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UNCOMMON COMMON SENSE
For People Who
Think
"The principle of spending money to be paid by posterity, under
the name of funding, is nothing but swindling futurity on a large
scale." --Thomas Jefferson
"I suppose, indeed, that in public life, a man whose political
principles have any decided character and who has energy enough to give them effect must always expect to encounter political hostility
from those of adverse principles." --Thomas Jefferson, letter to Richard
M. Johnson, 1808
"Don't judge each day by the harvest you reap,
but by the seeds you plant." Robert Louis
Stevenson
Every Time I come To a Fork In The Road, I
Always Decide To Take The One Less Travelled. Aubie
Baltin
THE CHICKENS COME HOME TO
ROOST
If I said it once, I said
it 1000 Times, “You must always keep your eye on the big picture. Let me explain: Every analyst and
Government spokesperson, from the President on down, keeps referring to the
trillions of dollars on the corporations books as well as the trillions of
dollars being held overseas and how the government must lower corporate taxes
and create a tax free holiday to repatriate all that overseas money. Sounds
well and good until you examine the President’s and the Democrat
rhetoric over the last 3 years and especially the last three months. What do
we hear over and over again? Tax the rich, make them pay their fair share,
eliminate loopholes such as tax deductions on corporate jets, break contracts
with the oil companies and eliminate their depletion allowances that were
given to encourage drilling. Cancel their oil leases. Why? Were they too
successful? Cancel their drilling permits after the companies have already
paid 100’s of billions of dollars for those very same leases. I could
go on, but instead I’ll ask you a simple question. Would you repatriate
your offshore profits, when there are numerous, much
more business friendly Country’s offering opportunities abroad
containing much less onerous regulations and lower tax rates? With the anti-business attitude in
Washington, would you speculate to increase your capacity before you have to?
Would you trust Washington not to reverse their tax policies soon after you
repatriated and invested your money? This is a perfect example that justifies
my constant warnings about the unintended consequences of government actions.
REALITY SETS IN
Lately all the Talking Heads were speculating
that Obama and Bernanke were going to lay down their weapons of mass
inflation and surrender peacefully to the Republicans clamoring for no new
spending. They would approve no new big money printing or other machinations
to pump liquidity into the economy. NOT SO FAST: Big BEN in a recent speech
has reopened the door to a new QE3
— one that, depending on his own Depression fears, could be enormous.
It will include radical measures that I have continuously railed against ---
like buying stocks and real estate for the Fed’s own account; dropping
bank reserve requirements and even forcing the nation’s banks into
making loans by charging them interest on their own reserves that they are forced to
keep at the FED and other embarrassing requirements like market
to market.
This new QE3 or whatever it will be referred
to will be huge! Not only will it be counter productive, but it confirms precisely with my
expectation that they will be setting the stage for that “last ditch”
rally into year end that will slam shut that giant
BULL TRAP that I have been writing about.
First step was that we’d get worse news on the economy,
driving bank and real estate stocks into the ground.
The Second step would be that the Fed would react with unprecedented money
printing and other stimulus, driving certain assets like Gold and the stock
and Bond markets through the roof.
We won’t have to wait much longer to find out
which direction Big Ben will turn to.
TOO BIG TO BAIL
Artificially manipulated
Low Interest Rates for an extended period of time will end up having
tremendous costs. The longer the period of time, the larger the eventual
costs will be. There is no such thing
as a free lunch. And I could write a book about all of the unintended
consequences of such thoughtless policies.
HOW NOW DOW
- The Value Line Geometric average peaked
in 1998 and then made a double TOP in 2006; the Value Line Arithmetic
Index peaked in May 2011(a Fibonacci 13 years later).
- The Real DJII (DJII/gold) TOPPED in
July1999 and the list of stocks making NEW ALL TIME HIGHS has been
shrinking ever since.
- The Arithmetic DJII reached it peak on May 2, 2011.
All combined these are
sure signs of internal WEAKNESS. However, the long term cyclical patterns are
pointing to a MAJOR TOP some time between now and
early 2012. (perhaps it has already been reached?)
The next major down wave
is projected to lose a minimum of 50%, similar to what we witnessed in
2007/2009, but more likely to what happened in 1929 to 1932 or a replay of
the Japan experience of the last 20 years.
The reality is that the
FED is stuck in failed Socialist theory and will be seen to have very limited
long term capability of control highlighted by a complete loss of
the public’s confidence. They will show impotence
when faced with CREDIT DEFLATION like we and the world have never seen.
