL THE GOLD PRICE GO DOWN AS INTEREST RATES RISE?
Again it comes back to confidence and the waning of instability. If U.S. interest rates move into real positive territory on the back of a sustainable recovery then the dollar will offer value. If the recovery has not gained real traction and rising interest rates still leave them negative ‘real' rates, then the dollar will not offer value. In the former case U.S. gold investors may well liquidate their holdings to some extent. In the latter case there is little reason to sell gold holdings. Global commodity prices are negatively correlated with global interest rate gap. As per my analysis, Gold prices would likely to cross $1500/oz mark and may go beyond $1550/oz taking into account the current chaotic global financial markets amd abysmally low confidence levels.
Accomodative monetary policy is the key reason behind the rise in commodity prices.**
**Sources: Bank of Japan March-2011 Report
Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any investment or strategy implemmentation. All financial transacations carry a RISK
Friday, April 8, 2011
Sunday, April 3, 2011
Why US Dollar fell during current crisis? By Shan Saeed
Why US Dollar fell during current crisis? Is financial chaos looming ahead………
By Shan Saeed
One of the more interesting aspects of the Libyan, Tunisian and Japanese crises was that the US dollar fell against major currencies— a lot. Normally, in times of crises, world investors tend to move into the dollar. It is viewed as a safe haven. However, during these crises, the dollar fell to historic lows against the yen, before massive international central-bank intervention reversed the fall. Financial market will remain uncertain in the next 2-years. You bet
Euro has also gained strongly against the dollar. Europe is in a messy situation that needs financial discipline. Most importantly, the Dollar Index, which weighs the dollar against a basket of foreign currencies, fell to 75 currently from 80 in January-2011. This may not seem like a big change, but in the currency markets, these changes are pretty dramatic. Although I wouldn't say this is the beginning of the end for the dollar, it is certainly another sign of what I think will be an increasing lack of confidence in the US dollar as a safe haven. Investors are moving into real assets [ gold and silver]and taking long positions in agri-commodities [ wheat, corn, soyabean, rice, sugar]to protect their wealth as they navigate through tumultuous times.
This change in psychology will be critical for foreign investors as inflation begins to move higher [ 5-7% according to Sam Zell---the billionaire Real Estate] and begins to more seriously affect foreign interest in U.S. bonds, and ultimately stocks as well [ Stock might take a 30% plunge going forward]. If foreign investors begin to decrease their massive support for U.S. stock and bond markets, both the dollar and those markets will begin to suffer an irreversible decline. Short term, I think the dollar is a bit oversold and will likely rebound somewhat in the near future.
There are always multiple reasons for such a fall in the currency — it’s not all just a growing lack of confidence in the dollar — and some of those reasons will change toward the upside. But it’s hard to overlook what is likely a growing sense by foreign investors that the financial condition of the U.S. government is weakening.
It is front-page news that the U.S. has too much debt and is doing little about it. In fact, is is only adding to it at increasing rates. Even worse, making it easier to add debt by printing massive amounts of money or QE or monetary accommodation, or interest rate stabilization or balance sheet expansion or QE 3.
Two of the most important indicators are foreign inflows of capital into the bond market and foreign flows into the stock market. By watching these indicators in the remainder of the year, you will be getting a better feel for whether foreign investors are getting increasingly nervous about the dollar. Muni bond due payment is around $135 billion. These kinds of changes don’t happen quickly, but when they do happen, they are hard to turn around.
According to JPMorgan Chase & Co. CEO Jamie Dimon, companies, insurance funds and investors would lose access to markets if the U.S. appears to be headed toward a default related to its debt limit.
“If the United States actually defaults on our debt it would be catastrophic” Dimon, said while addressing the U.S. Chamber of Commerce event in Washington. Asked further what may happen if the U.S. fails to increase its $14.29 trillion debt limit. He said: “Companies like us, every single company with Treasuries, every insurance fund, every requirement, it will start snowballing. All short-term financing would disappear.”
U.S. Senator Marco Rubio, a Florida Republican, has said he won’t approve a debt-limit increase without a range of tax-and-spending reforms. Moreover, he said: We need to use the debt limit itself as the way to ensure that America’s debt limit begins to decline, not always go up,” “How about the debt limit starting to go down? These are the kinds of things that I hope will be focused on.” Debt is expected to touch $19 trillion in the next 4 years.
Treasury Secretary Timothy F. Geithner has said the nation will suffer “catastrophic damage” if it loses investors’ confidence. He also has said it would be “unworkable” to give priority to payments on the national debt over other government obligations.
Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making or entering into any financial investment or strategy. All financial transactions carry a RISK.
By Shan Saeed
One of the more interesting aspects of the Libyan, Tunisian and Japanese crises was that the US dollar fell against major currencies— a lot. Normally, in times of crises, world investors tend to move into the dollar. It is viewed as a safe haven. However, during these crises, the dollar fell to historic lows against the yen, before massive international central-bank intervention reversed the fall. Financial market will remain uncertain in the next 2-years. You bet
Euro has also gained strongly against the dollar. Europe is in a messy situation that needs financial discipline. Most importantly, the Dollar Index, which weighs the dollar against a basket of foreign currencies, fell to 75 currently from 80 in January-2011. This may not seem like a big change, but in the currency markets, these changes are pretty dramatic. Although I wouldn't say this is the beginning of the end for the dollar, it is certainly another sign of what I think will be an increasing lack of confidence in the US dollar as a safe haven. Investors are moving into real assets [ gold and silver]and taking long positions in agri-commodities [ wheat, corn, soyabean, rice, sugar]to protect their wealth as they navigate through tumultuous times.
This change in psychology will be critical for foreign investors as inflation begins to move higher [ 5-7% according to Sam Zell---the billionaire Real Estate] and begins to more seriously affect foreign interest in U.S. bonds, and ultimately stocks as well [ Stock might take a 30% plunge going forward]. If foreign investors begin to decrease their massive support for U.S. stock and bond markets, both the dollar and those markets will begin to suffer an irreversible decline. Short term, I think the dollar is a bit oversold and will likely rebound somewhat in the near future.
There are always multiple reasons for such a fall in the currency — it’s not all just a growing lack of confidence in the dollar — and some of those reasons will change toward the upside. But it’s hard to overlook what is likely a growing sense by foreign investors that the financial condition of the U.S. government is weakening.
It is front-page news that the U.S. has too much debt and is doing little about it. In fact, is is only adding to it at increasing rates. Even worse, making it easier to add debt by printing massive amounts of money or QE or monetary accommodation, or interest rate stabilization or balance sheet expansion or QE 3.
Two of the most important indicators are foreign inflows of capital into the bond market and foreign flows into the stock market. By watching these indicators in the remainder of the year, you will be getting a better feel for whether foreign investors are getting increasingly nervous about the dollar. Muni bond due payment is around $135 billion. These kinds of changes don’t happen quickly, but when they do happen, they are hard to turn around.
According to JPMorgan Chase & Co. CEO Jamie Dimon, companies, insurance funds and investors would lose access to markets if the U.S. appears to be headed toward a default related to its debt limit.
