Friday, April 29, 2011

No QE3, Risk Trade Back On Anyway...

Back in early March I posed the question, what would happen if we didn't have QE3 immediately follow QE2? Well it seems the Fed is about to let us find out with Bernanke announcing last night that the Fed would finish it's bond purchasing to June, but made no promises about further increases to the Fed balance sheet.
April 27 (Bloomberg) -- Federal Reserve policy makers said the economy is recovering at a “moderate pace” and a pickup in inflation is likely to be temporary, as they agreed to finish $600 billion of bond purchases on schedule in June.

“The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually,” the Federal Open Market Committee said today in its statement after a two-day meeting in Washington. “Increases in the prices of energy and other commodities have pushed up inflation in recent months,” and the Fed expects “these effects to be transitory,” the statement said.
Some commentators have observed that even following the scheduled $600b bond purchases, the Fed will continue to be able to purchase US Treasury Securities (without increasing their asset base) due to other securities they hold maturing (see more on this from Jim Rickards). This has been referred to by some as QE "Lite".

Apparently the market has taken the FOMC meetings results as a positive with US Markets finishing strongly in the green, Silver retracing most of it's losses from earlier in the week and Gold putting in a new all time high (in USD). It seems for now Mr Market is happy to put risk back on... but for how long?

Here is a graph showing a comparison between the Fed Adjusted Monetary Base and a Commodity Price Index. Both have risen 73% from a January 2009 starting point (the Fed did pump the monetary base up quite substantially in the last half of 2008 as we saw Lehman Brothers collapse, etc). Coincidence or is liquidity finding it's way into commodities and other assets as the Fed expands it's balance sheet?

I am still somewhat concerned about what happens when the Fed stops increasing their balance sheet. During the last turn down in it's size we saw the May 2010 "Flash Crash".

The VIX (Volatility Indicator) is showing the market is extremely complacent at the moment* and that is a dangerous place to be considering:

- We are about to see the Fed pull back on the money printing
- We have US Congress yet to increase the US Debt Ceiling

Silver has had an extraordinary run and Gold has seen a modest rise over the last 6 months also. I will be looking to reduce my exposure to the metals (and related stocks) throughout this rally we are in. It will be the first time I significantly reduce exposure since I started heavy accumulation in 2008/2009.

With so many mixed signals it's hard to know what sort of outcome we might see post June when the Fed stops expanding their balance sheet. The old saying "Sell in May and go away" might just be a rule to adhere to this year and those familiar with the metals seasonal patterns will know that June through August can often be a slow period.

Short term (over the next 4-6 weeks) I still see room for Silver and Gold (and related stocks) to move higher. A week ago I suggested we would see weakness heading into options expiry (and we did), but suggested a rally above $50 was still likely following:
I do think that $50 will prove to be a short term psychological barrier, but my thinking is that there will probably be a lot of stops (by those shorting) just above the $50 level. So if Silver's momentum takes it above and these are triggered then we might just see the mother of all covering rallies/short squeezes with the metal heading to $55-$60 (maybe even higher) before this rally is over.Bullion Baron
I stick by this call, but take care, don't get caught up in the hype. Don't be afraid to take some profits off the table. If you're brand new to the metals, don't be afraid to dip your toes in the water, buy a little for protection, but I would suggest avoiding any "all in" type buying at these levels and be ready to ride out any volatility or corrections.

Disclosure: Positions held in Silver & Gold. Not investment advice. Do your own research.

* Thanks goes out to hiho @ Silver Stackers for noticing the VIX

Wednesday, April 27, 2011

Addition to the site: "Video Gallery"

For those who haven't already noticed, a few weeks ago I started a 'Video Gallery' page to display and briefly describe some of my favourite precious metals and economics related videos. You can view it using the link in the side bar to the right or here is a shortcut.

I would like to keep the list of them relatively manageable, perhaps 20-30 at most. Feel free to link any suggestions in the comments section for this post.


Tuesday, April 26, 2011

Is Bob Moriarty shorting Silver? A look at his "Facts"


You might be wondering who Bob Moriarty is... I wasn't really familiar with the name until the below discussed article started making headlines. He (and his wife) founded and, a couple of popular resource websites which host articles relating to their obvious subject matter.

Before getting to the article of his that caught my eye I thought I would draw your attention to a recent "email skirmish" between Bob and another precious metals market commentator (known as "Silver Shield"). You can read the entire exchange at this link, however the section that is relevant to my post is where Bob indicated that he intended on going short Silver:
The “prominent 321Gold source” wrote back about how he tried to get people to buy silver a $4 and that he called “tops” in 2001, 2004, 2008, and 2009, almost all to the day. He went on with his tirade by saying, “On the other hand, when silver is the highest it has been in 31 years, you discover it as the best investment ever. Are you kidding?” He then starts his first back peddle saying that, “I didn’t say it was at a top, but I am going to be going short silver soon.
This exchange occurred back in late February (when Silver was around $33).

