Oil vs. Stocks

Monday, June 30th, 2008

July 1, 2008 — (cour­tesy of Bespoke Invest­ment Group) If any one tries to tell you dif­fer­ently, all you need to do is show them the chart below.  As last week's trad­ing illus­trates, every time oil went up, stocks went down, and every time oil pulled back, the mar­ket gained steam.

Tags: Chart, Correlation, energy, oil, S&P500, Trading, US Stocks
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Gold vs. Oil Ratio

Monday, June 30th, 2008

July 2, 2008 — Cour­tesy of BMG Inc. — The Gold:Oil Ratio gives us a curi­ous chart. What is to be made of this com­par­i­son between two com­modi­ties? Some will argue that gold is a cur­rency, and that this chart shows an inverse price for oil in real money, gold. With oil at all–time highs and gold just off of its own high price, the two are show­ing the effects of infla­tion as they increase in price with every new US dol­lar printed. The rela­tion­ship between the two are seen in this chart, and inter­est­ing points are noted.

Hur­ri­cane Kat­rina gave us an oil price spike in August 2005, which shows up as a sharp bot­tom in the chart. Gold’s run to over $1000 ear­lier this year shows up as a top, fol­lowed by a sharp decline in the ratio as oil prices ran up to $140 per bar­rel while gold retreated to the $900 area. This see­saw move­ment of this ratio’s chart may only be indi­cat­ing the ebb and flow of these two mar­kets. But we can take some­thing from the long-term aver­age of this ratio of 15: If oil is the “right price” and the aver­age of 15 is applied, the price of gold would be headed towards $2025. If gold is at the right price, then oil would be headed to $60. Believe either of those cal­cu­la­tions at your own peril. The ratio spends time above the long-term aver­age of 15 typ­i­cally dur­ing a bull mar­ket in equi­ties. The aver­age for this decade is around 10.

With this value, the ratio sug­gests gold would be $1350 or oil $90; per­haps these are more rea­son­able short-term tar­gets as sug­gested by this ratio.

www.bmsinc.ca/pdf/goldoil2008.pdf

Tags: Barisheff, BMG Inc., Chart, Commodities, Currency, Dollar, energy, Gold, inflation, Markets, oil, Oil Prices, US Dollar, Value
Posted in Commodities, Energy & Natural Resources, Gold, Markets, Oil and Gas | Comments Off

The Bonfire of the Vanities, the Sequel

Thursday, June 26th, 2008

June 26, 2008 — Andrew Ross Sorkin, of the New York Times, writes about how prophetic Tom Wolfe's dec­la­ra­tion was on the day of the Black­stone debut: “We may be wit­ness­ing the end of cap­i­tal­ism as we know it.”

When you get to the end of an era, mark­ing the time­line with water­shed events is always ther­a­peu­tic. Here are some excerpts from Sorkin's NYTimes article:

... Mr. Wolfe must be in atten­dance — was that the Black­stone Group, the big pri­vate equity firm, was min­utes away from going pub­lic, the largest ini­tial pub­lic offer­ing in the United States since 2002. (At the time, he told The New York Observer that a friend was giv­ing him a tour.)

Just then, a CNBC reporter pulled Mr. Wolfe aside to ask him what he made of all the hub­bub. Mr. Wolfe paused for a moment to con­tem­plate his answer.

And then, with a wry smile, he deliv­ered a prophetic dec­la­ra­tion: “We may be wit­ness­ing the end of cap­i­tal­ism as we know it.”

 

One year later ...

Blackstone’s stock has gone nowhere but down since it went pub­lic, drop­ping nearly 50 per­cent from its high the day it started trad­ing. But that’s the least of it.

The once mighty Wall Street invest­ment banks have been brought to their knees, send­ing out pink slips to more than 83,000 employ­ees world­wide, rack­ing up bil­lions of dol­lars in losses as a results of their fool­ish for­ays into sub­prime mort­gages. Bear Stearns all but went out of busi­ness before being “saved.” Some hedge funds have gone belly up.

Those lords of pri­vate equity, many of which were prepar­ing to fol­low Black­stone into the pub­lic mar­kets, have been put on semi­per­ma­nent hia­tus. (Kohlberg Kravis Roberts & Com­pany refuses to with­draw its I.P.O fil­ing, almost a year after sub­mit­ting it, with no imme­di­ate hope in sight.) Their deal-making has all but stopped.

As Mr. Wolfe nicely put it, “It sounds like even the firms that aren’t in trou­ble are in trouble.”

And, what of credit ...

