Tuesday, August 12, 2014

Top 7 Reasons I’m Buying Silver Now

By Jeff Clark, Senior Precious Metals Analyst

I remember my first drug high.

No, it wasn’t from a shady deal made with a seedy character in a bad part of town. I was in the hospital, recovering from surgery, and while I wasn’t in a lot of pain, the nurse suggested something to help me sleep better. I didn’t really think I needed it—but within seconds of that needle puncturing my skin, I WAS IN HEAVEN.

The euphoria that struck my brain was indescribable. The fluid coursing through my veins was so powerful I’ve never forgotten it. I can easily see why people get hooked on drugs.

And that’s why I think silver, purchased at current prices, could be a life-changing investment.

The connection? Well, it’s not the metal’s ever-increasing number of industrial uses… or exploding photovoltaic (solar) demand… nor even that the 2014 supply is projected to be stagnant and only reach 2010’s level. No, the connection is….

Financial Heroin

The drugs of choice for governments—money printing, deficit spending, and nonstop debt increases—have proved too addictive for world leaders to break their habits. At this point, the US and other governments around the world have toked, snorted, and mainlined their way into an addictive corner; they are completely hooked. The Fed and their international central-bank peers are the drug pushers, providing the easy money to keep the high going. And despite the Fed’s latest taper of bond purchases, past actions will not be consequence-free.

At first, drug-induced highs feel euphoric, but eventually the body breaks down from the abuse. Similarly, artificial stimuli and sub-rosa manipulations by central banks have delivered their special effects—but addiction always leads to a systemic breakdown.

When government financial heroin addicts are finally forced into cold-turkey withdrawal, the ensuing crisis will spark a rush into precious metals. The situation will be exacerbated when assets perceived as “safe” today—like bonds and the almighty greenback—enter bear markets or crash entirely.

As a result, the rise in silver prices from current levels won’t be 10% or 20%—but a double, triple, or more.

If inflation picks up steam, $100 silver is not a fantasy but a distinct possibility. Gold will benefit, too, of course, but due to silver’s higher volatility, we expect it will hand us a higher percentage return, just as it has many times in the past.

Eventually, all markets correct excesses. The global economy is near a tipping point, and we must prepare our portfolios now, ahead of that chaos, which includes owning a meaningful amount of physical silver along with our gold.

It’s time to build for a big payday.

Why I’m Excited About Silver

When considering the catalysts for silver, let’s first ignore short-term factors such as net short/long positions, fluctuations in weekly ETF holdings, or the latest open interest. Data like these fluctuate regularly and rarely have long-term bearing on the price of silver.

I’m more interested in the big-picture forces that could impact silver over the next several years. The most significant force, of course, is what I stated above: governments’ abuse of “financial heroin” that will inevitably lead to a currency crisis in many countries around the world, pushing silver and gold to record levels.

At no time in history have governments printed this much money.

And not one currency in the world is anchored to gold or any other tangible standard. This unprecedented setup means that whatever fallout results, it will be of historic proportions and affect each of us personally.
Specific to silver itself, here are the data that tell me “something big this way comes”….

1. Inflation-Adjusted Price Has a Long Way to Go

One hint of silver’s potential is its inflation-adjusted price. I asked John Williams of Shadow Stats to calculate the silver price in June 2014 dollars (July data is not yet available).

Shown below is the silver price adjusted for both the CPI-U, as calculated by the Bureau of Labor Statistics, and the price adjusted using ShadowStats data based on the CPI-U formula from 1980 (the formula has since been adjusted multiple times to keep the inflation number as low as possible).


The $48 peak in April 2011 was less than half the inflation-adjusted price of January 1980, based on the current CPI-U calculation. If we use the 1980 formula to measure inflation, silver would need to top $470 to beat that peak.

I’m not counting on silver going that high (at least I hope not, because I think there will be literal blood in the streets if it does), but clearly, the odds are skewed to the upside—and there’s a lot of room to run.

2. Silver Price vs. Production Costs

Producers have been forced to reduce costs in light of last year’s crash in the silver price. Some have done a better job at this than others, but check out how margins have narrowed.


Relative to the cost of production, the silver price is at its lowest level since 2005. Keep in mind that cash costs are only a portion of all-in expenses, and the silver price has historically traded well above this figure (all-in costs are just now being widely reported). That margins have tightened so dramatically is not sustainable on a long-term basis without affecting the industry. It also makes it likely that prices have bottomed, since producers can only cut expenses so much.

Although roughly 75% of silver is produced as a by-product, prices are determined at the margin; if a mine can’t operate profitably or a new project won’t earn a profit at low prices, the resulting drop in output would serve as a catalyst for higher prices. Further, much of the current costcutting has come from reduced exploration budgets, which will curtail future supply.

3. Low Inventories

Various entities hold inventories of silver bullion, and these levels were high when U.S. coinage contained silver. As all U.S. coins intended for circulation have been minted from base metals for decades, the need for high inventories is thus lower today. But this chart shows how little is available.


You can see how low current inventories are on a historical basis, most of which are held in exchange-traded products. This is important because these investors have been net buyers since 2005 and thus have kept that metal off the market. The remaining amount of inventory is 241 million ounces, only 25% of one year’s supply—whereas in 1990 it represented roughly eight times supply. If demand were to suddenly surge, those needs could not be met by existing inventories. In fact, ETP investors would likely take more metal off the market. (The “implied unreported stocks” refers to private and other unreported depositories around the world, another strikingly smaller number.)

If investment demand were to repeat the surge it saw from 2005 to 2009, this would leave little room for error on the supply side.

4. Conclusion of the Bear Market

This updated snapshot of six decades of bear markets signals that ours is near exhaustion. The black line represents silver’s decline from April 2011 through August 8, 2014.


The historical record suggests that buying silver now is a low-risk investment.

5. Cheap Compared to Other Commodities

Here’s how the silver price compares to other precious metals, along with the most common base metals.

Percent Change From…
1 Year Ago 5 Years Ago 10 Years
Ago
All-Time
High
Gold -2% 38% 234% -31%
Silver -6% 35% 239% -60%
Platinum 3% 20% 83% -35%
Palladium 14% 252% 238% -21%
Copper -4% 37% 146% -32%
Nickel 32% 26% 17% -64%
Zinc 26% 49% 128% -47%


Only nickel is further away from its all-time high than silver.

6. Low Mainstream Participation

Another indicator of silver’s potential is how much it represents of global financial wealth, compared to its percentage when silver hit $50 in 1980.


In spite of ongoing strong demand for physical metal, silver currently represents only 0.01% of the world’s financial wealth. This is one-twenty-fifth its 1980 level. Even that big price spike we saw in 2011 pales in comparison.

There’s an enormous amount of room for silver to become a greater part of mainstream investment portfolios.

7. Watch Out for China!

It’s not just gold that is moving from West to East….


Don’t look now, but the SHFE has overtaken the Comex and become the world’s largest futures silver exchange. In fact, the SHFE accounted for 48.6% of all volume last year. The Comex, meanwhile, is in sharp decline, falling from 93.4% market share as recently as 2001 to less than half that amount today.
And all that trading has led to a sharp decrease in silver inventories at the exchange. While most silver (and gold) contracts are settled in cash at the COMEX, the majority of contracts on the Shanghai exchanges are settled in physical metal. Which has led to a huge drain of silver stocks….


Since January 2013, silver inventories at the Shanghai Futures Exchange have fallen a remarkable 84% to a record low 148 tonnes. If this trend continues, the Chinese exchanges will experience a serious supply crunch in the not-too-distant future.