On March 8th Bob had the following to say in this article:
I’m not saying it’s “The Top” since we have not yet seen the wild blowout as the public rushes into gold and silver, each eager to capture the very highest price. The chumps, the bag holders, are not yet out in force. But silver is beyond frothy. It might spike up another $5-$10 but the next $15 move is down.
Silver closed at $36 on March 8th. Apparently Bob thought Silver was going to $20 before it was going to $50.

On March 25th Bob pulled out the following comments in this article:
I might be off by a couple of days in silver and maybe a couple of bucks but I see way too much bullishness. The next major move in silver is down. A lot more than the silver bulls want to face. When silver permabulls throw in the towel and give up, I’ll be a buyer again.
Silver closed a little over $37 on the day of that article, come April 25th and we've had Silver come within cents of the $50 mark and Bob writes his most comprehensive article on the "top" yet. You can read it in full here.

He uses the article to downplay his incorrect top calls to date and makes a list of "facts" as if they somehow lend credibility to his view... quite bizarre. Anyway here are some excepts and my comments:
1. Silver is going parabolic.

According to Jim Rogers all parabolic moves end badly. I have seen similar charts in all kinds of commodities and they always correct. Parabolic charts mark tops. So when silver bugs start suggesting, "This time it's different" I know better.
Bob claims that Silver is going parabolic, yet in the very article he links to support his argument Jim Rogers claims that it's not: "If silver continues to go up like it has been over the past 2 or 3 weeks, yes, then it would get to triple digits this year. And then we’ll have to worry. It’s not parabolic yet". So who are we to believe Bob? Jim Rogers or yourself?
2. The actual ratio of silver to gold in the earth's crust is not 16 to 1.
It's more like between 20 or 26 or 64 to one. This is not an absolute fact, these are opinions from experts but no experts conclude the ratio is 16-1. Go to Wikipedia and do the math for yourself.
For the record I actually agree with the spiel that Bob goes into here regarding how rumours & misinformation get represented as fact through Silver commentary. He may very well be right on the ratio of Silver in the earth's crust, but what could I care? Wouldn't a much more relevant figure for today's bull market be how much we are actually digging out of the ground? Eric Sprott recently covered this: "In 2010, the world mined approximately 736 million ounces of silver and 85 million ounces of gold.3 The world also produced an additional 215 million ounces of silver and 53 million ounces of gold from recycled scrap. Adding both together brings us 951 million ounces of silver and 139 million ounces of gold supply, for a ratio of seven ounces of silver to one ounce of gold." Follow the Money.
3. There is no shortage of silver. There never has been a shortage of silver. Until the laws of supply and demand are repealed, there never will be a shortage of silver.

The first person I ever read that claimed there was a shortage of silver was Ted Butler. He claimed in May that according to his figures the world was going to totally run out of silver by December. This was on the Kitco forum. I wrote and told him he was dead wrong, there were billions of ounces of silver above ground.
I'm inclined to agree with Bob on this point. I don't think there is above ground shortage of Silver. I do think there is an above ground shortage of retail refined Silver (the variety that investors are interested in buying). I would be interested to hear why Bob thinks APMEX are offering $3 above spot price to BUY American Silver Eagles if there is no shortage! As I said, technically he is right, but where are the relevant facts??
4. The most illogical thinking and worst use of "facts" is common among the silver uberbulls and the parrots that follow them. Someone just posted the most incredible theory on the validity of SLV. That's the silver ETF that has been trashed for years by a small group of uberbulls with an agenda. One of their supporters came up with a brilliant argument. Since we don't really know and can't prove that SLV actually has all the physical silver, the proof that it is a scam is when they deny it being a scam.
Inclined to agree with his criticism of those that attack the validity of the SLV. I have read a lot of the articles that criticise it, mostly coming down to how difficult it is or might be to retrieve your physical Silver from the ETF in certain circumstances, when it seems quite obvious to me that most that trade SLV do so to avoid the inconvenience of physically holding the metal itself.

In the article Bob then goes onto list a 5th fact regarding the Comex and then provides the following commentary and summary:
One of two things is going to happen. Either we are at a top and silver is about to crash both hard and long, or the world's financial system is about to fall apart. I have been an advocate of a total financial crash for a lot longer than most writers. I was writing about the dangers of derivatives in 2002 when they were 15% of what they are now.

But I don't believe the world's financial system is going to crash next week. As in January of 1980, the silver bulls are going to be the ones losing money. You can't profit if you don't sell and all the permabulls are screaming "Buy, buy, buy." As they will at every top. Buying at record high prices is rarely profitable. But perhaps this time it really is different.

Here's what all potential investors in silver need to know.

1. The chart of silver has gone parabolic. Parabolic charts mark tops no matter what the commodity.

2. The bullish consensus on silver is at a record high. Record high bullish consensus on any commodity is common at tops.

3. When the most credible guys in an industry start explaining why supply and demand don't really work, it's a top. With 19 billion ounces of silver above ground we aren't about to run out any time soon.

