Saturday, February 13, 2016
Mark Cuban said he has acquired a decent amount of call options on gold, citing the uncertainty and lack of clarity on where the U.S. and global economy are heading, adding he was confused about the market along with a lot of investors.
There are a couple of things that drive gold, and that is the fear trade and when there are no reliable indicators that can be counted on. Both of those are in play now, although the odd performance of the market still has some waiting on the sidelines with gold, because there is still a lack of conviction on that side of the play as well.
Even so, gold has made a nice 17 percent move so far in 2016, and had its best day in about 2 years on February 11.
I think part of the problem is some investors were persuaded the U.S. economy had decoupled from the rest of global economy, which in my view is ludicrous. How could anyone seriously consider that as legitimate when for a long time the global economy has been cited as the source of long-term economic growth. That's especially true with China of course, which is now floundering after building up a mixed economy build on demand and farcical projects. Built it and they will come was a major Chinese failure.
Another reason I see gold being held back is because of the clueless Federal Reserve, which sounds like OPEC and Russia, which continue to say they're looking to make a supply cut agreement. With the Fed, they keep on with their never ending "uncertainty" as to whether or not it's going to raise interest rates and at what intervals.
Just like alleged meetings between the Russians and OPEC temporarily prop up the price of oil and create an atmosphere of uncertainty, so does the lack of visibility and straightforwardness of the Fed, which I think is a move to, at least partially, rein in the price of gold and silver, and the fear that drives capital fleeing to precious metals.
With all this artificial propping going around, when the bubble does burst, it's going to be like a flood because of the pent-up concern that will eventually express itself in fleeing stocks and moving back into gold and silver.
Wednesday, November 18, 2015
* Terrorism attacks only one of many potential catalysts that could bring down global economy
* Prior attacks in 2004 and 2005 didn't happen under the same economic conditions
* Stocks associated with tourism are taking the initial and biggest hits
* There is more fragility in the global economy than many think
There are obvious short-term repercussions from the terrorist attacks in Paris, as most companies serving in the tourism sector will experience a downturn, as evidenced by the stock market opening this week, where numerous companies were taking a hit.
Among the tourism sectors under pressure were travel agencies, airlines, cruise lines and hotels.
What isn't as obvious is the potential for more attacks which could cause some real problems in the industry over the long term; especially if important tourist destinations are hit.
All that said, there is a more ominous impact from the attacks, which highlight the fragility of the global economy in general, and how not only attacks like these, but a number of disruptions could be the catalyst many believe is coming that will cause it to collapse.
Goldman Sachs (GS) has went so far as to say the impact on the market should be "short-lived," as if this can be isolated from the other many factors weighing on the economy.
Sure, if nothing else happens, that may be true in the short run, but further out there are too many other factors that could cause disruption if they continue to weaken; things like rising interest rates, more surprise crises, defaults reaching an inflexion point, significant drop in consumer spending, and outside factors such as weather, which may be partly causing the slowdown in retail, and is disappointing on the energy side because of it being warmer than normal.
We've had risk associated with terrorism for a long time, and that has been priced into the market for years. What is different this time around is the rise of ISIS and the refugees crowding into Europe.
The problem is there has been no mechanism in place, or the will to introduce one in order to properly vet the refugees, so an unknown number of terrorists have entered the region, which could result in long-term disruption if the number of attacks increase.
This is far more than a nuisance or the loss of life; it could crush the economy of the Eurozone if people stop visiting the region and spending money. There is also growing nationalism which could cost enormous unrest as resistance to the flood of refugees and others grows.
Investors have to now start analyzing Europe and immigration as the top threat to the economy and stability of the EU, and the companies doing business there. The risk has definitely increased over the last 6 months, and it will probably get worse.
Past terrorist risks and the economy
One of the things Goldman Sachs used to make its determination there was only short-term risk was a reference to past attacks, where it didn't have a long-term effect on the economy. Those were attacks in Madrid in 2004 and London in 2005.
I take issue with that because from 2003 to 2007 there had been extraordinary financial gains. That economic scenario isn't the one we face today. And as already mentioned, the migration issue at that time is nothing compared to what it is at this time.
If we were to take into account the Paris attacks as some type of unusual, one-time event, than it would make sense to assume it would only be a temporary drag on an economy or industries associated with the attacks. I don't believe we can make that assumption any longer, and for that reason, even when taking terrorism in and of itself, consider it far more disruptive than it has been in the past.
Add to that the underlying global economic challenges, and these types of events could do some serious damage, especially if people no longer view Europe as a vacation destination.