There’s more….
  • Domestic silver supply in China is expected to hit an all-time high and exceed 250 million ounces this year (between mine production, imports, and scrap). By comparison, it was less than 70 million ounces in 2000. However, virtually none of this is exported and is thus unavailable to the world market.
  • Chinese investors are estimated to have purchased 22 million ounces of silver in 2013, the second-largest amount behind India. It was zero in 1999.
  • The biggest percentage growth in silver applications comes from China. Photography, jewelry, silverware, electronics, batteries, solar panels, brazing alloys, and biocides uses are all growing at a faster clip in China than any other country in the world.
These are my top reasons for buying silver now.

Based on this review of big-picture data, what conclusion would you draw? If you’re like me, you’re forced to acknowledge that the next few years could be a very exciting time for silver investors.

Just like gold, our stash of silver will help us maintain our standard of living—but may be even more practical to use for small purchases. And in a high-inflation/decaying dollar scenario, the silver price is likely to exceed consumer price inflation, giving us further purchasing power protection.

The bottom line is that the current silver price should be seen as a long-term buying opportunity. This may or may not be our last chance to buy at these levels for this cycle, but if you like bargains, silver’s neon “Sale!” sign is flashing like a disco ball.

What am I buying? The silver bullion that’s offered at a discount in the current issue of BIG GOLD. You can even earn a free ounce of silver at another recommended dealer by signing up for their auto accumulation program, an easy way to build your portfolio while prices are low.

Check out the low-cost, no-risk BIG GOLD to capitalize on this opportune time in silver

The article Top 7 Reasons I’m Buying Silver Now was originally published at Casey Research


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Saturday, August 9, 2014

The Single Most Important Strategy Most Investors Ignore

Jeff Clark, senior precious metals analyst for Casey Research, explains to skeptics why international diversification is so important.

The Single Most Important Strategy Most Investors Ignore

“If I scare you this morning, and as a result you take action, then I will have accomplished my goal.” That’s what I told the audience at the Sprott Natural Resource Symposium in Vancouver two weeks ago.

But the reality is that I didn’t need to try to scare anyone. The evidence is overwhelming and has already alarmed most investors; our greatest risk is not a bad investment but our political exposure.

And yet most of these same investors do not see any need to stash bullion outside their home countries. They view international diversification as an extreme move. Many don’t even care if capital controls are instituted.

I’m convinced that this is the most common—and important—strategic investment error made today. So let me share a few key points from my Sprott presentation and let you decide for yourself if you need to reconsider your own strategy. (Bolding for emphasis is mine.)

1: IMF Endorses Capital Controls

Bloomberg reported in December 2012 that the “IMF has endorsed the use of capital controls in certain circumstances.“

This is particularly important because the IMF, arguably an even more prominent institution since the global financial crisis started, has always had an official stance against capital controls. “In a reversal of its historic support for unrestricted flows of money across borders, the IMF said controls can be useful...”

Will individual governments jump on this bandwagon? “It will be tacitly endorsed by a lot of central banks,” says Boston University professor Kevin Gallagher. If so, it could be more than just your home government that will clamp down on storing assets elsewhere.

2: There Is Academic Support for Capital Controls

Many mainstream economists support capital controls. For example, famed Harvard Economists Carmen Reinhart and Ken Rogoff wrote the following earlier this year:

Governments should consider taking a more eclectic range of economic measures than have been the norm over the past generation or two. The policies put in place so far, such as budgetary austerity, are little match for the size of the problem, and may make things worse. Instead, governments should take stronger action, much as rich economies did in past crises.

Aside from the dangerously foolish idea that reining in excessive government spending is a bad thing, Reinhart and Rogoff are saying that even more massive government intervention should be pursued. This opens the door to all kinds of dubious actions on the part of politicians, including—to my point today—capital controls.

“Ms. Reinhart and Mr. Rogoff suggest debt write-downs and ‘financial repression’, meaning the use of a combination of moderate inflation and constraints on the flow of capital to reduce debt burdens.”

The Reinhart and Rogoff report basically signals to politicians that it’s not only acceptable but desirable to reduce their debts by restricting the flow of capital across borders. Such action would keep funds locked inside countries where said politicians can plunder them as they see fit.

3: Confiscation of Savings on the Rise

“So, what’s the big deal?” Some might think. “I live here, work here, shop here, spend here, and invest here. I don’t really need funds outside my country anyway!”

Well, it’s self-evident that putting all of one’s eggs in any single basket, no matter how safe and sound that basket may seem, is risky—extremely risky in today’s financial climate.

In addition, when it comes to capital controls, storing a little gold outside one’s home jurisdiction can help avoid one major calamity, a danger that is growing virtually everywhere in the world: the outright confiscation of people’s savings.

The IMF, in a report entitled “Taxing Times,” published in October of 2013, on page 49, states:

“The sharp deterioration of the public finances in many countries has revived interest in a capital levy—a one-off tax on private wealth—as an exceptional measure to restore debt sustainability.”

The problem is debt. And now countries with higher debt levels are seeking to justify a tax on the wealth of private citizens.

So, to skeptics regarding the value of international diversification, I would ask: Does the country you live in have a lot of debt? Is it unsustainable?

If debt levels are dangerously high, the IMF says your politicians could repay it by taking some of your wealth.

The following quote sent shivers down my spine…

The appeal is that such a task, if implemented before avoidance is possible and there is a belief that is will never be repeated, does not distort behavior, and may be seen by some as fair. The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away.

The IMF has made it clear that invoking a levy on your assets would have to be done before you have time to make other arrangements. There will be no advance notice. It will be fast, cold, and cruel.

Notice also that one option is to simply inflate debt away. Given the amount of indebtedness in much of the world, inflation will certainly be part of the “solution,” with or without outright confiscation of your savings. (So make sure you own enough gold, and avoid government bonds like the plague.)

Further, the IMF has already studied how much the tax would have to be:

The tax rates needed to bring down public debt to pre-crisis levels are sizable: reducing debt ratios to 2007 levels would require, for a sample of 15 euro area countries, a tax rate of about 10% on households with a positive net worth.

Note that the criterion is not billionaire status, nor millionaire, nor even “comfortably well off.” The tax would apply to anyone with a positive net worth. And the 10% wealth-grab would, of course, be on top of regular income taxes, sales taxes, property taxes, etc.
4: We Like Pension Funds

Unfortunately, it’s not just savings. Carmen Reinhart (again) and M. BelĂ©n Sbrancia made the following suggestions in a 2011 paper:

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of ‘financial repression.’ Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.

Yes, your retirement account is now a “captive domestic audience.” Are you ready to “lend” it to the government? “Directed” means “compulsory” in the above statement, and you may not have a choice if “regulation of cross-border capital movements”—capital controls—are instituted.

5: The Eurozone Sanctions Money-Grabs

Germany’s Bundesbank weighed in on this subject last January:

“Countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.”

The context here is that of Germans not wanting to have to pay for the mistakes of Italians, Greeks, Cypriots, or whatnot. Fair enough, but the “capital levy” prescription is still a confiscation of funds from individuals’ banks or brokerage accounts.

Here’s another statement that sent shivers down my spine:

A capital levy corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required.

The central bank of the strongest economy in the European Union has explicitly stated that you are responsible for your country’s fiscal obligations—and would be even if you voted against them! No matter how financially reckless politicians have been, it is your duty to meet your country’s financial needs.

This view effectively nullifies all objections. It’s a clear warning.

And it’s not just the Germans. On February 12, 2014, Reuters reported on an EU commission document that states:
The savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis.