4. When guys start writing about silver that didn't have a clue as to what it was or what it was used for at the bottom, you are at a top. I'm astonished at both the ignorance and the arrogance of the newly invented silver "Gurus."

5. When the smartest guys in an industry start telling you, "This time it's different," it's not. It's just a top.
So in Bob's opinion either Silver crashes now or the world financial system crashes? There is no potential for Silver to continue rising say another $10-20 or more even after he has called the top wrong twice this year already? The guy almost seems as irrational as the conspiracists he's trying to draw into battle with this article! He seems quite emotionally charged over the matter. He certainly must be hurting badly if he opened those shorts he talked about when Silver was $10-$15 lower.

Now I wouldn't call myself a permabull, in fact my previous suggestion that Silver and Gold are in/heading into the 3rd phase of the bull market have been somewhat unpopular when discussing it on related internet forums. For an article called 'Facts on Silver' it certainly lacked many facts that were relevant to the current situation.

Silver may very well have reached a short term top (much like those seen in 2004, 2006 and 2008 as I have previously discussed). Maybe it will be 3rd times the charm for Bob or maybe with the USD Index still hovering around the 74 and looking ominously like it wants to drop, it will sending Silver and Gold into one final parabolic leg in the short term before the usual middle of the year price doldrums...


Disclosure: Positions held in Silver & Gold. Not investment advice. Do your own research.

CME Increases Silver Margin Requirements

Around a month ago I pointed out that the CME margin hikes in the Silver market (and other leveraged markets) are far from a conspiracy. 

The CME have announced they are set to increase their margins again after close on Tuesday trade in the US which once again has the Silver market conspiracist frothing at the mouth claiming that it's all part of a larger plan to hold the price of Silver down. Now don't get me wrong, I do think the large players in these markets use their size to their favour to push the price around on a short term basis, infact I implied as much in a post a couple of days ago:
Firstly let's consider that we have options expiry on Tuesday, this is often a time of short term price weakness. If we see price weakness in the week ahead then the attempt at taking out a new all time high might not come for a week or two. 
I just don't think pushing around the price short term to the larger traders benefit also implicitly implies a longer term manipulation scheme to control the price.

Changes to the initial margin requirement for spec traders over the past 6 months look like this (with the latest change in bold):

Date: November 10th, 2010
Spot Price: $27.18
Contract Value: $135,900 (5000 x $27.18)
Margin Requirement: $8,775
(6.5% of full contract value)
Resulting Leverage: 15:1

Date: November 16th, 2010
Spot Price: $25.40
Contract Value: $127,000
(5000 x $25.40)
Margin Requirement: $9,788 (7.7% of full contract value)
Resulting Leverage: 13:1

Date: December 17th, 2010
Spot Price: $29.15
Contract Value: $145,750
(5000 x $29.15)
Margin Requirement: $10,463 (7.2% of full contract value)
Resulting Leverage: 14:1

Date: January 21st, 2011
Spot Price: $27.45
Contract Value: $137,250
(5000 x $27.45)
Margin Requirement: $11,138 (8.1% of full contract value)
Resulting Leverage: 12:1

Date: March 24th, 2011
Spot Price: $37.26
Contract Value: $186,300
(5000 x $37.26)
Margin Requirement: $11,745 (6.3% of full contract value)
Resulting Leverage: 16:1

Date: April 26th, 2011
Spot Price: $45.50*
Contract Value: $227,500
(5000 x $45.50)
Margin Requirement: $12,825 (5.6% of full contract value)
Resulting Leverage: 17:1
*Have just used current spot price as don't yet have Tuesday close price

As you can see the net result of the change is very much inline with previous increases. If anything the increase in margin requirement could have been more aggressive!

My opinion hasn't changed from a couple of days ago. I still think we may see $50 surpassed in this rally which will result in a quick squeeze to $55-$60 or higher before this current spike is over.

That said I'm not a short term trader and it doesn't both me whether the short term top is already in or yet to come.


Disclosure: Positions held in Silver. Not investment advice. Do your own research.

Sunday, April 24, 2011

Chinese Firm Buys 17.7% of Gold One Int. (GDO)

A few weeks ago I reported that ASX listed Gold miner GDO had announced the potential for a takeover offer:
Gold One International (GDO) was issued with a 'Price and Volume' query (commonly referred to as a 'speeding ticket' on share trading forums) yesterday. Their response was posted this morning to the ASX and included some interesting information regarding a potential takeover offer. Bullion Baron
During trade on Thursday an announcement was released showing that a Chinese mining group had purchased a significant stake in GDO at a large premium to the current share price:
A Chinese mining group has bought 17.7% of Australian and locally-listed precious metals miner, Gold One International, in a move seen as a precursor to it making a bid to buy the company.

Chinese mining group Baiyin Non-Ferrous Group bought the Gold One shares at a 20% premium.