“If the United States actually defaults on our debt it would be catastrophic” Dimon, said while addressing the U.S. Chamber of Commerce event in Washington. Asked further what may happen if the U.S. fails to increase its $14.29 trillion debt limit. He said: “Companies like us, every single company with Treasuries, every insurance fund, every requirement, it will start snowballing. All short-term financing would disappear.”
U.S. Senator Marco Rubio, a Florida Republican, has said he won’t approve a debt-limit increase without a range of tax-and-spending reforms. Moreover, he said: We need to use the debt limit itself as the way to ensure that America’s debt limit begins to decline, not always go up,” “How about the debt limit starting to go down? These are the kinds of things that I hope will be focused on.” Debt is expected to touch $19 trillion in the next 4 years.
Treasury Secretary Timothy F. Geithner has said the nation will suffer “catastrophic damage” if it loses investors’ confidence. He also has said it would be “unworkable” to give priority to payments on the national debt over other government obligations.
Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making or entering into any financial investment or strategy. All financial transactions carry a RISK.
Friday, April 1, 2011
Bullish on Russian economy ---by Shan Saeed
Russia: Economy will solid direction--By Shan Saeed
Why I am bullish on Russia?
Russia defaulted on its domestic debt amounting to $60 Billion on 17th August 1998. Every analyst surmised that Russia was gone economically. But, Russia recovered and paid off the IMF debt in record time. Russia emerged as strong country. If I can share some statistics with you about Russia: The world biggest producer of crude oil is Russia per se and not Saudi Arabia as most people think.
[Source: Economist 24th Feb-2011 & www.eia.doe.gov/countries.]
Russia is the 6th largest economy with per capita standing at $10,521 in 2010. According to the IMF, Russia is set to grow its GDP by 4.34% in 2011. Russia and China have signed trade agreement to enhance volumes of economic corporation in Chinese Yuan and Russian Ruble. I am bullish on Russia for the next decade. In currencies, I stand bullish on Chinese Yuan, Canadian dollar and Aussie dollar and Russian Ruble. Russia is a resource rich economy and its currency ruble will appreciate against US dollar going forward. Oil and Gas are the main exports. With oil prices continue to upsurge; Russian economy will drive huge dividends in this favorable commodity price environment.
There are few experts that I follow and I have met them to get their insights about commodities and global economy. According to Marc Faber—the author of Gloom, Doom and Boom, Russian economy will continue to grow since it is rich in oil. He is bullish on oil. Oil prices upside will be high as global demand and appetite would grow further as emerging economies need energy for their sustainable growth and development. The country is moving with strong political forces that are joining hands to take the country to the next phase of economic development. Skilled and educated labor force and evolving business environment are making a strong case for foreign direct investment to be placed in Russia.
According to commodity guru, Jim Rogers, no major exploration has been done in energy sector for the past 25 years and energy economics follow a different path as we move forward to bridge the gap between demand and supply. Energy demand i.e. Oil and gas will remain high for many years. In 1998, the average oil price was $17/barrel. In 2008, the average price was $38.77 / barrel. In 2018, average prices are expected to touch $77/barrel. At present price, oil is consumed amounting to $3.2 trillion annually. In a nutshell, Russia will benefit from oil and gas price rise globally and will emerge as one of the strongest players in the international financial markets with solid infra-structure and sound economic base to navigate through the financial meltdowns and storms coming in the noisy market.
Disclaimer:
This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making investment in any commodity, stocks, currency, bonds or country. All financial transactions carry a RISK.
Why I am bullish on Russia?
Russia defaulted on its domestic debt amounting to $60 Billion on 17th August 1998. Every analyst surmised that Russia was gone economically. But, Russia recovered and paid off the IMF debt in record time. Russia emerged as strong country. If I can share some statistics with you about Russia: The world biggest producer of crude oil is Russia per se and not Saudi Arabia as most people think.
[Source: Economist 24th Feb-2011 & www.eia.doe.gov/countries.]
Russia is the 6th largest economy with per capita standing at $10,521 in 2010. According to the IMF, Russia is set to grow its GDP by 4.34% in 2011. Russia and China have signed trade agreement to enhance volumes of economic corporation in Chinese Yuan and Russian Ruble. I am bullish on Russia for the next decade. In currencies, I stand bullish on Chinese Yuan, Canadian dollar and Aussie dollar and Russian Ruble. Russia is a resource rich economy and its currency ruble will appreciate against US dollar going forward. Oil and Gas are the main exports. With oil prices continue to upsurge; Russian economy will drive huge dividends in this favorable commodity price environment.
There are few experts that I follow and I have met them to get their insights about commodities and global economy. According to Marc Faber—the author of Gloom, Doom and Boom, Russian economy will continue to grow since it is rich in oil. He is bullish on oil. Oil prices upside will be high as global demand and appetite would grow further as emerging economies need energy for their sustainable growth and development. The country is moving with strong political forces that are joining hands to take the country to the next phase of economic development. Skilled and educated labor force and evolving business environment are making a strong case for foreign direct investment to be placed in Russia.
According to commodity guru, Jim Rogers, no major exploration has been done in energy sector for the past 25 years and energy economics follow a different path as we move forward to bridge the gap between demand and supply. Energy demand i.e. Oil and gas will remain high for many years. In 1998, the average oil price was $17/barrel. In 2008, the average price was $38.77 / barrel. In 2018, average prices are expected to touch $77/barrel. At present price, oil is consumed amounting to $3.2 trillion annually. In a nutshell, Russia will benefit from oil and gas price rise globally and will emerge as one of the strongest players in the international financial markets with solid infra-structure and sound economic base to navigate through the financial meltdowns and storms coming in the noisy market.
Disclaimer:
This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making investment in any commodity, stocks, currency, bonds or country. All financial transactions carry a RISK.
Monday, March 21, 2011
Oil, Gold, Silver are still the best bet against uncertainity---By Shan Saeed
Commodities are still the best bet against financial market chaos.
I am cautiously bullish on commodities. Last year, I predicted that the market would move higher on Fed liquidity and remain “cautiously bullish” on stocks. But I recommended that gold and silver will do well going forward and is especially positive on oil [ will stay over $100/barrel in 2011].
It’s not clear that the Federal Reserve can continue to keep interest rates low and QE2 and now QE3 is ready. Add to that the burden of new regulations on healthcare and labor from the White House, and the path forward for equities is less clear than a year ago.
Stocks have doubled off the March 2009 low but seem to have hit a wall on Middle East unrest and fears of a double-dip in the U.S. economy as oil shot higher. Gasoline prices now average $3.54 a gallon nationwide.
I think liquidity is slowing down a little bit. The market is having a harder time moving higher. It might even move lower here. Confidence is getting lower which is the main driver of the economy. How long can the Fed maintain these low interest rates? Are they going to another quantitative easing to stimulate the economy? While I remain cautiously bullish, I do think there are a lot of dangers there.