Reuters reported that the Commission plans to request a draft law, “to mobilize more personal pension savings for long-term financing.”

EU officials are explicitly telling us that the pensions and savings of its citizens are fair game to meet the union’s financial needs. If you live in Europe, the writing is on the wall.
Actually, it’s already under way… Reuters recently reported that Spain has

…introduced a blanket taxation rate of .03% on all bank account deposits, in a move aimed at… generating revenues for the country’s cash-strapped autonomous communities.

The regulation, which could bring around 400 million euros ($546 million) to the state coffers based on total deposits worth 1.4 trillion euros, had been tipped as a possible sweetener for the regions days after tough deficit limits for this year and next were set by the central government.

Some may counter that since Spain has relatively low tax rates and the bail-in rate is small, this development is no big deal. I disagree: it establishes the principle, sets the precedent, and opens the door for other countries to pursue similar policies.

6: Canada Jumps on the Confiscation Bandwagon

You may recall this text from last year’s budget in Canada:

“The Government proposes to implement a bail-in regime for systemically important banks.”

A bail-in is what they call it when a government takes depositors’ money to plug a bank’s financial holes—just as was done in Cyprus last year.

This regime will be designed to ensure that, in the unlikely event a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.

What’s a “bank liability”? Your deposits. How quickly could they do such a thing? They just told us: fast enough that you won’t have time to react.

By the way, the Canadian bail-in was approved on a national level just one week after the final decision was made for the Cyprus bail-in.

7: FATCA

Have you considered why the Foreign Account Tax Compliance Act was passed into law? It was supposed to crack down on tax evaders and collect unpaid tax revenue. However, it’s estimated that it will only generate $8.7 billion over 10 years, which equates to 0.18% of the current budget deficit. And that’s based on rosy government projections.

FATCA was snuck into the HIRE Act of 2010, with little notice or discussion. Since the law will raise negligible revenue, I think something else must be going on here. If you ask me, it’s about control.

In my opinion, the goal of FATCA is to keep US savers trapped in US banks and in the US dollar, in case the US wants to implement a Cyprus-like bail-in. Given the debt load in the US and given statements made by government officials, this seems like a reasonable conclusion to draw.

This is why I think that the institution of capital controls is a “when” question, not an “if” one. The momentum is clearly gaining steam for some form of capital controls being instituted in the near future. If you don’t internationalize, you must accept the risk that your assets will be confiscated, taxed, regulated, and/or inflated away.

What to Expect Going Forward

  • First, any announcement will probably not use the words “capital controls.” It will be couched positively, for the “greater good,” and words like “patriotic duty” will likely feature prominently in mainstream press and government press releases. If you try to transfer assets outside your country, you could be branded as a traitor or an enemy of the state, even among some in your own social circles.
  • Controls will likely occur suddenly and with no warning. When did Cyprus implement their bail-in scheme? On a Friday night after banks were closed. By the way, prior to the bail-in, citizens were told the Cypriot banks had “government guarantees” and were “well-regulated.” Those assurances were nothing but a cruel joke when lightning-fast confiscation was enacted.
  • Restrictions could last a long time. While many capital controls have been lifted in Cyprus, money transfers outside the country still require approval from the Central Bank—over a year after the bail-in.
  • They’ll probably be retroactive. Actually, remove the word “probably.” Plenty of laws in response to prior financial crises have been enacted retroactively. Any new fiscal or monetary emergency would provide easy justification to do so again. If capital controls or savings confiscations were instituted later this year, for example, they would likely be retroactive to January 1. For those who have not yet taken action, it could already be too late.
  • Social environment will be chaotic. If capital controls are instituted, it will be because we’re in some kind of economic crisis, which implies the social atmosphere will be rocky and perhaps even dangerous. We shouldn’t be surprised to see riots, as there would be great uncertainty and fear. That’s dangerous in its own right, but it’s also not the kind of environment in which to begin making arrangements.
  • Ban vs. levy. Imposing capital controls is a risky move for a government to make; even the most reckless politicians understand this. That won’t stop them, but it could make them act more subtly. For instance, they might not impose actual bans on moving money across borders, but instead place a levy on doing so. Say, a 50% levy? That would “encourage” funds to remain inside a given country. Why not 100%? You could be permitted to transfer $10,000 outside the country—but if the fee for doing so is $10,000, few will do it. Such verbal games allow politicians to claim they have not enacted capital controls and yet achieve the same effect. There are plenty of historical examples of countries doing this very thing.
Keep in mind: Who will you complain to? If the government takes a portion of your assets, legally, who will you sue? You will have no recourse. And don’t expect anyone below your tax bracket to feel sorry for you.

No, once the door is closed, your wealth is trapped inside your country. It cannot move, escape, or flee. Capital controls allow politicians to do anything to your wealth they deem necessary.

Fortunately, you don’t have to be a target. Our Going Global report provides all the vital information you need to build a personal financial base outside your home country. It covers gold ownership and storage options, foreign bank accounts, currency diversification, foreign annuities, reporting requirements, and much more. It’s a complete A to Z guide on how to diversify internationally.

Discover what solutions are right for you—whether you’re a big investor or small, novice or veteran, many options are available. I encourage you to pursue what steps are most appropriate for you now, before the door is closed.Learn more here…

The article The Single Most Important Strategy Most Investors Ignore was originally published at caseyresearch.



Wednesday, July 30, 2014

We’re Ready to Profit in the Coming Correction....Are You?

By Laurynas Vegys, Research Analyst

Sometimes I see an important economic or geopolitical event in screaming headlines and think: “That’s bullish for gold.” Or: “That’s bad news for copper.” But then metals prices move in the opposite direction from the one I was expecting. Doug Casey always tells us not to worry about the short term fluctuations, but it’s still frustrating, and I find myself wondering why the price moved the way it did.


As investors we’re all affected by surges and sell offs in the investments that we own, so I want to understand. Take gold, for example. Oftentimes we find that it seems to tease us with a nice run up, only to give a big chunk of the gains back the next week. And so it goes, up and down…..

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The truth is, and it really is this simple, but so obvious that people forget, that there are always rallies and corrections. The timing is rarely predictable, but big market swings within the longer term megatrends we’re speculating on are normal in our sector.

Since 2001, the gold price had 20 surges of 12% or greater, including the one that kick-started 2014. Even with last year’s seemingly endless “devil’s decline,” we got one surge. If we were to lower the threshold to 8%, there’d be a dozen more and an average of three per year, including two this year.


Here at Casey Research, we actually look forward to corrections. Why? We know we’ll pay less for our purchases—they’re great for new subscribers who missed the ground floor opportunities years ago.

This confidence, of course, is the product of decades of cumulative experience and due diligence. We’re as certain as any investor can ever be that today’s data and the facts of history back our speculations on the likely outcomes of government actions, including the future direction of the gold price.

When you keep your eye firmly on the ball of the major trends that guide us, you can see rallies and corrections for what they are: roller-coaster rides that give us opportunities to buy and take profits. This volatility is the engine of “buy low, sell high.” Understanding this empowers the contrarian psychology necessary to buy when prices on valuable assets tank, and to sell when they soar.

There have been plenty of opportunities to buy during the corrections in the current secular gold bull market. The following chart shows every correction of 6% or more since 2001.


As you can see, there have been 28 such corrections over the past 13 years—two per year, on average. Note that the corrections only outnumber surges because we used a lower threshold (6%). At the 12% threshold we used for surges, there wouldn’t be enough to show the somewhat periodic pattern we can see above. It’s also worth noting that our recent corrections fall well short of the sharp sell off in the crash of 2008.