A Sens announcement by Gold One said Baiyin had become an "initial substantial holder".
Business Live
Comments from GDO management were interesting, indicating that this may just be the beginning and possibly there are other deals still pending:
Neal Froneman, the CEO of Gold One, said the acquisition does indicate that a further offer will be made; however, he did leave the door open to the possibility of a takeover of Gold One by either Baiyin or any other suitor.

"Gold One is currently assessing a potential acquisition transaction, and also a potential change of control transaction for the company which, if it were to proceed, could involve an offer to Gold One shareholders to acquire all of their shares, on terms and conditions yet to be determined."
Trading on Thursday was slow to respond to the news and I had an opportunity to top up my own holdings at 45c before it ran hard to a 50c close, after trading at a new 52 week high of 51c (still below the price paid by Baiyin).

GDO is now my second largest share holding (second only to CCU) and I am quite confident we will see higher prices in the short to medium term as the market digests the Chinese buy-in announced Thursday and potential for a takeover offer in the near term.


Disclosure: Position held in GDO & GOLD. Not investment advice. Do your own research.

What happens when we get to $50 Silver?

Below is the Easter precious metals market schedule according to Zero Hedge:

•    April 21st, Holy Thursday: day before a holiday
•    April 22nd: Good Friday: CME Closed
•    April 23rd,Easter Saturday: Markets Closed
•    April 24th,Easter Sunday: Markets Closed
•    April 25th, Easter Monday: LME Closed
•    April 26th, Tuesday: May Options Expiration CME

We saw some very interesting trading on Friday with Silver rocketing up around a dollar on very light volume to above $47.

With the price of Silver so close to the all time high ($50, January 1980) it would be crazy not to expect this will be tested in the short term.

So what happens at $50?

Firstly let's consider that we have options expiry on Tuesday, this is often a time of short term price weakness. If we see price weakness in the week ahead then the attempt at taking out a new all time high might not come for a week or two.

There's a lot of momentum in the move towards $50, I think it would be a mistake to dismiss the possibility that we will surpass it and see new highs in the first half of this year.

I do think that $50 will prove to be a short term psychological barrier, but my thinking is that there will probably be a lot of stops (by those shorting) just above the $50 level. So if Silver's momentum takes it above and these are triggered then we might just see the mother of all covering rallies/short squeezes with the metal heading to $55-$60 (maybe even higher) before this rally is over.

For interests sake, here is how Gold took out it's 1980 high in early 2008. It met short term resistance on the first test, had a moderate correction, but in the process formed a wedge which formed the platform for the breakout:

Of course those familiar with Gold's trajectory over the last few years would know that after peaking at around $1030 it ended up falling back below $850 briefly in late 2008.

If we get the short squeeze in Silver as it heads above $50 this might be a good place to lighten the load. Historically Silver has seen large corrections following each of these spikes in price and there is no guarantee Silver stays above $50 once it's surpassed.

Following each of the previous spikes in Silver (2004/2006/2008) we saw a large correction ranging from around 25% to 40%.

If Silver heads to $60 at the peak of the current spike, the correction that follows could take it back below $50 to $45 in the event of a 25% correction or to $36 in the event of a 40% correction...

On a technical basis Silver is well overbought and it would be prudent to exercise caution when buying at these levels even if it can go higher short term.


Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

Wednesday, April 20, 2011

US Dollar Index Plunging - Dollar Crisis?

On February 25th I posted the following:
Back on the 18th of January I blogged about USDX support at 79 being broken to the downside. We're now dancing with the lower support area of 77. Below this there may be support at 76 and then 74, but the US Dollar is looking very weak. I would not be surprised to see a break below 74 over the next couple of months which would support higher Gold and Silver prices early in the year (as they have an inverse relationship).
Shortly after this post we saw the US Dollar Index fall below support at 77, it then broke support at 76 and has been dancing between 74 and 76 for a few weeks. In my opinion a break below the 74 support level is likely in the short term (previously made a low around this area in late 2009):

Below 74 and we're looking to retest the 2008 (all time) lows at around 71.

If the US Dollar Index were to fall below 71 this could cause a panic out of the Dollar leading to a "Dollar crisis". The panic is also likely to see Gold and Silver rise sharply (priced in USD) given their inverse relationship.

If the US Dollar were to fall to new all time lows it would put further pressure on the Fed to stop or reduce the QE program. I have previously discussed a  possible scenario that could occur if QE were to be halted this year. In my opinion it wouldn't be pretty.

I think any panic out of the USD this year would be short lived, much like the Euro sell off (in early 2010) we would likely see a sharp dip lower and then a strong bounce out of the lows.


Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

Tuesday, April 19, 2011

Bullion Baron Published in AHA Investor

In the current copy of AHA (Australian Hard Assets) Investor you will find an article on page 50 written by yours truly. The April/May issue of the bi-monthly magazine is the second so far. I enjoyed reading the first issue so when I was approached to make a contribution it was an easy decision!

If you'd like to read the article I would recommend buying the magazine ($7.95)

The story of Cobar Consolidated Resources (ASX: CCU) is a compelling one (which I covered in the article). If you've been following my blog you will have noticed I have covered their developments several times.