Tourism segments and companies to look at
Most if not all sectors related to tourism were under pressure to start the week. There are some more vulnerable than others.
For example, online travel agencies like Priceline Group Inc. (PCLN) and Expedia Inc. (EXPE) have and will continue to experience some downward pressure on their share price, and when thinking it through, that is the one legitimate segment of the tourism market that may only experience a short-term impact.
I draw that conclusion from the likelihood of people decide to not go to Europe to visit, they can easily change their plans and visit a region they consider safer. It's doubtful people will fore go vacation travel altogether unless the perception grows it's not safe to travel internationally.
But even there people in the U.S. could divert their destinations to domestic attractions.
Other segments of the tourism market don't have that option. If people stop flying to Europe, the airlines serving those markets would take a big hit. In the U.S. people could choose to drive instead of fly if they decide to visit somewhere closer to home. That means there is no guarantee someone cancelling flying to Europe would then fly domestically; it's not a direct correlation.
There will already be a small disruption for those airlines serving Europe, and if things deteriorate in France and spread to other parts of the EU, it is going to have a significant impact on airlines.
Cruise lines were also lower on Monday, with Carnival (CCL), Norwegian Cruise Line Holdings Ltd. (NCLH) and Royal Caribbean Cruises Ltd. (RCL) all trading down. These shouldn't be affected as much as airlines, but when people feel uneasy about travel, it dramatically affects their plans, even if there seems to be less chance of a threat.
Terrorism produces fear, and fearful people are less inclined to travel, no matter what the means used.
A final sector to look at is hotel and resorts, which is also trading down. These would be more geographic-specific, as I don't see people in the U.S. not staying in a hotel because of unrest or attacks in Europe.
That could change if something major were to happen domestically, but until and if it does, the risk to the industry would be in line with the amount of exposure to Europe.
Destinations like theme parks in Europe will also be slower, which could hurt a company like Disney (DIS) in France, but any theme park in Europe in general.
In the tourism industry in general it couldn't have happened at a worse time, as consumer spending appears to be in the early stage of decline, and this could increase the pace of the downward trend if it's the beginning of an austerity trend because of high debt levels among U.S. consumers.
Add to all of this the businesses that serve the industry, including those providing travel supplies, food, drinks and the many other elements included with the experience.
I've never believed there has been much in the way of an economic recovery, and have stated it numerous times. There are too many major risks that could bring it down quickly if something were to go wrong and create a domino effect.
A couple of those is the performance of a few major tech companies that have created the illusion of a robust S&P 500. Of course they count in the performance, but it masks the weaknesses of he remaining companies, which haven't done that well.
The other and more important area is with consumer spending, which while doing decently recently, has been fairly subdued for some time, and the primary impetus there has been debt-fueled auto sales.
Consumer debt is at all time highs, and this puts consumers in a difficult situation if anything disrupts the slow-growing U.S. economy. Taking out these auto sales, and the remaining real sales are actually down.
Just these two areas on their own point to the overall weakness of the U.S. economy, which if either of them decline in growth, will have a devastating impact on the economy.
Anything that creates an atmosphere of economic fear, which always produces austerity, will be a catalyst that will finally reveal the many cracks in the U.S. economy. When it reaches the masses the momentum will already be in motion. All we can do at that time is hold on and wait it out.
The attacks in Paris can't be considered some type of event that can be disassociated from the economy. That's because it is one part of many that are in play, and with the fragility of the global economy, anything at this time could be a trigger that causes all of it to slow down.
This is already happening in Asia and Western countries with a heavy reliance on commodities or raw materials to generate revenue.
A hit to consumer spending, which may already be showing signs of slowing down, would be the final catalyst that may result in a global recession.
We are not operating under the same economic conditions when some of the prior terrorist attacks happened, and are much more vulnerable to disruption if it results in consumers staying out of Europe.
Terrorism may not, in and of itself, be the major event or series of events that bring the economy down, but they could be one of several, which when combined, cause some serious economic damage.
That's how I assess the threat, and it's only a matter of time until more than one crumble, which is when I see the next recession arriving.
Monday, September 21, 2015
It can be confusing for some not familiar with what gold is and represents, when trying to figure out if it's simply one of many commodities. For those thinking it's primarily a commodity, at this time, because most commodities considered bearish, they will consider it a depressed asset that isn't worth owning.
For gold investors who understand what gold really is, they've been baffled because the price of gold, under the economic conditions of the last several years, should have soared. My belief is the reason it hasn't is because it has been classified wrong, and that has caused the price to be suppressed.
Why gold hasn't suffered a total breakdown is because there is a significant number of people understanding it has been a form of currency for thousands of years, and to this day can be used as such.