Of course, there are periods when the gold price is flat, but the point is that these kinds of surges and corrections are common.

Now the question becomes: what exactly drives these fluctuations (and the price of gold in general)?
In tackling this, we need to recognize the fact that not all “drivers” are created equal. Some transient events, such as military conflicts, political crises, quarterly GDP reports, etc., trigger short-lived upswings or downturns (like some of those illustrated in the charts above). Others relate to the underlying trends that determine the direction of prices long term. Hint: the latter are much more predictable and reliable. Major financial, economic, and political trends don’t occur in a vacuum, so when they seem to become apparent overnight, it’s the people watching the fundamentals who tend to be least surprised.

Here are some of the essential trends we are tracking…...

The Demise of the US Dollar

Gold is priced around the world in United States dollars, so a stronger US dollar tends to push gold lower and a weaker US dollar usually drives gold higher. With the Fed’s money-printing machine (“quantitative easing”) having been left on full throttle for years, a weaker dollar ahead is a virtual certainty.

At the same time, the U.S. dollar’s status as reserve currency of the world is being pushed ever closer to the brink by the likes of Russia and China. Both have been making moves that threaten to dethrone the already precarious USD. In fact, a yuan-ruble swap facility that excludes the greenback as well as a joint ratings agency have already been set up between China and Russia.

The end of the USD’s reign as reserve currency of the world won’t end overnight, but the process has been set in motion. Its days are all but numbered.

The consequences are not favorable for the US and those living there, but they can be mitigated, or even turned into opportunities to profit, for those who see what’s coming. Specifically, this big league trend is extremely bullish for real, tangible assets, especially gold.

Out-of-Control Government Debt and Deficits

Readers who’ve been with us for a while know that another major trend destined for some sort of cataclysmic endgame can be seen in government fiscal policy: profligate spending, debt crises, currency crises, and ultimately currency regime change. This covers more than the demise of the USD as reserve currency of the world (as mentioned above); it also covers a loss of viability of the euro, and hyperinflationary outcomes for smaller currencies around the world as well.

It’s worth noting that government debt was practically nonexistent, by modern standards, halfway through the 20th century. It has seen a dramatic increase with the expansion of government spending, worldwide. The U.S. government has never been as deep in debt as it is today, with the exception of the periods of World War II and its immediate aftermath, having recently surpassed a 100% debt to GDP ratio.

Such an unmanageable debt load has made deficits even worse. Interest payments on debt compound, so in time, interest rates will come to dominate government spending. Neither the dollar nor the economy can survive such a massive imbalance so something is bound to break long before the government gets to the point where interest gobbles up 80%+ of the budget.

Gold Flowing from West to East

The most powerful trend specifically in gold during the past few years has been the tidal shift in the flow of gold from West to East. China and India are the names of the game with the former having officially overtaken the latter as the world’s largest buyer of gold in 2013. Last year alone, China imported over 1,000 tonnes of gold through Hong Kong and mined some 430 tonnes more.

China hasn’t updated its government holdings of gold since it announced it had 1,054 tonnes in 2009, but it’s plain to see that by now there is far more gold than that, whether in central bank vaults or private hands. Just adding together the known sources, China should have over 4,000 tonnes of monetary gold, and that’s a very conservative estimate. That would put China in second place in the world rankings of official gold holdings, trailing only the United States. The Chinese government supports this accumulation of gold, so this can be seen as a step toward making the Chinese renminbi a world currency, which would have a lot more behind it than U.S. T-bills.

India presents just as strong a bullish case, if only slightly tainted with Indian government’s relentless crusade to rein in the country’s current account deficit by maintaining the outrageously high (i.e., 10%) import duty on gold and silver. Of course, this just means more gold smuggling, which casts official Indian stats into question, as more and more of the industry moves into the black and grey markets. World Gold Council research estimates that 75% of Indian households would either continue or increase their gold buying in 2014. Even without gold-friendly policies in place, this figure is extremely bullish for gold and in line with the big picture we’re betting on.

So What?

Nobody can predict when the next rally will occur nor the depth of the next sell-off. I can promise you this: as an investor you’ll be much happier about those surges if you stick to buying during the corrections. But it has to be for the right reasons, i.e., buying when prices drop below reasonable (if not objective) valuation, and selling when they rise above it. Focusing on the above fundamental trends and not worrying about short-term triggers can help.

Profiting from these trends is what we dedicate ourselves to here. Under current market conditions, that means speculating on the best mining stocks that offer leverage to the price of gold.

Here’s what I suggest: test drive the International Speculator for 3 months with a full money back guarantee, and if it’s not everything you expected, just cancel for a prompt, courteous refund of every penny you paid. Click Here to get Started Now.



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Monday, July 28, 2014

Free Webinar....How to Trade Options Like a Professional with John Carter

The "real option monster" John Carters next free webinar is this Thursday, July 31st at 8:00 p.m. est

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Thursday, July 24, 2014

The TRUTH about China’s Massive Gold Hoard

By Jeff Clark, Senior Precious Metals Analyst

I don’t want to say that mainstream analysts are stupid when it comes to China’s gold habits, but I did look up how to say that word in Chinese…..


One report claims, for example, that gold demand in China is down because the yuan has fallen and made the metal more expensive in the country. Sounds reasonable, and it has a grain of truth to it. But as you’ll see below, it completely misses the bigger picture, because it overlooks a major development with how the country now imports precious metals.

I’ve seen so many misleading headlines over the last couple months that I thought it time to correct some of the misconceptions. I’ll let you decide if mainstream North American analysts are stupid or not.

The basis for the misunderstanding starts with the fact that the Chinese think differently about gold. They view gold in the context of its role throughout history and dismiss the Western economist who arrogantly declares it an outdated relic. They buy in preparation for a new monetary order—not as a trade they hope earns them a profit.

Combine gold’s historical role with current events, and we would all do well to view our holdings in a slightly more “Chinese” light, one that will give us a more accurate indication of whether we have enough, of what purpose it will actually serve in our portfolio, and maybe even when we should sell (or not).

The horizon is full of flashing indicators that signal the Chinese view of gold is more prudent for what lies ahead. Gold will be less about “making money” and more about preparing for a new international monetary system that will come with historic consequences to our way of life.

With that context in mind, let’s contrast some recent Western headlines with what’s really happening on the ground in China. Consider the big picture message behind these developments and see how well your portfolio is geared for a “Chinese” future…

Gold Demand in China Is Falling

This headline comes from mainstream claims that China is buying less gold this year than last. The International Business Times cites a 30% drop in demand during the “Golden Week” holiday period in May. Many articles point to lower net imports through Hong Kong in the second quarter of the year. “The buying frenzy, triggered by a price slump last April, has not been repeated this year,” reports Kitco.

However, these articles overlook the fact that the Chinese government now accepts gold imports directly into Beijing.

In other words, some of the gold that normally went through Hong Kong is instead shipped to the capital. Bypassing the normal trade routes means these shipments are essentially done in secret. This makes the Western headline misleading at best, and at worst could lead investors to make incorrect decisions about gold’s future.

China may have made this move specifically so its import figures can’t be tracked. It allows Beijing to continue accumulating physical gold without the rest of us knowing the amounts. This move doesn’t imply demand is falling—just the opposite.

And don’t forget that China is already the largest gold producer in the world. It is now reported to have the second largest in-ground gold resource in the world. China does not export gold in any meaningful amount. So even if it were true that recorded imports are falling, it would not necessarily mean that Chinese demand has fallen, nor that China has stopped accumulating gold.