Nevertheless, I should advice my investors. Investors shouldn't fight the Fed by presuming that liquidity will end soon. There’s no indication that interest rates will rise, nor that the Fed’s bond-buying strategy has run its course. I think investors should take long position in oil, gold and silver. Agriculture is one aread where I feel that remained depressed for the last 27 years and would rish as weather patterns and population go up. I fully recommend my clients and investors to go into real assets and hold significant portfolio in gold and silver to get insurance of their wealth.
Regarding Oil, ExxonMobil recently announced that it would expand its production operations. Considering the continuing turmoil in the Middle East and the Obama administration’s unwillingness to expand drilling at home, investors would do well to focus on crude. Uncertainity would remain high and FEAR PREMIUM would average $30/barrel in 2011. I’m quite bullish on oil, gold is a great investment right now but oil is a better play.
As for inflation, while current inflation is around 5% and there are clear signs of inflation to keep rising as prices of precious metals go out of the roof. Inflation is still not that relevant. The fact that gold and silver are moving to new highs is a great indicator of future inflation. Current inflation is very strong which US government is ignoring. FED cannot fix the economy by printing money. US dollar will remain weak against major currencies by 9-10% in 2011.
Businesses are sitting on record amounts of cash but they are likely to continue to grow mostly by keeping costs in line with demand and taking advantage of rising productivity. There will be an eventual uptick in hiring, but expect plenty of mergers and acquisition activity this year. I do think employment is going to get better, but it’s going to be slow process. Unemployment in February fell to 8.9 percent from 9 percent, the lowest point since April 2009. In November, just three months ago, the jobless rate had been 9.8 percent. The Federal Reserve projects unemployment to stay at about its current level for the rest of 2011 and then fall to between 7.5 percent and 8 percent in 2012. But I think unemployment rate to stay over 10% as projected by Gallup.
Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making an strategic investment or strategy implemmentation.
I am cautiously bullish on commodities. Last year, I predicted that the market would move higher on Fed liquidity and remain “cautiously bullish” on stocks. But I recommended that gold and silver will do well going forward and is especially positive on oil [ will stay over $100/barrel in 2011].
It’s not clear that the Federal Reserve can continue to keep interest rates low and QE2 and now QE3 is ready. Add to that the burden of new regulations on healthcare and labor from the White House, and the path forward for equities is less clear than a year ago.
Stocks have doubled off the March 2009 low but seem to have hit a wall on Middle East unrest and fears of a double-dip in the U.S. economy as oil shot higher. Gasoline prices now average $3.54 a gallon nationwide.
I think liquidity is slowing down a little bit. The market is having a harder time moving higher. It might even move lower here. Confidence is getting lower which is the main driver of the economy. How long can the Fed maintain these low interest rates? Are they going to another quantitative easing to stimulate the economy? While I remain cautiously bullish, I do think there are a lot of dangers there.
Nevertheless, I should advice my investors. Investors shouldn't fight the Fed by presuming that liquidity will end soon. There’s no indication that interest rates will rise, nor that the Fed’s bond-buying strategy has run its course. I think investors should take long position in oil, gold and silver. Agriculture is one aread where I feel that remained depressed for the last 27 years and would rish as weather patterns and population go up. I fully recommend my clients and investors to go into real assets and hold significant portfolio in gold and silver to get insurance of their wealth.
Regarding Oil, ExxonMobil recently announced that it would expand its production operations. Considering the continuing turmoil in the Middle East and the Obama administration’s unwillingness to expand drilling at home, investors would do well to focus on crude. Uncertainity would remain high and FEAR PREMIUM would average $30/barrel in 2011. I’m quite bullish on oil, gold is a great investment right now but oil is a better play.
As for inflation, while current inflation is around 5% and there are clear signs of inflation to keep rising as prices of precious metals go out of the roof. Inflation is still not that relevant. The fact that gold and silver are moving to new highs is a great indicator of future inflation. Current inflation is very strong which US government is ignoring. FED cannot fix the economy by printing money. US dollar will remain weak against major currencies by 9-10% in 2011.
Businesses are sitting on record amounts of cash but they are likely to continue to grow mostly by keeping costs in line with demand and taking advantage of rising productivity. There will be an eventual uptick in hiring, but expect plenty of mergers and acquisition activity this year. I do think employment is going to get better, but it’s going to be slow process. Unemployment in February fell to 8.9 percent from 9 percent, the lowest point since April 2009. In November, just three months ago, the jobless rate had been 9.8 percent. The Federal Reserve projects unemployment to stay at about its current level for the rest of 2011 and then fall to between 7.5 percent and 8 percent in 2012. But I think unemployment rate to stay over 10% as projected by Gallup.
Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making an strategic investment or strategy implemmentation.
Friday, March 18, 2011
QE-3 is getting ready to enter the market--By Shan Saeed
QE2 was a disaster and so would be QE3. Its a balance sheet recession.
By Shan Saeed
The unwind of the carry trade has been in full swing for a couple of days now. It’s probably been accompanied by repatriation of capital by Japanese investment trusts and the like – time will tell. Without the aid of intervention – it’s likely that the peak of this flow has passed. Still, the withdrawal of the world’s best savers from the global capital markets can be expected to put upward pressure on interest rates from here on in. There would be lot of headwinds in the global financial markets as Decision makers try to navigate through turbulent times strategically.
Next phase of the crisis, as it will be played out in capital markets at least, will unfold over a couple of weeks as the impact on individual actors become clearer. Given the enormity of the events, it is unlikely that we will see a return to the optimism of a week ago – bounces in risk assets will be sold into. Stocks and equity market would take correction of 10-15% globally. Commodities will continue to upsurge as US dollar would stay weak.
The response from global governments, if they stick to the same script, will be to once again turn to the stimulus levers. Given that these have been overused of recent times, fiscal policy options are now somewhat constrained. As a result, it’s likely that ‘unconventional monetary policy’ will remain a feature of the landscape. In the US, the liklihood of QE3 being pre-announced ahead of the closure of QE2 has just risen dramatically. Inflation is aroung 5-7% in US and living standards have gone down by 20% courtesy Quantitative Easing. Japanese government will print money as well. QE is going global and getting global recognition.
So while we can argue cause and effect, fears of further price rises in real goods may be amplified by the crisis in Japan. It’s a balance sheet recession. Whenever you have a giant bubble collapse, and the whole economy goes under, then you enter into unusual territory. If millions of homeowners are underwater on their
mortgage notes, are they going to take out loans? No, they want to pay
down their loans if they can, and that is what is happening. Deleveraging would cost $5-6 trillion to the American consumers. This would create sub-par GDP growth going forward. BUT,since most of the money supply comes from credit money i.e. money
borrowed at the bank, then the money supply COLLAPSES when people don’t borrow.
The QE maneuvers are an asset SWAP. The FED trades out cash for bonds
held at the big banks. It is equivalent to the average person taking
money out of his savings account and transfering it to his checking
account. The bank is no longer earning interest, and cash is available
to lend. The FED also buys bonds from the Treasury, so the treasury can deficit
spend up to their authorization level.