OUTRIGHT DEFLATION
As the powers that be
continue to grapple over how and who is responsible for the AAA Rating being
lowered, the pile of bills due keeps growing exponentially larger. Prices for
almost everything we buy, especially food and energy, is slowly but steadily
increasing in price. What they should be concentrating on is how to limit
spending and drastically reduce regulation in order to allow the FREE MARKET
to work by investing and creating jobs.
It was my estimation that
the Debt Ceiling Bill (like the ECB and IMF’S 146 billion Euro Bailout)
is only a stopgap measure that is doomed to fail from the start. You have noticed
how both Gold and the Markets’ have voted? None of the real problems were even
addressed let alone repaired. Has the time finally come where
“They” and “WE” must finally address our REAL
PROBLEMS or can they still stall thinking any unpleasant thoughts a little
while longer? Most probably, they don’t know what any real potential
solutions are.
Since the problems are no
longer one of LIQUIDITY, but more of a long term structural problem that has
not even been looked at yet, could it be marking the beginning of the end of
the EUROPEAN UNION? Is Europe and the US heading for outright Stagflation to
be followed by Deflation and Depression? To me, it all looks like a Keynesian
House Of Cards and just like all houses of cards, it must eventually come tumbling
down.
A LITTLE HISTORY
The FED was also supposed
to be in "control" in 2007 as the 54% decline by the Industrials
began and it was not until the market and the economy hit their natural
cyclical bottoms that these declines were halted due primarily to the fact
that the markets were completely SOLD OUT. Of course, once the lows were
made, the Obama and the Fed took credited for having saved the world. Fact is
the Fed was not in control then, nor are they in control now. Bernanke has
absolutely no long term foresight. How could he since he is married to a
proven failed ECONOMIC (Keynesian) philosophy. The FED merely reacts
to the natural cyclical forces of the market using a system that has been
proven over the last 75 years not to have ever worked. In doing so, their
reactions ultimately only serve to make matters worse. As an example, it
should be obvious that the FED’S (re)actions after the 2002 low created
not only the housing (bubble) crisis and sharply rising commodity prices, but
was also responsible for the credit crisis and the eventual collapse that
made the decline into 2009 worse than the initial problem would have been had
they done nothing and allowed the markets to correct themselves. People
desperately want to think that someone is in control and that
"they" won't let this or that happen. Fact is, "they" are
never really in control and all "they" do is react and in doing so,
"they" only serve to exacerbate the problems and this time is no
different. As the markets moved down into the 2009 lows, the Fed pulled out
all the stops and literally threw in everything but the kitchen sink to keep
things afloat. But the fact is the markets moved into their natural cyclical
lows and once these counter-trend bounces have run their course, we should see
that once again, all "they" have done is make matters worse.
There is” No Such Thing as a Free Lunch”.
The price for keeping Interest Rates artificially low for extended periods of
time must be paid for in the end. Unfortunately the end is a lot nearer than
anyone now is even considering.
Market participants
clearly hoped the E125 billion orchestrated bailout of Greece would be the
end of Europe’s sovereign debt worries. Once again the markets have
voted. They say these small economies (States) “don’t
matter”, but we know better.
The Greek crisis (and the other European debt
crises yet to come) is merely a precursor to the "real world" debt
crisis of 2010-2012. (We say "real world" because a crisis among
developed nations will dwarf the "emerging-market" debt default
cycle of the late 1990s.) Likewise, both the emerging-market crises of the
last decade, the Internet Bubble that followed, and the Real Estate Bubble
after that were all merely stepping stones towards the ultimate collapse of
the world's untenable, Fiat paper-backed monetary standard.
Many of the world's developed economies have been
fueling very limited growth and their standard of living with foreign debts.
This growth and the asset values created under the euro standard are
unsustainable for the simple reason that debt service cannot be made and
creditors are no longer willing to extend these debts on reasonable terms.
These problems have no simple answers. They will spread from creditor to
creditor and intensify as the market realizes these defaults are unstoppable.
The next major country likely to experience a credit crisis is Italy, which
has enormous exposure through its banks to Eastern Europe the US Banks and
Asia. Italy's public debt totals €1.7 trillion – seven times the
size of Greece. Italy is the world's third-largest sovereign borrower. It
cannot be bailed out by the EU without help. – it
is simply too big. Meanwhile, it cannot possibly hope to pay back its debts
as long as it remains in the EU. In fact, Italy has been in recession almost
since the day it adopted the Euro: Its economy has grown by a total of 0.54%
over the last decade. The total public debt to GDP will soon surpass 120%. At
that point, they will no longer be able to pay just the interest and it will
become progressively more difficult for Italy to extend its foreign debts
because all of the foreign creditors will know these debts will never be
repaid. A default and devaluation will be the only way to restart Italy's
economy.