China Didn’t Announce an Increase in Reserves as Expected

A number of analysts (and gold bugs) expected China to announce an update on their gold reserves in April. That’s because it’s widely believed China reports every five years, and the last report was in April 2009. This is not only inaccurate, it misses a crucial point.

First, Beijing publicly reported their gold reserve amounts in the following years:
  • 500 tonnes at the end of 2001
  • 600 tonnes at the end of 2002
  • 1,054 tonnes in April 2009.
Prior to this, China didn’t report any change for over 20 years; it reported 395 tonnes from 1980 to 2001.
There is no five-year schedule. There is no schedule at all. They’ll report whenever they want, and—this is the crucial point—probably not until it is politically expedient to do so.

Depending on the amount, the news could be a major catalyst for the gold market. Why would the Chinese want to say anything that might drive gold prices upwards, if they are still buying?

Even with All Their Buying, China’s Gold Reserve Ratio Is Still Low

Almost every report you’ll read about gold reserves measures them in relation to their total reserves. The US, for example, has 73% of its reserves in gold, while China officially has just 1.3%. Even the World Gold Council reports it this way.

But this calculation is misleading. The U.S. has minimal foreign currency reserves—and China has over $4 trillion. The denominators are vastly different.

A more practical measure is to compare gold reserves to GDP. This would tell us how much gold would be available to support the economy in the event of a global currency crisis, a major reason for having foreign reserves in the first place and something Chinese leaders are clearly preparing for.

The following table shows the top six holders of gold in GDP terms. (Eurozone countries are combined into one.) Notice what happens to China’s gold to GDP ratio when their holdings move from the last reported 1,054-tonne figure to an estimated 4,500 tonnes (a reasonable figure based on import data).

Country Gold
(Tonnes)
Value US$ B
($1300 gold)
GDP US$ B
(2013)
Gold
Percent
of GDP
Eurozone* 10,786.3 $450.8 12,716.30 3.5%
US 8,133.5 $339.9 16,799.70 2.0%
China** 4,500.0 $188.1 9,181.38 2.0%
Russia 1,068.4 $44.7 2,118.01 2.1%
India 557.7 $23.3 1,870.65 1.2%
Japan 765.2 $32.0 4,901.53 0.7%
China 1,054.1 $44.1 9,181.38 0.5%
*including 503.2 tonnes held by ECB
**Projection
Sources: World Gold Council, IMF, Casey Research proprietary calculations


At 4,500 tonnes, the ratio shows China would be on par with the top gold holders in the world. In fact, they would hold more gold than every country except the U.S. (assuming the U.S. and EU have all the gold they say they have). This is probably a more realistic gauge of how they determine if they’re closing in on their goals.


This line of thinking assumes China’s leaders have a set goal for how much gold they want to accumulate, which may or may not be the case. My estimate of 4,500 tonnes of current gold reserves might be high, but it may also be much less than whatever may ultimately satisfy China’s ambitions. Sooner or later, though, they’ll tell us what they have, but as above, that will be when it works to China’s benefit.

The Gold Price Is Weak Because Chinese GDP Growth Is Slowing

Most mainstream analysts point to the slowing pace of China’s economic growth as one big reason the gold price hasn’t broken out of its trading range. China is the world’s largest gold consumer, so on the surface this would seem to make sense. But is there a direct connection between China’s GDP and the gold price?
Over the last six years, there has been a very slight inverse correlation (-0.07) between Chinese GDP and the gold price, meaning they act differently slightly more often than they act the same. Thus, the Western belief characterized above is inaccurate. The data signal that, if China’s economy were to slow, gold demand won’t necessarily decline.

The fact is that demand is projected to grow for reasons largely unrelated to whether their GDP ticks up or down. The World Gold Council estimates that China’s middle class is expected to grow by 200 million people, to 500 million, within six years. (The entire population of the U.S. is only 316 million.) They thus project that private sector demand for gold will increase 25% by 2017, due to rising incomes, bigger savings accounts, and continued rapid urbanization. (170 cities now have over one million inhabitants.) Throw in China’s deep seated cultural affinity for gold and a supportive government, and the overall trend for gold demand in China is up.

The Gold Price Is Determined at the Comex, Not in China

One lament from gold bugs is that the price of gold—regardless of how much people pay for physical metal around the world—is largely a function of what happens at the Comex in New York.

One reason this is true is that the West trades in gold derivatives, while the Shanghai Gold Exchange (SGE) primarily trades in physical metal. The Comex can thus have an outsized impact on the price, compared to the amount of metal physically changing hands. Further, volume at the SGE is thin, compared to the Comex.
But a shift is underway…..

In May, China approached foreign bullion banks and gold producers to participate in a global gold exchange in Shanghai, because as one analyst put it, “The world’s top producer and importer of the metal seeks greater influence over pricing.”

The invited bullion banks include HSBC, Standard Bank, Standard Chartered, Bank of Nova Scotia, and the Australia and New Zealand Banking Group (ANZ). They’ve also asked producing companies, foreign institutions, and private investors to participate.

The global trading platform was launched in the city’s “pilot free-trade zone,” which could eventually challenge the dominance of New York and London.

This is not a proposal; it is already underway.

Further, the enormous amount of bullion China continues to buy reduces trading volume in North America. The Chinese don’t sell, so that metal won’t come back into the market anytime soon, if ever. This concern has already been publicly voiced by some on Wall Street, which gives you an idea of how real this trend is.
There are other related events, but the point is that going forward, China will have increasing sway over the gold price (as will other countries: the Dubai Gold and Commodities Exchange is to begin a spot gold contract within three months).

And that’s a good thing, in our view.

Don’t Be Ridiculous; the US Dollar Isn’t Going to Collapse

In spite of all the warning signs, the US dollar is still the backbone of global trading. “It’s the go-to currency everywhere in the world,” say government economists. When a gold bug (or anyone else) claims the dollar is doomed, they laugh.

But who will get the last laugh?

You may have read about the historic energy deal recently made between Chinese President Xi Jinping and Russian President Vladimir Putin. Over the next 30 years, about $400 billion of natural gas from Siberia will be exported to China. Roughly 25% of China’s energy needs will be met by 2018 from this one deal. The construction project will be one of the largest in the world. The contract allows for further increases, and it opens Russian access to other Asian countries as well. This is big.

The twist is that transactions will not be in US dollars, but in yuan and rubles. This is a serious blow to the petrodollar.

While this is a major geopolitical shift, it is part of a larger trend already in motion:
  • President Jinping proposed a brand-new security system at the recent Asian Cooperation Conference that is to include all of Asia, along with Russia and Iran, and exclude the US and EU.
  • Gazprom has signed agreements with consumers to switch from dollars to euros for payments. The head of the company said that nine of ten consumers have agreed to switch to euros.
  • Putin told foreign journalists at the St. Petersburg International Economic Forum that “China and Russia will consider further steps to shift to the use of national currencies in bilateral transactions.” In fact,a yuan-ruble swap facility that excludes the greenback has already been set up.
  • Beijing and Moscow have created a joint ratings agency and are now “ready for transactions… in rubles and yuan,” said the Russian Finance Minister Anton Siluanov. Many Russian companies have already switched contracts to yuan, partly to escape Western sanctions.
  • Beijing already has in place numerous agreements with major trading partners, such as Brazil and the Eurozone, that bypass the dollar.
  • Brazil, Russia, India, China, and South Africa (the BRICS countries) announced last week that they are “seeking alternatives to the existing world order.” The five countries unveiled a $100 billion fund to fight financial crises, their version of the IMF. They will also launch a World Bank alternative, a new bank that will make loans for infrastructure projects across the developing world.
You don’t need a crystal ball to see the future for the US dollar; the trend is clearly moving against it. An increasing amount of global trade will be done in other currencies, including the yuan, which will steadily weaken the demand for dollars.