The flaw is that banks are not revenue limited to issue loans. If you
have a good credit rating, the bank will lend to you despite what they
have in reserves. The bank can borrow money anytime to back up a new
loan. So, the quantitative easing forces some banks to speculate in
order to keep their profits up. Think of it like the banker in the
game monopoly getting to play AND be the banker. But again, people are
not taking out loans, and the banks are sitting on piles of cash. You
cannot push on a string.
What the government should do and they aren’t, is direct spending into
main street. Simply issue cash to build bridges, infrastructure, and
so on. That will put people to work, thus improving wealth. It will
also put money in peoples hands so they can pay down their upside down
loan debts to the bankers.
The bottom line is the money needs to be issued vertically when you
have a balance sheet recession. How it is spent is very important, and
there are no good laws or sensibility issuing forth from Washington. I
blame it on predatory financial capitalism that has captured
Washington. Its like a revolving door of Goldman Sachs type people at
the levers of power, and they have pulled the wool over idiot lawyers
eyes in Washington.
A sovereign people should not have to borrow their own credit. I
think the banking class as important, but they really
aren’t. All a banker should do is match up creditors with debtors.
They should intermediate between credit and debt, and earn a fee for
their services. That’s it. As soon as US politicians and public
figure out that the money power rightly belongs under legal control,
then it can move on to a bright future. A federal political system is
ideal for controlling the money power through proper poltical
representation. In case of US, the money power is held in private hands,
and has usurped political power. Big difference.
During the great depression, FDR borrowed money to build things like
the Hoover dam. This money put people to work, and left behind
tangible wealth. The country was better off for putting people to work
and creating real wealth. At first the banks wouldn’t make any loans,
until they were threatened with the Thomas ammendment, which would
have allowed debt free greenbacks thus bypassing the banking system.
When WW2 came around the bankers opened their wallets to the max. They
agreed to 3/8 of 1% (memory, but it is close). In other words, the
bankers issued plenty of credit at low interest rates, when they knew
our tanks and planes would be blown up, but the debt would remain.
Imagine how much can get done in a balance sheet recession if US government spent
money to build infrastructure, low cost housing, strucural reforms and fiscal discipline, etc. There is plenty that needs to be done. Instead, since US does not have good laws, and doesn’t understand money, the deficit spend so people can sit on their rears in unemployment. Pumped money into the banking system, usually to create / gather dust, or be speculatively spent to create bubble in the financial markets.
Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any stategic investment or implementation.
By Shan Saeed
The unwind of the carry trade has been in full swing for a couple of days now. It’s probably been accompanied by repatriation of capital by Japanese investment trusts and the like – time will tell. Without the aid of intervention – it’s likely that the peak of this flow has passed. Still, the withdrawal of the world’s best savers from the global capital markets can be expected to put upward pressure on interest rates from here on in. There would be lot of headwinds in the global financial markets as Decision makers try to navigate through turbulent times strategically.
Next phase of the crisis, as it will be played out in capital markets at least, will unfold over a couple of weeks as the impact on individual actors become clearer. Given the enormity of the events, it is unlikely that we will see a return to the optimism of a week ago – bounces in risk assets will be sold into. Stocks and equity market would take correction of 10-15% globally. Commodities will continue to upsurge as US dollar would stay weak.
The response from global governments, if they stick to the same script, will be to once again turn to the stimulus levers. Given that these have been overused of recent times, fiscal policy options are now somewhat constrained. As a result, it’s likely that ‘unconventional monetary policy’ will remain a feature of the landscape. In the US, the liklihood of QE3 being pre-announced ahead of the closure of QE2 has just risen dramatically. Inflation is aroung 5-7% in US and living standards have gone down by 20% courtesy Quantitative Easing. Japanese government will print money as well. QE is going global and getting global recognition.
So while we can argue cause and effect, fears of further price rises in real goods may be amplified by the crisis in Japan. It’s a balance sheet recession. Whenever you have a giant bubble collapse, and the whole economy goes under, then you enter into unusual territory. If millions of homeowners are underwater on their
mortgage notes, are they going to take out loans? No, they want to pay
down their loans if they can, and that is what is happening. Deleveraging would cost $5-6 trillion to the American consumers. This would create sub-par GDP growth going forward. BUT,since most of the money supply comes from credit money i.e. money
borrowed at the bank, then the money supply COLLAPSES when people don’t borrow.
The QE maneuvers are an asset SWAP. The FED trades out cash for bonds
held at the big banks. It is equivalent to the average person taking
money out of his savings account and transfering it to his checking
account. The bank is no longer earning interest, and cash is available
to lend. The FED also buys bonds from the Treasury, so the treasury can deficit
spend up to their authorization level.
The flaw is that banks are not revenue limited to issue loans. If you
have a good credit rating, the bank will lend to you despite what they
have in reserves. The bank can borrow money anytime to back up a new
loan. So, the quantitative easing forces some banks to speculate in
order to keep their profits up. Think of it like the banker in the
game monopoly getting to play AND be the banker. But again, people are
not taking out loans, and the banks are sitting on piles of cash. You
cannot push on a string.
What the government should do and they aren’t, is direct spending into
main street. Simply issue cash to build bridges, infrastructure, and
so on. That will put people to work, thus improving wealth. It will
also put money in peoples hands so they can pay down their upside down
loan debts to the bankers.
The bottom line is the money needs to be issued vertically when you
have a balance sheet recession. How it is spent is very important, and
there are no good laws or sensibility issuing forth from Washington. I
blame it on predatory financial capitalism that has captured
Washington. Its like a revolving door of Goldman Sachs type people at
the levers of power, and they have pulled the wool over idiot lawyers
eyes in Washington.
A sovereign people should not have to borrow their own credit. I
think the banking class as important, but they really
aren’t. All a banker should do is match up creditors with debtors.
They should intermediate between credit and debt, and earn a fee for
their services. That’s it. As soon as US politicians and public
figure out that the money power rightly belongs under legal control,
then it can move on to a bright future. A federal political system is
ideal for controlling the money power through proper poltical
representation. In case of US, the money power is held in private hands,
and has usurped political power. Big difference.
During the great depression, FDR borrowed money to build things like
the Hoover dam. This money put people to work, and left behind
tangible wealth. The country was better off for putting people to work
and creating real wealth. At first the banks wouldn’t make any loans,
until they were threatened with the Thomas ammendment, which would
have allowed debt free greenbacks thus bypassing the banking system.
When WW2 came around the bankers opened their wallets to the max. They
agreed to 3/8 of 1% (memory, but it is close). In other words, the
bankers issued plenty of credit at low interest rates, when they knew
our tanks and planes would be blown up, but the debt would remain.
Imagine how much can get done in a balance sheet recession if US government spent
money to build infrastructure, low cost housing, strucural reforms and fiscal discipline, etc. There is plenty that needs to be done. Instead, since US does not have good laws, and doesn’t understand money, the deficit spend so people can sit on their rears in unemployment. Pumped money into the banking system, usually to create / gather dust, or be speculatively spent to create bubble in the financial markets.
Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any stategic investment or implementation.
Saturday, March 5, 2011
Why dollar will stay low in 2011------by Shan Saeed
Why a Dollar Rally Will Never Last Long? By Shan Saeed
The bull market in the U.S. dollar is like an Invisible Man. Its quite funny when people talk about currencies without executing or performing their preparation on the subject.
An important aspect of any bull market is psychology. Bull markets climb a wall of worry, or so they say. This means that the market will continue to climb despite all of the worries surrounding the bull market.
Let analyze history and find some facts. For example, from 1982 to 2000, when the Dow Jones Industrial Average soared from 777 to above 11,000, there were all sorts of worries. Inflation pressures, the collapsed of the Eastern Bloc, the S&L crisis, the Mexican peso crisis, the Long Term Capital collapse in 1998.
Throughout all of these crises and collapses, equity prices kept climbing. If you read the book "The Great Super Cycle by David Skarica'....I analyzed why its true. One of the reasons is that markets take on a life of their own. These major cycles run 15 years to 20 years and they go on despite wars, recessions, drought, etc.
The same goes for downward cycles. Despite all of the reasons to buy the dollar in recent years — such as the financial crisis of 2008 which caused a flight to the dollar and the euro crisis of 2010 — the dollar has continued on its long-term downward trend.
However, I'm hearing more calls for a dollar rally. People are talking about reasons the dollar will rally, such as the Middle East crisis will cause another flight to safety in the dollar.
I hear that the U.S. economy will grow faster [ GDP 3%] in the short term due to the tax cuts of late 2010. Some say that the euro crisis will show its ugly head again. However, with so many calls for a dollar rally, I think this means the dollar will continue on its downward trend. Dollar will lose 9-10% against major basket of currencies. There are just too many people looking for a dollar rally.
In addition, we must remember three points about the dollar at the moment:
1• The U.S. is running a near-10 percent of GDP deficit, which is higher than every other Western government in fiscal 2011. Higher than Great Britain. Higher than Spain. Higher than Portugal. Yes, even higher than Greece, if its austerity measures pay off. These deficits are putting the U.S. in danger of losing its reserve-dollar status.
2• As George Soros pointed out recently, the euro crisis is all but over with the recent austerity and bailout measures being passed. The crisis this year is in local municipalities and states in the United States. It requires $127 billion to rescue the failed states in USA. They are acting like Greece....California, Illinois, Michigan, Wisconsin are all in red & in bad shape....This will put further pressure on the U.S. dollar in 2011.
3• If the Middle East crisis spreads[ Saudi Arabia is a bombshell], oil prices will continue to spike [ might touch $137/barrel this year]. My prediction of $$117/barrel already hit the market. The U.S. is much more reliant on the automobile and low oil prices than other Western nations. European nations have much better public transportation and train systems. Therefore, higher oil prices will pressure the U.S. more than Europe.
Therefore, other than small rallies upward, I expect that the dollar is going to continue its bear market [9-10% down in 2011] and continue to move lower against other major world currencies.
Disclaimer...This is just a research piece and not an investment advice. Investors are strongly encouraged to execute their own due diligence before making any investment decision or strategy execution.
The bull market in the U.S. dollar is like an Invisible Man. Its quite funny when people talk about currencies without executing or performing their preparation on the subject.
An important aspect of any bull market is psychology. Bull markets climb a wall of worry, or so they say. This means that the market will continue to climb despite all of the worries surrounding the bull market.
Let analyze history and find some facts. For example, from 1982 to 2000, when the Dow Jones Industrial Average soared from 777 to above 11,000, there were all sorts of worries. Inflation pressures, the collapsed of the Eastern Bloc, the S&L crisis, the Mexican peso crisis, the Long Term Capital collapse in 1998.
Throughout all of these crises and collapses, equity prices kept climbing. If you read the book "The Great Super Cycle by David Skarica'....I analyzed why its true. One of the reasons is that markets take on a life of their own. These major cycles run 15 years to 20 years and they go on despite wars, recessions, drought, etc.
The same goes for downward cycles. Despite all of the reasons to buy the dollar in recent years — such as the financial crisis of 2008 which caused a flight to the dollar and the euro crisis of 2010 — the dollar has continued on its long-term downward trend.
However, I'm hearing more calls for a dollar rally. People are talking about reasons the dollar will rally, such as the Middle East crisis will cause another flight to safety in the dollar.
I hear that the U.S. economy will grow faster [ GDP 3%] in the short term due to the tax cuts of late 2010. Some say that the euro crisis will show its ugly head again. However, with so many calls for a dollar rally, I think this means the dollar will continue on its downward trend. Dollar will lose 9-10% against major basket of currencies. There are just too many people looking for a dollar rally.
In addition, we must remember three points about the dollar at the moment:
1• The U.S. is running a near-10 percent of GDP deficit, which is higher than every other Western government in fiscal 2011. Higher than Great Britain. Higher than Spain. Higher than Portugal. Yes, even higher than Greece, if its austerity measures pay off. These deficits are putting the U.S. in danger of losing its reserve-dollar status.
2• As George Soros pointed out recently, the euro crisis is all but over with the recent austerity and bailout measures being passed. The crisis this year is in local municipalities and states in the United States. It requires $127 billion to rescue the failed states in USA. They are acting like Greece....California, Illinois, Michigan, Wisconsin are all in red & in bad shape....This will put further pressure on the U.S. dollar in 2011.
3• If the Middle East crisis spreads[ Saudi Arabia is a bombshell], oil prices will continue to spike [ might touch $137/barrel this year]. My prediction of $$117/barrel already hit the market. The U.S. is much more reliant on the automobile and low oil prices than other Western nations. European nations have much better public transportation and train systems. Therefore, higher oil prices will pressure the U.S. more than Europe.
Therefore, other than small rallies upward, I expect that the dollar is going to continue its bear market [9-10% down in 2011] and continue to move lower against other major world currencies.
Disclaimer...This is just a research piece and not an investment advice. Investors are strongly encouraged to execute their own due diligence before making any investment decision or strategy execution.
Tuesday, February 22, 2011
WHY YOU NEED TO BE BULLISH ON SILVER? By Shan Saeed
Silver has had an incredible run over the past year or
so... Where do you think it's headed in 2011? Might touch $49/ounce
Silver has definitely been very exciting. The price has
basically more than doubled [ 83% in 2010] and many of the stocks have done much
better than that... Silver has already touched $33/ounce [first in 31 years] on 21 Feb, 2011. Its in backwardation phase, which is common in commodities but rare in precious metals. But its happening...... [what’s Backwardation: When spot price is higher than future price] So you could be forgiven for asking how long that
can continue. I think the bullish case for silver going forward comes down to three main factors.
FIRST is industrial demand. Everyone knows industrial use is much
greater for silver than gold, and that does make it more susceptible
to an economic slowdown. But what's interesting is these industrial
uses are growing rapidly. But this silver investment could be one of the cheapest ways to protect your money from the decline of the U.S. dollar.