Finally… what should you do about all these risks?
- Hold plenty of Gold and Silver bullion.
- Short financial stocks.
- Hold cash in sound currencies.
- Buy farmland.
- Buy energy – during its
corrections.
Don't believe a word
anyone from the banks or the government says. Oh… and be sure to renew
your UNCOMMON COMMON SENSE newsletter,
Last week there were NO
New 52-week highs: None.
GOLD
Gold has been rising at an increasingly steep pitch
since early July warning us that whatever deal emerges from the NUT HOUSE on
Capitol Hill, it will not do anything to affect the steady ongoing
destruction of the Dollar that began in 1913 but really exploded after the
FED dropped Gold as backing the Dollar in 1971. The Fed, as we know, was
charged with conducting monetary policy and supervising the banking system.
However since 1971, the Central Bank’s mandate was expanded to include
the responsibility for maintaining full employment. The dire implications of
this for the U.S. dollar have not been lost on bullion investors and traders,
even if conventional thinking would feign to suggest that precious metals are
just a barbarous relic and that their prices have come too far, too fast.
Compared to what? Over the last decade, bullion has outperformed every other
asset class you can name.
Perhaps the
destruction of the Dollar has entered a new and cataclysmic phase. What will
replace the Dollar when it utterly fails, as it eventually must if we
continue at the rate of credit creation that we are now in? GOLD may not be
classed as MONEY yet, but it is sure headed in that direction.
Further
confirmation in the continuing stealth accumulation of bullion by Central
Banks came with the confirmation that South Korea's Central Bank bought 25
tons of Gold over a two month period. The Gold is worth $1.24 billion and
resulted in a 17-fold increase in their Gold reserves.
Thailand’s
Gold reserves rose by 15.5% in the two months and rose to about 4.07 million
ounces in June, from about 3.523 million ounces in May, according to
Bloomberg.
South Korea is the world’s seventh biggest
foreign exchange reserve holder and 64% of its reserves are in U.S. Dollars.
The bank said that it also holds Euros and other assets and the move was
about achieving diversification. The BOK’s reserves, stored in the vaults
of the Bank of England, increased by 25 tons to 39.4 tones (from 14.4
tones),but remain meager when compared to the size of their foreign exchange
reserves. Their Gold holdings account for only 0.7% of its reserves, up from
0.2% prior to the purchase. The BOK reserves were at a record high of $311.03
billion at the end of July which puts this $1.25 billion Gold purchase in
perspective. Rest assured they will be doing a lot more buying in the very
near future, especially if there is any kind of meaningful ($100) pullback.
Their Gold
reserves and those of other Asian Central Banks, particularly the
People’s Bank of China, remain meager when compared to those of Western
Central Banks and the U.S.
Earlier this
year, Thailand, whose Gold holdings account for only 2.9% of reserves, bought
9.3 tons of Gold. Russia purchased 41.8 tons and Mexico bought 99.2 tons.
China is the
world's sixth largest Gold holder and the biggest among Asian banks with
1,054.1 tons, equivalent to just 1.6% of their massive currency reserves.
According to
the World Gold Council, governments hold an average of 10% of foreign
exchange reserves in Gold: Larger economies such as the USA, France and
Germany hold more than 50% of their currency reserves in Gold. And they claim
Gold is not money?
"As a
real safe asset, Gold helps us to cope effectively with changes in the
international financial market," said Jaehyun Joo of the Bank of Korea. "We expect that Gold will
serve as a safety net for official foreign reserve and enhance the stability
of the Bank of Korea's (BOK) foreign reserve management.” His comments
reflect perfectly the mindset of the Central Bankers in Asia who realize the
increasing importance of Gold as a store of value and are increasingly
concerned about the Euro, the Dollar and the global financial and monetary
system.
The
“Asian put” continues to place a very stable floor under the Gold
market and means that Gold will not be seeing any meaningful corrections any time
soon. Smart money and official demand for Gold remains robust as a very
fragile global economic recovery is becoming more and more doubtful and
stubbornly high and rising inflation in many countries, sovereign debt and
contagion risks lead to my conclusion that the single best investment is
GOLD.
DON’T LOOK A GIFT HORSE IN THE MOUTH
As Gold
bullion pushed to new all time highs virtually on a
daily basis, Gold mining stocks instead of following Gold, followed all the
other stocks (around the world) setting up a tremendous buying opportunity.