They have just raised capital again (should be the final one leading to production in late 2011), but unlike many juniors they are doing the right thing by existing shareholders. The previous two times they have raised capital at a premium to the share price (almost unheard of in the junior Gold/Silver sector). This time we saw a 5% discount to institutional & sophisticated investors, but a 15% discount for existing shareholders (via 1 for 10 entitlements offer). Way to look after the little guys!

Not only will the capital raised be put to good use for building the plant, but should provide some extra funding for exploration activities. We are waiting on results from a VTEM survey announced early April which should provide some solid leads for further drilling. The MD Ian Lawrence can be heard discussing the capital raising and exploration opportunities in this Board Room Radio presentation: Link.


Disclosure: Positions held in CCU. Not investment advice. Do your own research.

Friday, April 15, 2011

Bolivia to nationalise Silver mines?

A Zero Hedge article caught my eye this morning as I checked overnight news. Apparently Bloomberg is reporting that Bolivia is nationalising their Silver mines:
Two weeks ago the precious metals space was closely following the fate of Sumitomo's San Cristobal mine, where a long strike had paralyzed work at the world's third largest producer of silver and sixth-largest producer of zinc. While the strike was eventually resolved with concession to the domestic workers, a far more troubling report from Bolivian daily La-Razon states that Bolivia's president Evo Morales is now planning on expropriating zinc, silver and tin mines sold off by previous governments. Bloomberg reports that "Morales will announce a decree May 1 to “dismantle the privatization model,” said Nicolas Fernandez, a spokesman for state mining company Corp. Minera de Bolivia, known as Comibol. "The government is recovering all the privatized companies,” Fernandez said today in a telephone interview from La Paz. “When the decision is taken, Comibol will be ready to manage these mines.”" Among the contracts to be affected are those with Glencore International AG, Pan American Silver Corp., and most importantly, Coeur d’Alene Mines Corp., which is operator of the San Bartolome mine: the world's largest pure silver mine. Notably San Bartolome and Sumitomo's San Cristobal "account for about 83% of the nearly 1.1M tons of fine silver Bolivia produced in 2009, according to Mining Ministry data" according to The Gold Report. If indeed this news is proven true, and we will know for sure in 16 days, looks for the price of silver to spike considering about 1.33 million kilograms of silver was produced in Bolivia 2009, according to the U.S. Geological Survey: an amount which will likely fall off a cliff following the utter chaos that is unexpected nationalization. ZH
Pan American Silver Corp and Coeur d’Alene Mines Corp both saw large falls in their share price on the news:


If a nationalisation of their mines takes place it may see a rush of investors looking for politically safe countries to invest in, so I wouldn't be surprised to see Australian Silver stocks get a boost from this.

Gold and Silver surged last night with Gold closing at US$1475 and Silver above US$42.

Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

Tuesday, April 12, 2011

Maryborough Apartments 'Riverview on March'

Just a quick update on an auction I mentioned in a post around a week ago:
Here is a link to the apartments that are being advertised (LINK), the auction is this Friday, it will be interesting to see what prices they get given the "no reserve" status of the listings. Link to previous post.
I posted the above with reference to adverts I had seen in a Google sidebar (an unusual way of advertising specific properties in my opinion), I came across this article which covered the auction results:
After more than 18 months on the market, the luxury Riverview On March apartments finally went under the hammer yesterday — and about 140 people came to watch as they sold for a song.

Valued at $650,000 to $700,000-plus each, four of the six units sold. They fetched $510,000, $320,000, $339,000 and $300,000.

Auctioneer Jason Andrew was made to earn his keep in cajoling every last dollar out of the buyers, but bidding was desultory for the two penthouses, which were eventually passed in because they did not meet the reserve price.

Developer Ron Blyth admitted he felt hard done by, with three of the four sold units going for less than half the building cost.

Even on the highest-selling apartment, Mr Blyth lost about $200,000 – or a total of about $1.2 million for the combined sales. FCC
It's not clear whether the loss was on actual development costs or just a loss based on what the apartments were previously valued at. Either way I think it shows that significant property price falls here aren't just a possibility, in some areas it's already happening.


Monday, April 11, 2011

Silver's Unrelenting March Higher

The current Silver rally is exhilarating. 

Even as I write this the chart I've used below is basically out of date with Silver having soared higher to almost US$42 during Asian trade today, only around $8 below it's all time nominal high of $50 set in January 1980.

While it has experienced several small corrections along the way, it is obvious that this spike higher in price differs to those seen previously in the bull market, such as those in 2004, 2006 and 2008. Look at a 10 year Silver chart and the current move looks parabolic.

Every dip is being bought. Some dips are literally lasting only hours. This from April 1st:

Here's a chart type that I used a little while back to show the difference between the bull market in the 1970s vs today. A few months on and we've seen only one slightly negative month over 8 months of strong moves higher and it's looking like April will be no exception. 