For example, all of the following uses for silver are increasing:
medical, apple i-phone, plasma tv, electronics, food processing, water treatment, paper,building materials, wood preservation, textiles, consumer products...
the list goes on and on. Every bandage-maker, for example, now offers
a silver-based product. You can buy silver-laced toothbrushes,
hairbrushes, combs, and make-up applicators. In England, you can buy silver-based soap.
The takeaway is that all these uses are on the rise, so even in an
economic slowdown, there is a higher level of base demand. The demand
for any individual application could decline, but the total number of
applications for silver is increasing. Over time, I think we'll see
increasing levels of demand.
SECOND major factor is investment demand. Investment demand is
soaring and can't be ignored. The U.S. mint sold more one-ounce Silver
Eagles in January than in any other month since they began creating
them in 1986. China's net imports of silver quadrupled in 2010.
Against all this you have the fact that most Americans don't own any
gold or especially silver. So even though there's already incredible
investment demand, the potential for it to increase is still
tremendous.
THIRD factor is supply. Ask yourself what's wrong with this
picture: Total global demand for silver is about 897 million ounces a
year. Total global supply is about 729 million ounces a year.
Sources:
Deutsche Bank
Credit Suisse
JP Morgan
Goldman Sachs
UBS
HSBC
Citibank
Nomura
ICBC
China Construction Bank
Scrap currently makes up the difference, but I think the crucial point
to recognize is that producers can't dig up enough silver to meet
current demand.
So what happens if industrial uses continue to rise? What happens if
investment demand continues growing? What happens if we do get some
type of currency collapse?
Vietnam has already devalued its currency Dong [ 8.5%] on 20th Feb-2011 to boost exports, which is not the solution to her problem. Moody’s downgraded Vietnam and Japan in recent reports. More to come from advance economies whose policy makers are still in the reactive mood. Europe is shivering with fiscal profligacy.
There were few bottleneck issues with physical supply in 2008, where mints
across the world couldn't keep up with orders. A lot of it was due to
them being unprepared for the rush, and they've since improved some of
their operations. That's great.
But even with all the improvements, even after adding equipment, even
after adding staff, even after adding work shifts... they're still
having issues. Over the past three or four months we've been hearing
about mints having delays, temporarily running out of stock, etc. So
it's still a problem.
And if all the factors I just mentioned come into play, then I think
you could say "bottleneck, meet desperation." Regardless of how well
prepared a manufacturer might be, demand at some point could
legitimately overwhelm the system, and I think that's a very real
possibility. Anything could happen. But the scary thing is, we may not
have enough supply to meet demand if we get a mania.
So based on these factors, my view is that silver can continue rising
for quite some time. I don't think it stops until SLV, the silver ETF,
is a favorite of the fund managers... until Silver Wheaton is a market
darling of the masses... until Pan American Silver is Wall Street's
top pick for the year... That's when I'll be looking for the end of
this silver bull market.
Many people don't realize this, but silver rose 3,647% in the
1970s, from its November '71 low to its January 1980 high. If you were
to apply the same percentage rise to our current bull market, silver
would climb another 500% from here, and the price would hit $160 an
ounce. Those are just numbers, but it shows that we have an established
precedent for the price to go much higher.
It's the fundamentals, of course, that will determine how high the
price ultimately goes. Show me a healthy dollar, show me no threat of
inflation, show me a responsible government that stops printing
money... Show me a repentant Iran and North Korea...Show me that Middle East is at peace with rulers[ Jordan, Egypt, Tunisia, Bahrain, Morocco, Saudi Arabia, Kuwait] acting normally and not running from the country. Show me that the
sovereign debt issues in Europe are resolved... Show me positive real
interest rates... Show me that unemployment is plummeting, that bank
closures have stopped, that real estate is recovering...Show me all that and I'll talk about the gold and silver run being over... But until those things start changing in a big way, I'm still buying.
Silver bears often suggest that a large part of the rally in the
last bull market was due to the Hunt brothers, who were accused of
trying to corner the market. What is my take on that?
I'm skeptical that the reason silver went as high as it
did was primarily due to the Hunt brothers' activity in the market.
It's interesting to note that they bought silver primarily because
they mistrusted the government, and because they thought silver was
going to be confiscated. Remember... gold ownership was illegal when
they first started buying silver in the early '70s.
Yes, they [ Hunt brother] bought a lot of silver... But if you look at the
correlation, you'll notice the price didn't necessarily move up when
they bought. In fact, when the rumors that they were trying to
"corner" the silver market really started going mainstream, which was
in the spring of 1974, the silver price dropped solidly for the next
two years. One would think that the price would've risen not fallen if
silver was being "cornered."
Secondly, if you look at price charts, silver moved in lockstep with
gold back then. They rose and fell pretty much together. They both
peaked on the very same day, January 21, 1980. So unless the gold
market was equally spooked by what the Hunt brothers were doing with
silver, it seems a stretch to assume they were the primary cause of
the rise.
Lastly, you have to consider that it was the mainstream media that largely promoted this idea the Hunts were "cornering" the market. With that in mind, one has to be suspicious that was, in fact, the case.
To be clear, I'm sure they had some effect, but to suggest they were
the main impetus behind silver's tremendous rise doesn't seem wholly
accurate. And look at the price today... It's outperforming gold in
our current bull market, just as it did in the '70s, and there's no
Nelson Bunker Hunt around. Besides... who's to say that we won't see other "Hunts" come along today and try to buy up large quantities of the metal? I wouldn't rule it out.
So again, I think it's more important to look at silver's fundamentals
for any kind of price projection than a one-off event. And those
fundamentals are very bullish.
ECONOMIC CRASH
I elaborated this earlier... but if the economy crashes, silver is likely to suffer more than gold due to its large industrial use component. Another factor is that silver is not bought by central banks, so one source of demand for gold is not present with silver.
But I think the bigger trend of a currency crisis is going to dwarf
those concerns. I see lot of currency intervention in the global financial markets. Chinese yuan would be under pressure from USA. However, Yuan/Renminbi would appreciate 4-5% in 2011 against US dollar with GDP touching 9.6%
Prudent approach
Silver is more volatile than gold, but that just means you get better
opportunities to buy it cheaper, and probably make more money on it if
you sell near the top. So yes, there are bearish arguments for silver, and one has to be prudent in buying it – you don't want it to be the only asset you own,
for example. But it would be equally a mistake to not own a meaningful
amount.
Good time to buy…
There's your answer. If you have minimal or no exposure, I suggest
buying. Don't rush out and spend all your available cash, because
there will always be corrections, but the less you own, the more you
want to make a plan to add a meaningful amount to your portfolio.
Remember...silver is a currency replacement just like gold. It's
money... and therefore you want to make sure you own enough for both
protection and profit. If you don't own enough, I suggest going into
"accumulation" mode... buying some on a regular basis, like
dollar-cost averaging.