Start accumulating Precious Metal stocks and/or add to your positions. The
big profits come only to those who have the courage to go against the crowd.
Investment in
Precious Metals represents only 1% of the worlds
total Investment dollars. Bubbles have not been reached until over 5%
investment has been reached and during those times, there was never a doubt
as to the safety of the US DOLLAR.
The Gold-to-Silver Ratio: What It’s
Telling Us Today
I always write about Gold bullion in every one of my commentaries, but
Silver is mostly an after taught. But since Silver was, for a time,
outperforming Gold, I guess I made a serious oversight and so it’s
about time I correct that. Right up front, I want to say I’m more biased
towards Gold than Silver as an investment. I’ve been pushing Gold since
2001. About the time, I started getting concerned about spiraling U.S. debt
and the increase in the money supply in conjunction with my ELLIOTT WAVE
technical analysis telling me that the 20 year Bear Market in Gold had ended.
My thought has always been: If the security of the U.S. Dollar ever comes
into play, Gold will be the currency of choice, not Silver. I can see the
government eventually forced into a situation where U.S. Dollars will once
again be partially backed by Gold. I can’t see U.S. dollars backed by
Silver.
On the other hand, Silver is in ever
increasing demand because of its unique properties in ever increasing diverse
new industries, whereas Gold is still primarily used in jewelry and as an
investment-related commodity. If the worlds’ emerging economies such as
China continue to grow as we believe they will, demand for Silver for
industrial use will continue to explode, driving up Silver prices. Gold
prices were up about 13% this year compared to a 29% increase in the price of
Silver before Gold’s latest run.
The Gold-to-Silver ratio works like this: We
take the current price of Gold and divide it by the current price of Silver.
Historically over two centuries, the Gold-to-Silver ratio has averaged
37-to-1. Today, it sits at 41-to-1 which, at their highs in 1980, hit a low
of 17 to 1.This tells me that although Silver is not cheap in respect to
Gold, it is not overvalued either.
It also tells me something else. My Gold
advice, prediction as expressed in these pages over the last 5 years is for
Gold bullion to reach $6250 per ounce before the Bull Market in Gold is over
sometime by 2017. If I apply the historic 37-to-1 Gold-to-Silver ratio,
Silver should be trading at $170 an ounce if Gold
reaches $6,250 an ounce. At a 17–to–1 ratio, we are looking at a
Silver price of $367.00. You only
have to make one right decision in your investment career to become wealthy,
no matter how much money you start with. All you need is the courage to hang
on. I only went 2.7 seconds on that bull named Fu Manchu, but I can guarantee
you I will hang on to this Gold and Silver Bull and set an all time record
for Bull Riding. In short, Silver along with Gold is a tremendous
investments and not just riding gold’s coat tails for the past 10
years. Besides, Silver has always been considered the poor man’s Gold
and there can be no bubble until everyone, including the poor are in solid.
There are several major Silver producers
traded on various stock exchanges. On Silver price dips, like right NOW,
I’d be a buyer of the major Silver producer stocks listed on major
stock exchanges.
Prepare for the worst economic period that we
have seen in 80 years, as that is what I see coming. I’ve written over
the past three years how, in the late 1920s, real estate prices fell first
before the stock market and how I felt the same would happen this time. Home
prices in the U.S. peaked in 2005 and started falling in 2006. (In Florida
where I live, the average Bear Market in Real Estate lasts 10 years). The
stock market followed suit in 2008. Is a Depression coming? Maybe not, but a
severe stagflation followed by deflationary recession definitely is.
Guess Which Industry Is Reporting
Outstanding Financial Results?
Gold Silver miners are reporting their second-quarter earnings right
now and, for the most part, they are awesome. If it’s one thing that
Gold-producing businesses have learned over the last few years, it’s
that there’s no need to hedge the price at which they sell their Gold.
The outlook for the spot price of Gold has been so uniformly strong that
virtually no mining company engages in a major hedging program to protect
their profits. There hasn’t been any need, especially with the spot
price hitting new records all the time.
One benchmark company that’s a good
indicator as to the health of the Gold mining industry is Yamana
Gold Inc. (NYSE/AUY). The company is currently worth about 10 billion dollars
in stock market capitalization and I refer to it as one of the top mid-cap
Gold miners within the industry. The stock is highly liquid and is well
followed by the Street.