This strength of move has no precedent in the current bull market. It makes me wonder whether we are heading into a power move the likes of which we haven't seen since the 1970s. For example in the 1970s run there were 3 separate monthly occasions where Silver rose 40% month on month (using the same month on month London fix average). The last two times were shortly before the final 1980 peak.

This move also concerns me. 

We have increasing coverage of the rally by mainstream media sources, as well as suggestions that Silver is entering a new paradigm:
    * Demand is expected to outstrip production growth. BMO Research analysis indicates silver demand & supply fundamentals should remain positive to the end of 2012E.

    * The prospects of further quantitative easing combined with sovereign debt concerns, competitive ‘fiat’ currency devaluation in western economies, and the return of inflation could result in investment demand exceeding BMO Research’s projections and extending the supply deficit through 2014E.

    * This shift in the supply/demand dynamic lies in contrast to the broader investment perception for silver, which is rooted in the 1990’s when the metal was in abundance, driven by the demise of the photographic industry and Chinese selling.

    * The paradigm shift for silver suggests that the traditional benchmarks for silver, such as the long-term historical ratio with gold, are no longer valid.

    * Accordingly, the markets are searching for a new set of criteria against which to benchmark the price of silver, with a bias to the upside.

BMO Capital Markets
Is this just an increase in mainstream support for Silver as we enter the media attention phase of the bull market or is this the start of the mania...?

Some questions that are running through my mind at this time:

- Is this a parabolic spike or the start of THE parabolic move to end the Silver bull market?

- Does Silver necessarily have to peak at the same time as Gold this time around?

- What does the end of QE2 mean for Silver if QE3 does not immediately follow (a gap is looking more likely everyday)?

- Could this information age see the mania phase of the bull market occur at a faster pace than most expect?


Disclosure: Positions held in Silver. Not investment advice. Do your own research.

Thursday, April 7, 2011

Real Estate Propagana Machine...

And the propaganda machine continues…
RENTERS continue to be squeezed as the deteriorating outlook for home affordability pushes up demand for rental properties.
House rents increased in every capital city except for Sydney, Melbourne and Darwin, a report by property data collection agency RP Data found.
Rents increased by 1.4 per cent nationally and 2.7 per cent in the capital cities over the past 12 months. Adelaide Now

An increase in rents by 1.4% nationwide or 2.7% in capital cities is now considered a squeeze? If rental increases below the current rate of inflation are considered a squeeze then sign me up for a squeeze like that every year! The reality is that the above figures show the cost of rent is falling (in real terms).

I think this pattern (rents falling in real terms) will continue Australia wide (along with house price falls) over the next several years. Households are already under pressure with rising costs of essentials such as groceries and petrol, there is little room for any large increases in the cost of rent as well. Poor retail figures are already showing that households have been cutting back on excess expenditure.

What cost increases have property investors and owners on a variable rate mortgage incurred over the last 12 months?

Using the standard variable mortgage rate from Loan Sense:

Mar-2010 – 6.24%
Mar-2011 – 7.79%

Investors and owners (with a mortgage) have seen a cost increase of 25% over the last 12 months (an increase of 1.55% in rate) on interest rates alone, besides rising council rates, maintenance expenses, levies & other associated ownership costs.

Who is getting the squeeze? It certainly isn’t renters!


Wednesday, April 6, 2011

Real Estate Industry thinks outside the square?

I have seen a few examples recently of real estate agents advertising in new and interesting ways.

The latest was a letter box drop that I received today:

Rather than advertise any of the properties features the flyer promotes that the property has seen a "Price Adjustment".

I have seen a heavy increase in the amount of real estate related junk mail that I receive. How about it Australian readers? Have you seen an increase? Describe what you've seen in the comment section below!

Further to the above I recently noticed some Google adverts displaying the following ads (this is two for the same properties):

Certainly an interesting way of looking for potential buyers, can't say I've seen this method used before, sure I've seen real estate specific adverts, but never for a single property or group of properties and look at the wording... is it any wonder though, a quick look at Maryboroughs trend and anyone can see their units are in trouble:

Here is a link to the apartments that are being advertised (LINK), the auction is this Friday, it will be interesting to see what prices they get given the "no reserve" status of the listings.

REFind shows there are currently almost 900 properties for sale in Maryborough.

Google ads isn't the only innovative online advertising I've seen, you may have also seen these recent 'raunchy' adverts that have gone viral (warning: may not be work suitable).

With both of the above properties still listed for sale on listing sites one has to wonder just how effective this style of advertising is (for achieving a sale).

It will be interesting to see just how far the propaganda goes as this correction plays out, I suspect the actions of sales agencies will get more and more desperate as time goes on.

Industry experts are constantly talking about it being a buyers market, but I suspect that we 'ain't seen nothing yet'. The fear is only just starting to set in. I suspect we have a couple of years to go until we hit despair.


Saturday, April 2, 2011

Gold moves to next bubble phase?