With the global economy getting more volatile, the commodity classification of gold is slowly eroding, and it's once again being considered the safe haven it always had been. That will have strong implications as the potential for significant events grow, in which investors will flee for safety. Gold will be there waiting for them.
Impetus for gold
One thing about gold is it takes difficult times to remind the majority of investors of its store of value. When the economy is doing well, it is for the most part forgotten by the majority and lingers in the background until global events once again trigger the memory of the important role gold plays in the world.
There was a reason the price of gold soared during the last market and economic meltdown, and it appears we're closing in on the early stages of the next recession, largely because of slowing China and its Asian neighbors.
The key metrics to watch in relationship to gold price movements are volatility and fear. They work together, and one builds on the other to produce the most optimal conditions for gold; a trend that is growing at this time.
Gold has to be nudged by events to appeal to investors, and those types of events are increasing around the world.
What type of fear and volatility?
It's also important to understand there is a certain type of fear and volatility that supports gold. While I think it's not the best way to think of gold, the main driver is financial fear, not political fear.
The reason for that is the market, overall, reacts to what is happening in the moment, and the the long-term view of the consequences of specific political events isn't priced in immediately, or sometimes not understood or digested as to the potential financial consequences. One of the most recent is the tensions between Russia and Ukraine, and Russia's support of Syria in the Middle East.
Where the two can converge of course is when political events visibly affect finances. But for the most part, it's almost always financial fears alone that result in people running to gold and the price being pushed up. That is the stage being set up now, and at least part of the reason asserted by the Federal Reserve as to why it didn't raise interest rates.
On the investment side, until there is short-term pain, meaning consistent weak quarterly results, the price of gold, in general, will remain subdued. It's when the negative financial news is coupled with earnings consequences that gold will once again soar.
The reason for that is the majority of investors will only respond when they believe their capital is under siege; meaning only when events affect their money.
We can read about China and other weak Asian countries all we want. We can read about or listen to news reports about Russia and how it may respond to Western resistance to its policies. But until that is connected to the stock market in the minds of investors, it doesn't have a lot of support for gold.
This is one of the reasons those that closely watch the potential impact of political events on the economy can get frustrated with their gold investments, as they make the connection much quicker than the general investing community, and get in much earlier and have to wait for the market to come to them.
Making the connection between political and economic events
Earlier I mentioned gold being classified wrong. The reason for that is the lack of correlation between political and financial events at this time. Once gold is reclassified in the minds of investors - from a commodity to a currency - that will be a bullish trigger.
There are a growing number of news reports on the slowing Chinese economy, weakening manufacturing in the U.S., and the growing human migration problems in Europe and America. These have potential for tremendous financial upheaval, and in fact there are some ramifications already causing economic tremors, with the most obvious at this time being China, which has for so long been touted as the main driver of global economic growth.
Even now investors have been slow to see how it will impact the U.S. and other markets, because they still haven't made the connection financially. That's because while there are economic concerns growing, the latest earnings reports appear to be fairly strong, even as the macro-economic situation is looking weaker.
Gold as money
When referring to gold as money, the idea isn't that people necessarily use it as a means of exchange of goods or services. That can and does happen in some parts of the world, but in general, that's not how business is conducted.
What I mean is gold is considered money in the sense of is being used to protect assets. After all, if it wasn't considered a form of currency, why do people always rush to hold gold when difficult and unpredictable times come about?
Remember what happened a short time ago when the stock market in China crashed, and the crazy responses by China's leaders to it. Right in their faces was the reality China's market was highly overvalued, and it wasn't reflective of its economy. In response to that, the price of gold made a quick move upward, once again confirming it's considered a safe haven asset investors in order to protect their capital. That's money, no matter how it may be spun.
For now a lot of people are in cash. Part of that is for safety, and a lot of it is for the purpose of waiting for opportunities to come to them.
When the next economic downturn comes, which as I mentioned, is probably in its early stages, the thought of bottom-feeding will change to capital preservation and growth, and under crises situations, very few assets perform like gold does, and that's why being positioned for a prolonged season of economic difficulties with some of our assets is a smart play.
Discipline is important under these circumstances. If you believe we are going to enter into a season of economic weakness, going long gold is a sure winner. I've been long gold and silver for some time, and I know I'll be rewarded significantly over time.
As for what to look for, historically the larger miners with significant gold exposure are the first to move, followed by juniors and then explorers. Juniors are my favorite play because they have proven reserves and have the most upside potential. You have to do your homework of course, but for the strongest upward potential, juniors will strong management in place will make you more money.