The shift will be chaotic at times. Transitions this big come with complications, and not one of them will be good for the dollar. And there will be consequences for every dollar based investment. U.S. dollar holders can only hope this process will be gradual. If it happens suddenly, all U.S. dollar based assets will suffer catastrophic consequences. In his new book, The Death of Money, Jim Rickards says he believes this is exactly what will happen.

The clearest result for all U.S. citizens will be high inflation, perhaps at runaway levels—and much higher gold prices.

Gold Is More Important than a Profit Statement

Only a deflationary bust could keep the gold price from going higher at some point. That is still entirely possible, yet even in that scenario, gold could “win” as most other assets crash. Otherwise, I’m convinced a mid-four-figure price of gold is in the cards.

But remember: It’s not about the price. It’s about the role gold will serve protecting wealth during a major currency upheaval that will severely impact everyone’s finances, investments, and standard of living.
Most advisors who look out to the horizon and see the same future China sees believe you should hold 20% of your investable assets in physical gold bullion. I agree. Anything less will probably not provide the kind of asset and lifestyle protection you’ll need.

In the meantime, don’t worry about the gold price. China’s got your back.

You don’t have to worry about silver, either, which we think holds even greater potential for investors. In the July issue of my newsletter, BIG GOLD, we show why we’re so bullish on gold’s little cousin.

And we provide two silver bullion discounts exclusively for subscribers, and name our top silver pick of the year.

Of course, we also have all our best buys in the gold mining sector as well.

Click here to get it all with a 90 day risk free trial to our inexpensive BIG GOLD newsletter

The article The TRUTH about China’s Massive Gold Hoard was originally published at Casey Research


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Thursday, July 10, 2014

Using Supply and Demand to Beat the Market: An Interview with Fund Manager Charles Biderman

By Dan Steinhart, Managing Editor, The Casey Report

It’s an investing strategy so simple, you’ll wonder why you didn’t think of it. Like any other market, the stock market obeys the laws of supply and demand. Reduce supply, and prices should rise. Therefore, companies that reduce their outstanding shares by buying back their own stock should outperform the market.

That’s the basic theory that Charles Biderman, who was recently featured in Forbes and is chairman and founder of TrimTabs Investment Research, follows to manage his ETF, TrimTabs Float Shrink (TTFS).
And it works. Since its inception in October 2011, TTFS has beaten the S&P 500 by 15 percentage points. That’s no small feat, especially during a bull market. Most hedge fund managers would sacrifice their firstborns for such stellar performance.

There are, of course, nuances to the strategy, which Charles explains in an interview with Casey Research’s managing editor Dan Steinhart below. For example, companies must use their own money to buy back shares. Borrowing for buybacks is a no no.

It’s also worth mentioning, you can meet and learn all about Charles’ strategy in person. He’ll be available at  Casey Research’s Summit: Thriving in a Crisis Economy in San Antonio, TX from September 19-21 where he’ll be working with attendees to teach them how to beat the market using supply and demand analysis.

And Charles is just one of many all stars on the faculty for this summit—click here to browse the others, which include Alex Jones, Jim Rickards, and, of course, Doug Casey.

Also, you can still sign up for this Summit and meet some of the world’s brightest financial minds and receive a special early bird discount. You’ll save $400 if you sign up by July 15th. Click here to register now.
Now for the complete Charles Biderman interview. Enjoy!


Using Supply and Demand to Beat the Market: An Interview with Fund Manager Charles Biderman

Dan: Thanks for joining us today, Charles. Could you start by telling us a little bit about your unique approach to stock market research?

Charles: Sure. I’ve been following the markets for 40 years. Everybody talks about earnings and interest rates and growth rates and what the government is doing. But here’s the thing: the stock market is made up of shares of stock. That’s it. There is nothing else in the stock market.

So my firm tracks the supply and demand of the stock market. The number of shares outstanding is the supply. Money is the demand. We discovered when more money chases fewer shares, the market goes up. Isn’t that shocking?

Dan: [Laughs] Not very, when you put it that way.

Charles: Whenever I talk with individual investors, I tell them that there’s only one reason for them to listen to me: that they think I can help them beat the market. I’ve spent 40 some years looking at markets in a different way than other people. I’ve found that the market is like a casino: it has a house and players. You know the house has an edge, because if it didn’t, the stock market wouldn’t exist.

Who is the house in the stock market? Not brokers, or even high frequency traders. Companies are the house. As investors, we’re playing with their shares, and the companies know more about them than we do.
I’ve discovered that companies buy back their own shares because they think the price is heading higher. So when a company buys back its own shares using its own money, you should buy that stock too. But only if the company uses its own money. Borrowing money to buy shares is a no-no.

Conversely, when companies are growing their shares outstanding by selling stock to raise money, they don’t like where their stock price is headed. If they don’t want to own their own stock, you shouldn’t either.
My basic philosophy is to follow supply and demand of stocks and money, and you can’t go wrong.

Dan: Your theory has worked very well in practice. Your TrimTabs Float Shrink ETF (TTFS) beat the S&P 500 by an impressive 12 percentage points in 2013. And that’s really saying something, considering how well the S&P 500 performed.

Charles: Yes, and we’ve outperformed the S&P 500 over the past year as well.

Dan: What specific investment strategies did you use to generate that return?

Charles: Our fund invests in 100 companies that are growing free cash flow—which is the money left over after taxes, R & D, capital expenditures, and dividends—and using it to buy back their own shares.
We modify our holdings every month because we’ve discovered that the positive effects of buybacks only last for a short time. So when a company stops shrinking its float, we kick it out. Our turnover is about 20 stocks per month.

Dan: The supply side of the equation seems pretty straightforward. What do you use to approximate demand? Money supply numbers?

Charles: Sort of. Institutions own around 80% of the shares of the Russell 1000, so we track the money that flows through them into and out of the stock market.

We also track wage and salary growth. We’re not interested in income generated by government actions, but rather by the wages of the 137 million Americans who have jobs subject to withholding. Money for investment comes from income. People can only invest the money they have left over after they cover expenses.

Income in the U.S. is currently around $7.5 trillion per year. That’s an increase of around $300 million over last year, or a little under 3% after inflation. That’s not sufficient to generate money for investment.

However, the Fed’s zero interest rate policy has showered companies with plenty of cash to improve their operations. As a result, many industries have record high profit margins. But at the same time, most management teams are still afraid to reinvest their profits into expanding their businesses because they don’t see final consumption demand growing. So these companies have been buying back their shares instead. The total number of shares in the market has declined pretty much consistently since 2010.

An investment institution typically targets a specific percentage of cash to hold, say 5%. So when a company buys back its own stock from these institutions, the institutions now have more money and fewer shares. To meet their cash allocation target, they have to go out and buy more shares. So the end result is more money chasing fewer shares.

This is why we’ve been experiencing a “melt-up” in the market. It has nothing to do with the economy—it’s solely due to supply and demand. And as buybacks continue, stock prices will continue to rise.

The caveat is that unless the economy recovers in earnest, the gap between stock prices and the real-world economy will continue to grow. At some point, it will get too wide, and we’ll get a bang moment similar to the housing crisis, when everyone realized that housing prices were too far above their underlying value in 2007.

Dan: Do you monitor macroeconomic issues as well?