Most regular readers would be familiar with my thoughts on where we are in the precious metals bull market, I think we are at the business end and will soon (within 2-3 years) be heading parabolic (into a bubble).

The Prince posted a great article the other day on Macro Business and is happy for me to share it with readers here. I will post a few comments at the end.


Gold moves to next bubble phase? 

Investing and speculating in gold is almost as emotive a subject as residential property, so I’ll try to keep this short and sweet.

I treat physical gold as a “Type Zero” security asset, a small insurance hedge against financial instability – a “Minsky Metal”. (I will publish an article regarding my research into the “Minsky Metal” and how I treat capital assets differently in the future) 

Physical gold may have a place in a future reserve currency or SDR (most likely alongside a basket of other currencies and goods) if the modern monetary system changes, and if so, the intrinsic value of gold should increase, but this is nothing more than speculation.

When it comes to the derivative of the shiny physical stuff, I throw out all these notions and see gold for what it is: a speculative commodity/currency. I trade gold futures from time to time (only because its behaviour is very similar to my equities based trading system) and have studied its long and medium term price behaviour, correlated against other risk assets. 

Most of the time, in a flight to safety during a dip or correction in a secular trend (or the current bear market rally), it is dumped alongside other risk assets as speculators move back to the USD. Interestingly, this hasn’t happened as harshly in recent “safety” events, which may show an internal resilience to the gold “bubble”.

There are (worrying?) signs that gold may be moving into the “Media Phase” of the classic bubble chart by Dr Jean-Paul Rodriguez, as seen below, which may go someway to explaining this slightly different behaviour.

If the GFC was the Bear Trap....

Mad Jim Cramer, the notorious CNBC shock stock jock, has proclaimed that everyone should have gold in their portfolio. This is usually a deathknell for stocks and other assets (although to give Cramer a break, he has been right most of the time during this crack-up boom in US stocks – but then everyone thinks they’re a stock-picking genius when everything is going up.) 

Rotten Apple (Macro’s man in Manhattan) has reported before about the bombardment in the US media for retail investors to pile into gold. The Bullion Baron (my favourite Australian gold blogger) has also talked about gold’s rise in the Australian/Asian media.

The definitive main in Australian “mainstream” media, NineMSN has recently published an online article (h/t to Burbwatcher) claiming that “gold could hit $US1600 an ounce”, although the story is made up of a series of quotes from a very bullish gold investor. 

The Bullion Baron (my favourite Australian gold blog) has talked about this new media previously.

From Media to Public
What makes this seemingly new media phase different to the even more bullish “public enthusiasm” stage? Similar to other speculative assets like property, you need to take care of signs that the bubble has taken hold with the crowd including:
  • almost all financial planners advocating a strong gold presence in your portfolio (and never physical, always via an ETF or a structured product) – by strong I mean more than 2% which seems to be the standard for professional investor advice
  • talk at social gatherings (e.g BBQ’s, dinner parties etc) about people buying gold, shares in gold mining companies etc online and claiming “its obvious to anyone that it will replace the dollar as a currency – you’ve got to buy some!”
  • any discovery, or possible discovery or expansion of current mining operations publicised by any gold mining company results in said companies shares skyrocketing that day (intraday moves of over 100% are not out of the question – bigger companies like KCN, NCM etc could go up by more than 10% each day). Year on year tripling or more of share prices will not be uncommon.
  • mainstream media articles explaining how even if a bit expensive, gold is now a good part of your portfolio for diversification, pointing to the lack of downward price whenever markets correct or dip (thus self-justifying the “it can only go up” behaviour)
  • charts proliferating showing gold is “not in a bubble” but rising in correlation with the fundamentals. Most of these charts will be constructed to obfuscate the exponential price rise, like the current “price-to-income has been flat for 10 years” for property.
  • more ETF/trading vehicles for gold become available for the retail investor, including built-in leverage (the “Ponzi” moment when investment banks look for as many ways possible to make money out of the bubble)
Tin-foil hat conspricacy theorists aside, have you heard or seen any of the above in great quantity or broad reach yet? 

From Bull to Bubble
I contend that for a bull market to transition to a bubble, the uninformed (and greedy) crowd has to move in and bid up the prices, using “fundamentals” to justify their fear of “missing out”. This clearly occurred in the NASDAQ boom and the US housing boom of the last decade, and its peak has probably occurred already with the Australian housing bubble (although I can only hear a hiss, not a pop – I’ll let others work that one out).

The DotCom NASDAQ Bubble....

TEOTWAWKI – and I feel fine…
Just to be clear (I’m beginning to sound like John Cleese in Life of Brian) I contend that physical gold is not a speculative endeavour, as only a very small minority of people actually own physical “Minsky Metal” although its price is quoted daily at the end of our nightly news as if we all have a few ounces at home.

However, like all other risk assets, gold trading in non-physical form is purely speculative and there are clear signs that this speculation is spreading. The memes of “higher inflation” and continued ZIRP by the ECB, BOE and The Fed could provide the turning points for the crowd to step in and bid up gold to new heights, thus justifying the bubble itself.