My recommendation which is a conservative by the way – is that approximately one-third of your strategic valued assets be devoted to the precious metals market. That includes gold, silver, and precious metal stocks. That may sound
extreme to some, but I think the risk to currencies right now is
extreme. Chinese government has already communicated to her people to increase their Gold and Silver holding in their asset portfolios. Therefore, being overweight precious metals is justified. Obviously, each individual investor has to be comfortable with what they do.
I generally recommend you hold more gold than silver. I suggest approximately 70%-80% in gold versus 20%-30% in silver. Depending on your situation and risk tolerance, you may wish to have more or less in silver, but again the point is to have meaningful or market focused exposure.
Silver purchased method:
The options are becoming more and more mainstream, so it's
getting easier to buy both metals. The alternatives are growing, and
they're also improving. You basically have two choices: You can either
buy and store it yourself, or you can buy and have someone else store
it for you. Ideally, you want to do both... you want to DIVERSIFY YOUR RISK AND ASSET CLASS.
There are risks to storing metals yourself, such as theft, loss, or
fire. You can put it in a safe deposit box, but then it's in the
financial system and it's subject to banking hours and could even be
susceptible to confiscation, though I'm skeptical that will actually
happen. But I do think everyone should have some physical silver
handy, at least a couple months worth of expenses.
So the short answer is to diversify what you buy and how you store it.
For physical silver, I would stick to buying the popular one-ounce
bullion coins – Eagles, Maple Leafs, etc.
Silver Stocks.
It's pretty clear the go-to stock in the silver industry
– in my opinion at least – is Silver Wheaton. It's definitely been a
sweetheart the past two years. It's given us everything we could want
in a silver stock.
The stock suffered badly in the meltdown of '08, and things did get a
little dicey at the time, but I remember thinking that unless the
world comes to an end and the silver price never recovers, this
company is going to survive and bounce back – in part because of
management and in part because of the business model. They have no
exposure to mining costs, for example.
Shares back then were around $3... If you bought at the time, they're
now a ten-bagger. So it's been an incredible run. The question, of course, is going forward: Since the stock is already at $35, can it be another ten-bagger from here? The company expects to increase "production" by 70% by 2013. And
their costs will basically stay stagnant. Meanwhile, imagine where the
silver price could be in the next two to three years, and you can see
this company can make enormous amounts of cash. Some of that is
probably priced into the stock already, but you can't deny where this
company is headed over the next few years.
Could it have a big correction? Recently dropped as much as
28%, but sure... it could easily fall more than that in a major
correction. But if that happened, I'd consider it a big buying
opportunity. In my opinion, the bigger the correction, the bigger the buying
opportunity, because I really believe the future is very bright for
the company.
NUTSHELL
If you're bullish on gold, I think you need to be bullish on
silver, unless you think inflation will never come to pass. Regardless
of the short-term fluctuations in the market, it's only a matter of
time before the currency issues punch us in the gut and inflation
really takes off.
Second, remember that silver will be volatile, but focus on the
fundamentals and use sell offs as buying opportunities. Until the
fundamentals driving the bull market change, buy.
Bottom line, the bull market is far from over. I think it's going to
go much longer and much stronger... So buying on dips is the best
advice I could give anyone.
DISCLAIMER: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any strategic investment or strategy implemmentation.
so... Where do you think it's headed in 2011? Might touch $49/ounce
Silver has definitely been very exciting. The price has
basically more than doubled [ 83% in 2010] and many of the stocks have done much
better than that... Silver has already touched $33/ounce [first in 31 years] on 21 Feb, 2011. Its in backwardation phase, which is common in commodities but rare in precious metals. But its happening...... [what’s Backwardation: When spot price is higher than future price] So you could be forgiven for asking how long that
can continue. I think the bullish case for silver going forward comes down to three main factors.
FIRST is industrial demand. Everyone knows industrial use is much
greater for silver than gold, and that does make it more susceptible
to an economic slowdown. But what's interesting is these industrial
uses are growing rapidly. But this silver investment could be one of the cheapest ways to protect your money from the decline of the U.S. dollar.
For example, all of the following uses for silver are increasing:
medical, apple i-phone, plasma tv, electronics, food processing, water treatment, paper,building materials, wood preservation, textiles, consumer products...
the list goes on and on. Every bandage-maker, for example, now offers
a silver-based product. You can buy silver-laced toothbrushes,
hairbrushes, combs, and make-up applicators. In England, you can buy silver-based soap.
The takeaway is that all these uses are on the rise, so even in an
economic slowdown, there is a higher level of base demand. The demand
for any individual application could decline, but the total number of
applications for silver is increasing. Over time, I think we'll see
increasing levels of demand.
SECOND major factor is investment demand. Investment demand is
soaring and can't be ignored. The U.S. mint sold more one-ounce Silver
Eagles in January than in any other month since they began creating
them in 1986. China's net imports of silver quadrupled in 2010.
Against all this you have the fact that most Americans don't own any
gold or especially silver. So even though there's already incredible
investment demand, the potential for it to increase is still
tremendous.
THIRD factor is supply. Ask yourself what's wrong with this
picture: Total global demand for silver is about 897 million ounces a
year. Total global supply is about 729 million ounces a year.
Sources:
Deutsche Bank
Credit Suisse
JP Morgan
Goldman Sachs
UBS
HSBC
Citibank
Nomura
ICBC
China Construction Bank
Scrap currently makes up the difference, but I think the crucial point
to recognize is that producers can't dig up enough silver to meet
current demand.
So what happens if industrial uses continue to rise? What happens if
investment demand continues growing? What happens if we do get some
type of currency collapse?
Vietnam has already devalued its currency Dong [ 8.5%] on 20th Feb-2011 to boost exports, which is not the solution to her problem. Moody’s downgraded Vietnam and Japan in recent reports. More to come from advance economies whose policy makers are still in the reactive mood. Europe is shivering with fiscal profligacy.
There were few bottleneck issues with physical supply in 2008, where mints
across the world couldn't keep up with orders. A lot of it was due to
them being unprepared for the rush, and they've since improved some of
their operations. That's great.
But even with all the improvements, even after adding equipment, even
after adding staff, even after adding work shifts... they're still
having issues. Over the past three or four months we've been hearing
about mints having delays, temporarily running out of stock, etc. So
it's still a problem.
And if all the factors I just mentioned come into play, then I think
you could say "bottleneck, meet desperation." Regardless of how well
prepared a manufacturer might be, demand at some point could
legitimately overwhelm the system, and I think that's a very real
possibility. Anything could happen. But the scary thing is, we may not
have enough supply to meet demand if we get a mania.
So based on these factors, my view is that silver can continue rising
for quite some time. I don't think it stops until SLV, the silver ETF,
is a favorite of the fund managers... until Silver Wheaton is a market
darling of the masses... until Pan American Silver is Wall Street's
top pick for the year... That's when I'll be looking for the end of
this silver bull market.
Many people don't realize this, but silver rose 3,647% in the
1970s, from its November '71 low to its January 1980 high. If you were
to apply the same percentage rise to our current bull market, silver
would climb another 500% from here, and the price would hit $160 an
ounce. Those are just numbers, but it shows that we have an established
precedent for the price to go much higher.