Yamana is a Canadian Gold mining company with significant
Gold production and development properties in Brazil, Argentina, Chile,
Mexico, and Central America. The company is producing Gold and other precious
metals at intermediate-company production levels, in addition to a
significant amount of copper. Recently, the company reported record financial
results for its second quarter. New records were achieved in revenues, cash
flow, and earnings.
According to the company, its revenues grew to
573.3 million dollars in the second quarter on the sale of 220,376 ounces of
Gold (excluding its Alumbrera operations), 2.1
million ounces of Silver, and 41.6 million pounds of Copper. This compares
with revenues of 351.4 million dollars generated in the same quarter last
year on the sale of 186,921 ounces of Gold (excluding Alumbrera),
2.6 million ounces of Silver and 31.6 million pounds of Copper (excluding Alumbrera). Any way you cut it, this is excellent growth.
Yamana generated record net earnings of 194.7 million
dollars during the latest quarter, representing an increase of 178% compared
to earnings of 70.1 million dollars generated in the second quarter of 2010.
Earnings per share increased 189% to $0.26 on a basic and diluted basis. Cash
flow generated from operations (before changes in working capital) grew to
331million dollars, or $0.44 per share, compared to 194.3 million dollars, or
$0.26 per share, for the second quarter of 2010.
Company management cited that its financial
success was due to strong cost controls, an increase in Gold, Silver and
Copper volumes and higher prices for all commodities. Yamana
finished the second quarter with 520.9 million dollars in cash, representing
an increase of 190.4 million dollars since December 31, 2010.
Even the technology sector can’t seem to
touch the growth rates currently being achieved in the Gold-mining business.
It’s the one industry now that seems flush with cash and great
prospects for the future. Right now, the big investment banks are saying that
investors should be buying Gold. In fact, equity investors should have been
buying Gold years ago. With the age of austerity upon us, a weaker dollar and
inflationary pressures revealing themselves, Gold should be one of the top
outperformers over the next few years.
GOLD: What
Do I do Now?
Every analyst and his mother and that includes
both the Johnny Come Lately’s as well as most
of the best of the GOLD analysts are saying that at 25% above its 200 day MA,
Gold is grossly over bought, BUT not me! I have explained on many occasions
too numerous to mention that Gold is a market UNTO ITS SELF. At times, it
goes with Oil and as we have seen lately, at times it doesn’t. The same
is true for every other commodity, index, currency or what have you. GOLD is
a SUPERIOR good. Unlike most other things, the faster the price of Gold
rises, the faster and larger the demand for it increases. My long term target
for GOLD remains $6,250/oz. Although I am not calling for a market meltdown
tomorrow, it will happen and since I do not have a crystal ball, I cannot
tell you exactly when, but it could be tomorrow. Our biggest risk is to take
our huge profits in Gold now, as everyone else is recommending, only to see GOLD take off while we are sitting on worthless
cash. The worst case scenario that I can see for us is that we have a mild
correction ($200) for a month or so before Gold explodes upward, again
triggered by some Black Swan. A selloff like we had in June and July will not
be enough to let you back in at lower prices than you got out at (Even if we
got a 2006 or 2008 type sell off). The danger is that you might not get back
in at all, waiting for that one last drop. I won’t belabor the point.
My recommendation is to sit tight. If you are too nervous and afraid of
losing all those big profits you have built up, you can buy some two month
Puts on GLD; enough to let you sleep at night. But for heavens
sake, HOLD ON TO YOUR CORE POSITIONS. Continue to accumulate Gold and Silver
mining stocks on either weakness or on breakouts to new all
time highs. It takes guts to make the BIG MONEY.
GOOD LUCK AND GOD BLESS
If you need cogent analysis and clear reasoning,
if your time matters as much as your investments, then UNCOMMON COMMON SENSE
is the service for you. My job is to uncover what is really happening find
you the best of the best Investments, making sure your radar is pointed in
the right direction and weeding out all the noise so that you can make an
informed decision for yourself. You must do some of your own research.
Credit Cards Accepted - Please call (561) 840-9767 to subscribe
by credit card or mail your check for the required amount to:
UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA,
CFP, PhD.
2078
Bonisle Circle
Palm Beach Gardens FL. 33418
aubiebat@yahoo.com
561-840-9767
Please Note: This article is for education purposes only and is
designed to help you make up your own mind, not for me to make it up for you.
Only you know your own personal circumstances so only you can decide the best
places to invest your money and the degree of risk that you are prepared to
take. All Information and data included here has been gleaned from sources
deemed to be reliable, but is not guaranteed by me. Nothing stated in here
should be taken as a recommendation for you to buy or sell securities. I am not a registered investment advisor
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