Participants and non-participants alike need to observe the careful dynamic of psychological behaviour of bubbles and manias and take defensive (and possibly profitable) actions where necessary.
Disclosure: Regular readers know I’m a full time equities trader, but I also trade gold from time to time (usually long but sometimes short). I also own physical gold, but only as a “Minsky Metal”, and only as a small part of my portfolio. My investment company does not trade in, nor invest in gold or gold mining companies.


The Prince points out in the above article that Gold's intrinsic value could be pushed higher in the event of it's use in an SDR. Presumably such a change in the monetary system would require allocated Gold to be set aside for this purpose pushing up demand. Something to consider is that Gold may very well reach the price peak of the current bull/bubble before a new monetary system is introduced, so waiting for monetary or currency changes (because they are "inevitable") before trading out of Gold could be a mistake.

I like the practical suggestions The Prince has made for signals to look for when watching for signs of a bubble mentality. More often than not when I see commentators talking about signals to watch for they make a list in jest such as Peter Schiff did here. Funny, but not particularly helpful.

Not all buyers of Gold and Silver are looking to try and time their exit from the bull market, some simply "stack" the metals as a form of savings. For these buyers talk about the different stages of a bull market is largely irrelevant. 

For those of us who are looking to time the market The Prince talks about some signs that indicate we could be entering the 'media attention' section of the phase chart (start of the mania phase). He posts a link to where popular TV host Jim Cramer advocates Gold in the above article. Not only has Jim Cramer been advocating Gold recently, but also Silver (!) as per the below video:

As I've mentioned before, (to his credit) Jim Cramer has been an advocator of holding (some) Gold for a number of years and I have heard him talk about Silver before (usually the ETF: SLV), but not in the same way he does in the above video. One comment he made really rings true:

"Those who do not deal with the physical really don't understand the true demand."

Until you physically hold and own some real metal for yourself it's just not possible to understand.

A bar I bought recently


Disclosure: Position held in Silver & Gold. Not investment advice. Do your own research.

Australian Buyers Strike Makes Inernational News

The First Home Buyers Strike started by Prosper Australia a little over two weeks ago has just started making international headlines.

Here is an article posted online for The Telegraph:
Australian home buyers 'strike' over inflated house prices
What started as a small campaign by land tax lobby group Prosper Australia has grown into a sizeable movement, with more than 5,600 people signing a statement saying: "I undertake not to bid at auction or negotiate by private treaty to buy real estate until prices moderate, just as they have in all the countries we compare ourselves to."

The campaign has captured the imagination of the public because house prices in major Australian cities are believed to be overvalued by more than 50 per cent, with many average income earners unable to afford a first home even on the fringes of Sydney, Melbourne and Brisbane.

A recent survey of 20 countries by the Economist magazine found Australian property prices were the most inflated in the world, at 56 per cent over their long-term average, beating those in Hong Kong and France.

Other research suggests that just three out of ten lots for sale in new housing estates are affordable to average-income first-home buyers. Australian property prices did not fall during the global recession, unlike like those in Britain and the US, because the nation escaped the worst of the downturn.

Prosper Australia believes the situation has created a property bubble that will burst when first home buyers abstain from paying over the going rate for properties.
Further to the above the strike has also just been covered by well known econoblogger Mish on his blog Global Economic Trend Analysis where he suggests the following:
I think those buyers' strike vote are somewhat wasted. Buyers will do what they will do and buyers are already on strike.

From my way of thinking it would be better to pressure the Australian government to abandon its ludicrous first time home buyers' grant.

That "Home Buyers' Grant" program sounds very much like President Bush's failed "Ownership Society".

Simply put, government has no business promoting personal choices unless it purposely wants to create bubbles.

If you have votes to spare (or if you have not yet registered) I suggest you cast every one of your votes to Stopping the First Home Buyers Grant. It's time to end the insanity.
I agree with Mish's comments above. As I have mentioned previously I think it's great that the strike has gained so much attention for the affordability issue, it's now time to focus on what we can do to sustainably improve the situation.

Both Prosper Australia and Steve Keen have recently made suggestions on how this could be achieved. I already covered Keen's in a previous post, if you want to see them again they are available on his blog here.

Prosper Australia has proposed the following:
What We Want
* 10,000 people to sign our Total Abstainers Pledge
* Negative gearing limited to new home construction, then phased out completely
* Stamp Duty eliminated
* Abolishing First Home Owner Grants (never again!)

Prosper’s longer term aims include:
# Funding the abolition of stamp duty and negative gearing with a higher and flatter Land Value Tax
# Reducing the threshold on Land Tax to zero
# Continuing to transfer taxes off incomes, GST and onto fixed assets like land, iron ore and the electromagnetic spectrum.
I think both Keen and Prosper have made valid proposals for changes that could improve the property market (and affordability), making it a fairer system for all.

Let's just hope this strike has the political clout to bring about some permanent changes for the better.