It's the fundamentals, of course, that will determine how high the
price ultimately goes. Show me a healthy dollar, show me no threat of
inflation, show me a responsible government that stops printing
money... Show me a repentant Iran and North Korea...Show me that Middle East is at peace with rulers[ Jordan, Egypt, Tunisia, Bahrain, Morocco, Saudi Arabia, Kuwait] acting normally and not running from the country. Show me that the
sovereign debt issues in Europe are resolved... Show me positive real
interest rates... Show me that unemployment is plummeting, that bank
closures have stopped, that real estate is recovering...Show me all that and I'll talk about the gold and silver run being over... But until those things start changing in a big way, I'm still buying.
Silver bears often suggest that a large part of the rally in the
last bull market was due to the Hunt brothers, who were accused of
trying to corner the market. What is my take on that?
I'm skeptical that the reason silver went as high as it
did was primarily due to the Hunt brothers' activity in the market.
It's interesting to note that they bought silver primarily because
they mistrusted the government, and because they thought silver was
going to be confiscated. Remember... gold ownership was illegal when
they first started buying silver in the early '70s.
Yes, they [ Hunt brother] bought a lot of silver... But if you look at the
correlation, you'll notice the price didn't necessarily move up when
they bought. In fact, when the rumors that they were trying to
"corner" the silver market really started going mainstream, which was
in the spring of 1974, the silver price dropped solidly for the next
two years. One would think that the price would've risen not fallen if
silver was being "cornered."
Secondly, if you look at price charts, silver moved in lockstep with
gold back then. They rose and fell pretty much together. They both
peaked on the very same day, January 21, 1980. So unless the gold
market was equally spooked by what the Hunt brothers were doing with
silver, it seems a stretch to assume they were the primary cause of
the rise.
Lastly, you have to consider that it was the mainstream media that largely promoted this idea the Hunts were "cornering" the market. With that in mind, one has to be suspicious that was, in fact, the case.
To be clear, I'm sure they had some effect, but to suggest they were
the main impetus behind silver's tremendous rise doesn't seem wholly
accurate. And look at the price today... It's outperforming gold in
our current bull market, just as it did in the '70s, and there's no
Nelson Bunker Hunt around. Besides... who's to say that we won't see other "Hunts" come along today and try to buy up large quantities of the metal? I wouldn't rule it out.
So again, I think it's more important to look at silver's fundamentals
for any kind of price projection than a one-off event. And those
fundamentals are very bullish.
ECONOMIC CRASH
I elaborated this earlier... but if the economy crashes, silver is likely to suffer more than gold due to its large industrial use component. Another factor is that silver is not bought by central banks, so one source of demand for gold is not present with silver.
But I think the bigger trend of a currency crisis is going to dwarf
those concerns. I see lot of currency intervention in the global financial markets. Chinese yuan would be under pressure from USA. However, Yuan/Renminbi would appreciate 4-5% in 2011 against US dollar with GDP touching 9.6%
Prudent approach
Silver is more volatile than gold, but that just means you get better
opportunities to buy it cheaper, and probably make more money on it if
you sell near the top. So yes, there are bearish arguments for silver, and one has to be prudent in buying it – you don't want it to be the only asset you own,
for example. But it would be equally a mistake to not own a meaningful
amount.
Good time to buy…
There's your answer. If you have minimal or no exposure, I suggest
buying. Don't rush out and spend all your available cash, because
there will always be corrections, but the less you own, the more you
want to make a plan to add a meaningful amount to your portfolio.
Remember...silver is a currency replacement just like gold. It's
money... and therefore you want to make sure you own enough for both
protection and profit. If you don't own enough, I suggest going into
"accumulation" mode... buying some on a regular basis, like
dollar-cost averaging.
My recommendation which is a conservative by the way – is that approximately one-third of your strategic valued assets be devoted to the precious metals market. That includes gold, silver, and precious metal stocks. That may sound
extreme to some, but I think the risk to currencies right now is
extreme. Chinese government has already communicated to her people to increase their Gold and Silver holding in their asset portfolios. Therefore, being overweight precious metals is justified. Obviously, each individual investor has to be comfortable with what they do.
I generally recommend you hold more gold than silver. I suggest approximately 70%-80% in gold versus 20%-30% in silver. Depending on your situation and risk tolerance, you may wish to have more or less in silver, but again the point is to have meaningful or market focused exposure.
Silver purchased method:
The options are becoming more and more mainstream, so it's
getting easier to buy both metals. The alternatives are growing, and
they're also improving. You basically have two choices: You can either
buy and store it yourself, or you can buy and have someone else store
it for you. Ideally, you want to do both... you want to DIVERSIFY YOUR RISK AND ASSET CLASS.
There are risks to storing metals yourself, such as theft, loss, or
fire. You can put it in a safe deposit box, but then it's in the
financial system and it's subject to banking hours and could even be
susceptible to confiscation, though I'm skeptical that will actually
happen. But I do think everyone should have some physical silver
handy, at least a couple months worth of expenses.
So the short answer is to diversify what you buy and how you store it.
For physical silver, I would stick to buying the popular one-ounce
bullion coins – Eagles, Maple Leafs, etc.
Silver Stocks.
It's pretty clear the go-to stock in the silver industry
– in my opinion at least – is Silver Wheaton. It's definitely been a
sweetheart the past two years. It's given us everything we could want
in a silver stock.
The stock suffered badly in the meltdown of '08, and things did get a
little dicey at the time, but I remember thinking that unless the
world comes to an end and the silver price never recovers, this
company is going to survive and bounce back – in part because of
management and in part because of the business model. They have no
exposure to mining costs, for example.
Shares back then were around $3... If you bought at the time, they're
now a ten-bagger. So it's been an incredible run. The question, of course, is going forward: Since the stock is already at $35, can it be another ten-bagger from here? The company expects to increase "production" by 70% by 2013. And
their costs will basically stay stagnant. Meanwhile, imagine where the
silver price could be in the next two to three years, and you can see
this company can make enormous amounts of cash. Some of that is
probably priced into the stock already, but you can't deny where this
company is headed over the next few years.
Could it have a big correction? Recently dropped as much as
28%, but sure... it could easily fall more than that in a major
correction. But if that happened, I'd consider it a big buying
opportunity. In my opinion, the bigger the correction, the bigger the buying
opportunity, because I really believe the future is very bright for
the company.
NUTSHELL
If you're bullish on gold, I think you need to be bullish on
silver, unless you think inflation will never come to pass. Regardless
of the short-term fluctuations in the market, it's only a matter of
time before the currency issues punch us in the gut and inflation
really takes off.
Second, remember that silver will be volatile, but focus on the
fundamentals and use sell offs as buying opportunities. Until the
fundamentals driving the bull market change, buy.
Bottom line, the bull market is far from over. I think it's going to
go much longer and much stronger... So buying on dips is the best
advice I could give anyone.
DISCLAIMER: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any strategic investment or strategy implemmentation.
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