On the other hand, if safety is the major factor, the larger miners can preserve and grow your capital when the rest of the market is floundering.
The catalyst will be when investors make the connection between political events and the economy. Discovery of that will be the sustainable upward movement in the price of gold. The decision to get in on that should be what your outlook is in regard to economic conditions and how long it'll take for investors to recognize the risks that are quickly approaching.
Investing in gold shouldn't be considered a short-term play, traders need to go long and hold on during these times of volatility. I don't think we're quite there yet with investors sentiment in regard to fear, and until that escalates, there will continue to be up and down movements.
And while the Fed and interest rates, in my opinion, has already been priced in, the ongoing sport of reporting on and guessing as to whether or not the Fed will increase interest rates will continue, and that means having the stomach to endure volatility in the gold price.
Even if the Fed eventually increases interest rates, it's not going to be by much. And with the many potential triggers that could bring more fear to the market increasing in the world, I don't think there should be a fear of overt interest rate intrusion.
As events unfold and the realization the global economy is slowing sinks in, nothing will be able to hold back money flowing to gold, and that means much higher gold prices. Position yourself accordingly.
Friday, September 4, 2015
Hedge fund master Stanley Druckenmiller has had one of the strongest performances in stock market history, generating a return of about 30 percent over a 30-year period. That is in line with another legendary investor, Peter Lynch, who produced an annual return of 29 percent.
Interestingly, Druckenmiller and Lynch both quit because of the toll it took on them to maintain those type of returns. Sorry. If we want to live longer, we'll just have to settle for a piddly 20 percent annual return or so.
For some time Druckenmiller has blasted the Federal Reserve for keeping interest rates near zero, saying it has changed the behavior of companies, which instead of using cash to build the businesses, they are using it for leveraged buyouts, mergers and stock repurchase schemes.
Interpreting this as a negative, Druckenmiller has taken a huge stake in SPDR Gold Shares (GLD), investing $323,626,000, which comes to 2.8 million shares. That's more than double any of his other holdings at this time.
when asked about why he put such a large portion of his investment portfolio in GLD, Druckenmiller said when he sees something that gets him excited, he's willing to take that step.
Talking a lot about risk/reward ratio over the years, he obviously sees something in gold that has a lot of potential at this time. I agree with him.
Friday, August 28, 2015
The economic data is getting weirder and weirder. China devalued the renminbi because its exports had plummeted about 8 percent, and now we hear consumer spending in America was up 3.1 percent in the second quarter.
Have U.S. consumers suddenly stopped buying Chinese products? I don't think so. For that reason I'm very suspect of these numbers.
Once answer could be consumers slowed down spending during one part of the quarter, which could have skewed the export numbers of China for last month.
Other than that, it's very strange if we find out that wasn't the case, and somehow consumer spending exceeded expectations by a lot, but they decided to spend on goods from America or other countries. Since that hasn't happened in years, as far as what would essentially boycotting Chinese products, it's very difficult to believe these numbers are reflective of real consumer spending.
Again, the only scenario I can think of is if Americans really spend big in the first two months of the quarter, and then cut back. Otherwise, something stinks in these numbers.
Thursday, August 27, 2015
When you consider the self-deception of the Federal Reserve, it's difficult to project whether or not it will raise interest rates in September.Even though global economic conditions are deteriorating, there has been no strong signal one way or the other on what Yellen is thinking.
Almost all of Asia is crashing. Countries with strong exposure to commodities, like Canada, Brazil, Russia and Australia are struggling, and Europe is weak as always. That leaves the U.S on its own. I don't see how it can maintain any semblance of growth in the near future.
One temporary answer would be for the government to increase spending like it did the last quarter to reinforce the illusion of a strong recovery. That never works over time though, which is good for gold.
As a matter of fact, if China and many other Asian countries work to strengthen their currencies by selling Treasuries en masse, even while they engage in a currency war, that would almost certainly halt the idea of raising interest rates, and some believe it may even initiate another round of quantitative easing. We all know what that would do to gold prices.
We must watch China in the weeks ahead, as it has already sold off over $100 billion in Treasuries over the last couple of weeks, and it's sure to continue to do so. Almost certainly other Asian nations will do the same, which has the potential to change the direction the Fed wants to go.
What's happening in Asia is countries are fighting to remain competitive with exports, which of course why they're devaluing their currencies. At the same time they don't want them to fall so much it wreaks havoc on imports and brings about higher inflation domestically, so they're selling Treasuries to support their respective currencies.That means Treasury yields are going to remain level or go up, which the Federal Reserve doesn't want to face when it comes time to make an interest rate decision.