Charles: Yes, but as I like to say, all macro issues manifest as supply and demand eventually. Supply and demand is what’s happening right now. All of those other inputs get us to “now.”

Dan: I understand. So you’re more concerned with the effects of supply and demand than the causes.

Charles: Right. Price is a function of the world as it exists right now. If you don’t have cash, it doesn’t matter how fantastic stock market fundamentals look. Without cash, you can’t buy, no matter how compelling the value.

Dan: Could you share a preview of what you’ll be talking about at the Casey Research Summit in San Antonio?

Charles: I’ll be giving specific advice to individual investors on how to beat the market. Outperforming the overall market is very difficult to do, and earnings analysis and graphic analysis has never been proven to do it over a long period. Supply and demand analysis has. So I will work with attendees and show them how to apply those strategies to beat the market going forward.

Dan: Great; I look forward to that. Is there anything else you’d like to add?

Charles: The phrase “disruptive technology” is popular today. I think investing on the basis of supply and demand is a disruptive technology compared with other investing strategies, most of which have never really worked. Cheap, broad-based index funds are so popular because very few investing strategies offer any real edge. I believe supply and demand investing gives me an edge.

Dan: Thanks very much for sharing your insights today. I’m excited to hear what else you’ll have to say at our Thriving in a Crisis Economy Summit in San Antonio.

Charles: I’m looking forward to the Summit as well. I hope the aura of the San Antonio Spurs’ victory will rub off on all of us.

Dan: Me too. Thanks again.




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Tuesday, July 8, 2014

Low VIX and What It Means to Your Trading....Our Next Free Webinar

You are invited to attend our next free webinar, presented by former CBOE floor trader Dan Passarelli on Tuesday July 15th at 4:30 EDT. Dan's focus for this webinar will be "Low VIX and What It Means to Your Trading".

Many traders are having a tough time making money in this market. Why? Low VIX. Professional traders use the VIX as a guide to gauge potential option profits. Attend this webinar with Dan and learn what the VIX is telling us about your trading this summer.

Don't miss this special webinar.

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Hedge Fund University

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Monday, July 7, 2014

Gold Option Trade – Will Gold Continue to Consolidate?

Until recently, the world has forgotten about gold and gold futures prices it would seem. A few years ago, all we heard about was gold and silver futures making new highs on the back of the Federal Reserve’s constant money printing schemes.

However, after a dramatic sell off the world of precious metals it became very quiet.


Gold prices have been in a giant basing or consolidation pattern for more than one year. As can clearly be seen below, gold futures prices have traded in a range between roughly 1,175 and 1,430 since June of 2013.


Chart1


The past few weeks we have heard more about gold prices as we have seen a five week rally since late May. I would also draw your attention to the fact that gold futures also made a slightly higher low which is typically a bullish signal.


At this point in time, it appears quite likely that a possible test of the upper end of the channel is possible in the next few weeks / months. If price can push above 1,430 on the spot gold futures price a breakout could transpire that could see $150 or more added to the spot gold price.


Clearly there are a variety of ways that a trader could consider higher prices in gold futures. However, a basic option strategy can pay handsome rewards that will profit from a continued consolidation. The trade strategy is profitable as long as price stays within a range for a specified period of time. Ultimately this type of trade strategy involves the use of options and capitalizes on the passage of time.


The strategy is called an Iron Condor Strategy, however in order to make this trade worth while we would consider widening out the strikes to increase our profitability while simultaneously increasing our overall risk per spread. Consider the chart of GLD below which has highlighted the price range that would be profitable to the August monthly option expiration on August 15th.


Chart2


As long as price stays in the range shown above, the GLD August Iron Condor Spread would be profitable. Clearly this strategy involves patience and the expectation that gold prices will continue to consolidate. This trade has the profit potential of $37 per spread, or a total potential return based on maximum possible risk of 13.62%. The probability based on today's implied volatility in GLD options for this spread to be profitable at expiration (August 15) is roughly 80%.


Our new option service specializes in identifying these types of consolidation setups and helps investors capitalize on consolidating chart patterns, volatility collapse, and profiting from the passage of time. And if you Advanced options trades are not your thing, we also provide Simple options where we buy either a call or put option based on the SP500 and VIX. The nice thing about buying calls and puts is that you can trade with an account as little as $2,500.


If You Want Daily Options Trades, Join the Technical Traders Options Alerts

See you in the markets!

Chris Vermeulen

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Friday, July 4, 2014

5 Simple Rules to Evolve Past the Hot Stock List

By Andrey Dashkov

If you’re a typical small time investor, chances are you prefer to let a team of analysts fuss about such irksome things as correlation and beta. Maybe you’ve bought a stock because your brother in law gave you a hot tip, maybe you heard something about it on a financial news show, or maybe you just loved the company’s product.


Friends often ask me for “hot stock tips”—which is like walking up to someone at the craps table and asking what number to bet on. An accomplished craps player will have position limits, stop losses, income targets, and an overall strategy that does not hinge on one roll of the dice. You need an overall strategy long before you put money down.

So, what do I tell those friends asking for hot stock tips? Well, that they can retire rich with a 50-20-30 portfolio:
  • Stocks. 50% in solid, diversified stocks providing healthy dividends and appreciation.
  • High Yield. 20% in high yield, dividend paying investments coupled with appropriate safety measures. These holdings are bought for yield; any appreciation is a nice bonus.
  • Stable Income. 30% in conservative, stable income vehicles.
Unless you’re starting entirely from scratch, you should review your current portfolio allocations, identify where you’re over or underallocated, and then look for investments to fill those holes. In our portfolio here at Miller's Money Forever, we separate our recommendations into StocksHigh Yield, and Stable Income to help you do just that.

The Art of the Pick

 

By the time an investment lands in our portfolio, we’ve already run it through our Five Point Balancing Test. When your boasting brother in law tempts you with a “can’t-miss opportunity” or some pundit touts a hot tech company on television, you can come back to these five points, again and again.
  1. Is it a solid company or investment vehicle? Investing your retirement money safely is a must. How do you know if a company is solid? Take the time to validate essential company information, particularly when the recommendation comes from a source with questionable motivation.
  2. Does it provide good income? A good stock combines a robust dividend and appreciation potential.
  3. Is there a good chance for appreciation? There are two types of appreciating stocks: those that rise because of general market conditions and those that rise further because of the way management runs the business. We want both.
  4. Does it protect against inflation? High inflation is one of the biggest enemies of a retirement portfolio.
  5. Is it easily reversible? Ask yourself, “Can I quickly and easily reverse this investment if something unexpected occurs?” The ability to liquidate inexpensively is critical to correcting errors.

Marking the Bull’s Eye So You Can Hit It

 

It’s worthwhile to write down your goal—including an income target and the price at which you’ll sell if things head south—with every investment. After all, if you can’t see the bull’s eye, how will you know if you’ve hit it? Buying any investment because a trusted adviser, newsletter, or pundit recommended it is not a good enough reason. Buying because your portfolio has a hole, you understand the company, the investment vehicle, the risks, and the potential is.

Remember, retiring rich means having enough money to enjoy your lifestyle without money worries. Do your homework on every investment and you’ll make that pleasant thought your life’s reality. Every week, the Miller’s Money team provides no nonsense, practical advice about the best ways to invest for your retirement in  Miller’s Money Weekly Sign up here to receive it every Thursday.

The article 5 Simple Rules to Evolve Past the Hot-Stock List was originally published at Millers Money


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Tuesday, July 1, 2014

Minimum Wage, Maximum Stupidity

By Doug French, Contributing Editor

The minimum wage should be the easiest issue to understand for the economically savvy. If the government arbitrarily sets a floor for wages above that set by the market, jobs will be lost. Even the Congressional Budget Office admits that 500,000 jobs would be lost with a $10.10 federal minimum wage. Who knows how high the real number would be?

Yet here we go again with the “Raise the minimum wage” talk at a time when unemployment is still devastating much of the country. The number of Americans jobless for 27 weeks or more is still 3.37 million. And while that’s only half the 6.8 million that were long term unemployed in 2010, most of the other half didn’t find work. Four fifths of them just gave up.

So, good economics and better sense would say, “make employment cheaper.” More of anything is demanded if the price goes down. That would mean lowering the minimum wage and undoing a number of cumbersome employment regulations that drive up the cost of jobs.

But then as H.L. Mencken reminded us years ago, “Nobody ever went broke underestimating the intelligence of the American public.” Which means the illogical case made by Republican multimillionaire businessman Ron Unz is being taken seriously.

We Don’t Want No Stinkin’ Entry Level Jobs

 

Unz says the minimum should be $12 and recognizes that 90% of the resistance is that it would kill jobs. So what’s his answer to that silver bullet to his argument? America doesn’t want those low paying jobs anyway. In his words, “Critics of a rise in the minimum wage argue that jobs would be destroyed, and in some cases they are probably correct. But many of those threatened jobs are exactly the ones that should have no place in an affluent, developed society like the United States, which should not attempt to compete with Mexico or India in low wage industries.”

He doesn’t think much of fast food jobs either. But he knows that employment can’t be shipped overseas, so Mr. Unz’s plan for those jobs is as follows:

So long as federal law requires all competing businesses to raise wages in unison, much of this cost could be covered by a small one time rise in prices. Since the working poor would see their annual incomes rise by 30 or 40 percent, they could easily afford to pay an extra dime for a McDonald’s hamburger, while such higher prices would be completely negligible to America’s more affluent elements.

The Number of Jobs Isn’t Fixed

 

He believes that if all jobs pay well enough, legal applicants will apply and take all the jobs. This is where Unz crosses paths with David Brat, the economics professor who recently unseated House Majority Leader Eric Cantor.

Brat claims to be a free-market sympathizer and says plenty of good things. However, in his stump speeches and interviews, Brat says early and often, “An open border is both a national security threat and an economic threat that our country cannot ignore. … Adding millions of workers to the labor market will force wages to fall and jobs to be lost.”

That would make sense if there were a fixed number of jobs, but that’s not the case. An economics professor should know that humans have unlimited wants and limited means, which, as Nicholas Freiling explains in The Freeman, “renders the amount of needed labor virtually endless—constrained only by the economy’s productive capacity (which, coincidentally, only grows as the supply of labor increases).”

An influx of illegal immigrants may or may not drive down wages, but even if it does, that’s a good thing. Low wages allow employers to invest in other things. More efficient production lowers costs for everyone, producers and consumers, allowing for capital creation. In the long run, it is capital investment that creates jobs.

Employers Bid for Labor Like Anything Else

 

Mr. Unz claims that low-wage employers are being subsidized by the welfare state. “It’s a classic case of where businesses manage to privatize the benefits of their workers—they get the work—and socialize the costs. They’ve shifted the costs over to the taxpayer and the government,” writes Unz.

It makes one wonder how the businessman made millions in the first place. Wage rates aren’t determined by what the employee’s expenses are. “Labor is a scarce factor of production,” wrote economist Ludwig von Mises. “As such it is sold and bought on the market. The price paid for labor is included in the price allowed for the product or the services if the performer of the work is the seller of the product or the services.”

Mises explained that a general rate of wages does not exist. “Labor is very different in quality,” Mises wrote, “and each kind of labor renders specific services. each is appraised as a complementary factor for turning out definite consumers’ goods and services.”

Not every job contributes $12 an hour in production benefits toward a finished good or service. And many unskilled laborers can’t generate $12 an hour worth of output. The Congress that created the minimum wage knew this and carved out the 14(c) permit provision in the Fair Labor Standards Act of 1938, allowing an exemption from minimum wage requirements for businesses hiring the handicapped.

That Congress included in the act this language:

The Secretary, to the extent necessary to prevent curtailment of opportunities for employment, shall by regulation or order provide for the employment, under special certificates, of individuals ... whose earning or productive capacity is impaired by age, physical or mental deficiency, or injury, at wages which are lower than the minimum wage.

Entrepreneurs must purchase all factors of production at the lowest prices possible. No offense to labor—that’s what customers demand. All cuts in wages pass through to customers. If a business pays more than the market wage rate, the business “would be soon removed from his entrepreneurial position.” Pay less than the market, and employees leave to work somewhere else.

Who Picks Up The Tab?

 

First, Unz says, “American businesses can certainly afford to provide better pay given that corporate profits have reached an all-time high while wages have fallen to their lowest share of national GDP in history.” So, instead of taxpayers supporting the poor, Unz wants business to pay. No, wait: later he writes that consumers will support the poor by paying higher prices.

“McDonald’s and fast food places would probably have to raise their prices by 8 or 9 percent, something like that. Agricultural products that are American-grown would go up by less than 2 percent on the grocery shelves. And those sorts of price increases are so small that they would be almost unnoticed in most cases by the consumer.” Walmart would cover a $12 minimum wage with a one time price increase of 1.1%, he says, with the average Walmart shopper paying just an extra $12.50 a year. So it’s consumers—who are also taxpayers—who get to be their brother’s keeper either which way with Unz’s plan.

Walmart Must Be Offering Enough

 

Fortune magazine writer Stephen Gandel appeared on Morning Joe this week, making the case that Walmart should give its employees a 50% raise (his article in Fortune on the subject appeared last November). According to him, the company is misallocating capital by not paying higher wages. He says investors are not giving the company credit for the lower pay in the stock price, so they should just do the right thing and pay their employees more.

But Walmart does pay more when it has to compete for employees. In oil rich Williston, North Dakota, the retail giant is offering to pay entry level workers as much as $17.40 per hour to attract employees.
Walmart isn’t alone. McDonald’s is paying $300 signing bonuses to attract workers. The night shift at gas stations in Williston pays $14 an hour.

By the way, whatever Walmart is paying, it must be enough, because it has plenty of applicants to choose from. In 2005, 11,000 people in the Bay Area applied for 400 positions at a new Oakland store. Three years later near Chicago, 25,000 people applied for 325 positions at a new store.

Last year a new Walmart opened in the DC area. Again, the response was overwhelming. Debbie Thomas told the Washington Post, “It’s hard to live in this city on $7.45 or $8.25 an hour. I’ve lived here all my life, and I want to stay here. In the end, I’m just glad Walmart’s here. I might get a job.”

Throughout history, people have had to relocate to find work. Today is no different.

In the long run, as the minimum wage increases, capital will be invested to replace labor. We’ve seen it for years. Machines don’t call in sick, sue for harassment, require health insurance, or show up late. Now patrons pour their own drinks. Shoppers scan their own groceries and pump their own gas. Soon we’ll be ordering from electronic tablets at our tables in sit down restaurants to cut down on wait staff, and the cooks will be replaced by automated burger makers.

Unz may well believe what he proposes would be doing good; however, it means kids and the unskilled go unemployed and in the end, are unemployable.

You read an excerpt from the Daily Dispatch, Casey Research’s wildly popular e-letter. Stay in the loop on big-picture trends, precious metals, energy, technology, and more. Sign up Here to receive the Daily Dispatch free of charge in your inbox.

The article Minimum Wage, Maximum Stupidity was originally published at Casey Research


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