It's amazing at times to see how quickly investors forget lessons in safety, and blindly believe the mainstream narrative on the state of the economy and stock market.
For that reason, along with the Fed's manipulation using its lack of commitment and visibility concerning interest rates, it is keeping investors paralyzed in regard to moving more of their capital to gold. Since they don't know what the Fed is going to do, they're seeking safety in cash or Treasuries instead.
With the world now plunging toward global recession, it's amazing the disconnect many investors have between the world and America, as if what happens everywhere else won't have an impact on the American economy.
It's going to take a harder landing to reveal the real weakness of the U.S. economy, and it will definitely come in the not-too-distant future. Smoke and mirrors can only do so much before it comes falling down.
At that time gold will be the go to place of safety, and it once again will soar in price.
Sometimes it does get old when mainstream media cheerleaders gush over any news it deems irrefutable and positive about the economy. The latest data suggest an "unexpected" solid performance in the last quarter, which suggested to many the recovery remains on track.
Of course much of the response came about because of the plunge in the stock market, temporarily disrupting the media narrative, which now can be resumed as if everything is okay.
What I want to talk about most is the government spending number, which was up about 2 percent. To me, that's almost the entire story of the surprising growth numbers.
Sure, corporate and consumer spending improve, and that appears to be legitimate. But when you include a 2 percent increase in government spending, that disproportionately pushing up the numbers because of the size of the budget, which if they were removed from the data, would have resulted in an unimpressive performance.
As for the corporate expenditures, my belief is a lot of that was because of the depressed commodity prices, which companies took advantage of. China did so as well, spending over 20 percent year-over-year on over 20 commodities. With reports suggesting this isn't sustainable, I think some figured this out, and attempted to lower future expectations.
Gold is still positioned well in this economic environment, and I believe the fake economic recovery will be exposed in the near future, as it already is in many other parts of the world, and gold will start to climb.
Tuesday, August 25, 2015
The more I watch what has happened with the price of gold recently, which while having some strength, hasn't jumped in the way it should have under these market and economic conditions.
It's obvious investors have been holding back on plowing into gold for safety because of the manipulative comments from the Fed that is may or may not be raising interest rates in the near future.
The lack of clarity, which now has to be considered a planned move, is what has been holding the price of gold down because investors don't know whether or not there is a rate increase coming soon.
This pushes capital into bonds, which is what the government and the Fed prefer. That may last for a little while, but once the Fed makes it clear what its next move is, there will no longer be any doubt. Almost certainly the next move will be to do nothing.
Once that happens, there will be an accompanying comment that will once again darken visibility in attempts to keep money from being placed in gold.
The reason why the Fed hates that is it contradicts its cheerleaders, and brings back the narrative of the consequences throwing fiat money into the financial system has.
My belief is the Fed won't be taking any steps in regard to interest rates, as the global markets aren't through getting hammered, and with China, Japan and Asia in general struggling, along with Canada and Australia, there is little in the way of positive catalysts to signify ongoing growth.
The slow growth projections of the U.S. economy confirm this.
With a lot of cash on the sidelines as well, I believe it's getting ready to be invested in gold once the central bank signals where it's taking interest rates.
By making investors wait, it's further generating pent-up demand, which when released, may even be stronger than believed at this time.
If it goes the other way and interest rates are increased, I see that as a temporary pause. The global economy is grinding to a halt, and there is no way the U.S. economy can maintain the slow growth way it's now enduring, with consumer spending.
One way or the other gold prices are going to rise, and I don't think it's going to be a long time into the future, whether the Fed raises interest rates or not.
Monday, August 24, 2015
With economies around the world slowing down, currencies plummeting, and the commodity sector beaten down, there is more to the stock market correction, then, well, being a correction. That's good news for those that have been waiting for gold prices to gain some momentum.
There of course is also the tough decision ahead for the Federal Reserve, which until recently, was almost sure to raise interest rates. That's more than in question at this time, as global markets take a big hit.
Even if the Fed decides to boost interest rates, gold is still looking good, as there are just too many negative catalysts out there to make that the determining factor in the price of gold.
Not only that, but there is a growing number of people that believe not only won't the Fed raise interest rates, but the global and domestic U.S. economy may be far worse than it is, which points to the possibility of another round of quantitative easing. And we all know how gold prices would jump in case of that event. If the Fed decides to hold off for now, that is also positive for gold. So whatever way you look at it, gold prices will start to rise, and will continue to do so over the next year at least; possibly further out as well.
Safety is going to be a dominating part of the investment landscape, and gold will be one of the leading assets investors seek to protect their capital.