And yet, there has been a per­verse, and mis­guided, opti­mism that some­how the sit­u­a­tion will improve in the sec­ond half of 2008. How? Sure, the big banks may take fewer write-downs — but there is no way of know­ing that. The news a few days ago that the big bond insur­ers were being down­graded will cre­ate new havoc — and losses — for hold­ers of toxic sub­prime debt. Indeed, the big­ger issue is what kind of busi­ness is going to gen­er­ate any return for its investors. When you can’t lend or trade — and you can’t invest with the lever­age that juiced returns to sup­port seven– and eight-figure bonuses — how exactly are you going to make money?

“It has always inter­ested me that the word ‘credit’ comes from the word ‘credere,’ which means ‘to believe,’ ” Mr. Wolfe said. “It only works if peo­ple believe in it.” He’s right, of course: one rea­son the credit mar­kets have tanked is that peo­ple don’t believe anymore.

Com­plete Article:

A "Bon­fire" Returns as Heart­burn, Andrew Ross Sorkin, NYTimes, June 24, 2008

Tags: Andrew Ross Sorkin, Banks, Bear Stearns, Blackstone, capitalism, Credit, Credit Market, Credit Markets, Dealbook, Dollar, Excerpts, Financials, Hedge Fund, Hedge Funds, Investment Banks, Markets, Mortgage, New York Times, REW, risk, SMI, Tom Wolfe, Trading, Wall Street, Water
Posted in Bonds, Credit Markets, Markets | Comments Off

Pickens: Water is the New Oil

Tuesday, June 24th, 2008

T. Boone Pick­ens, the leg­endary cor­po­rate raider and oil­man believes that water is the new oil. A recent Busi­ness­Week arti­cle dis­cusses his invest­ment and and his con­vic­tions on the water sup­ply oppor­tu­nity and his com­pany, Mesa Water's plans. This is an inter­est­ing story, micro­cos­mic of the crit­i­cal issue and oppor­tu­nity in water that is bub­bling up globally.

Here are a cou­ple of excerpts:

Into this envi­ron­ment comes Pick­ens, who made a good liv­ing for a long time extract­ing oil and gas and now, at 80, believes the era of fos­sil fuel is over. So far he has spent $100 mil­lion and eight years on his project and still has not found any city in Texas will­ing to buy his water. But like many oth­ers, Pick­ens believes there's a for­tune to be made in slak­ing the thirst of a rapidly grow­ing pop­u­la­tion. If he pumps as much as he can, he could sell about $165 mil­lion worth of water to Dal­las each year. "The idea that water can be sold for pri­vate gain is still con­sid­ered uncon­scionable by many," says James M. Olson, one of America's pre­em­i­nent attor­neys spe­cial­iz­ing in water– and land-use law. "But the scarcity of water and the extra­or­di­nary prof­its that can be made may over­whelm ordi­nary pub­lic sensibilities."

"Water is a com­mod­ity," he says. "Heck, isn't it like oil? You have to come back to who owns the water. The ground­wa­ter is owned by the landowner. That's it." When it comes to poten­tial buy­ers, Pick­ens cares about only one thing: how much they're will­ing to pay. "Do I care what Dal­las does with the water? Hell no."

Read the full article: 

There Will Be Water, Susan Berfield, Busi­ness­Week, June 12, 2008

Tags: Commodity, Excerpts, Markets, Mesa Water, oil, Oil and Gas, pickens, Scarcity, SMI, Water, water supply
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Stephen Briese: 200-days Oil Supply Held Long by Speculators (Audio Interview)

Tuesday, June 24th, 2008

Stephen Briese, a highly regarded com­modi­ties trad­ing expert, independent com­modi­ties analyst, author of The Com­mit­ments of Traders Bible (2008), edi­tor of http://www.commitmentsoftraders.org/, and an advi­sor for Jov­In­vest­ment Management's Hori­zons Global Con­trar­ian Fund, says, for exam­ple, that large investors are sit­ting (naked) on roughly 200-days worth of crude oil, and the CFTC (Com­modi­ties Futures Trad­ing Com­mis­sion) knows it.
GreenLightAdvisor.com inter­viewed Stephen Briese, and here is an excerpt. You may hear the entire inter­view by click­ing the link below.

"I fol­low the Com­mit­ment of Traders reports and what we see there is that the pro­duc­ers and users who are hedg­ing in the mar­ket, the 'neg­a­tive feed­back traders' — the higher prices go, the more they sell [of the com­modi­ties], and they were sell­ing at record lev­els last Sep­tem­ber, indi­cat­ing that they were fully hedged." Briese says. "Now those hedged traders have con­tin­ued to sell all the way up, and his­tor­i­cally they have defended their mar­kets by doing that, but I think that all of the price increases since Sep­tem­ber have been speculative."

Under CFTC rules how­ever, large investors who are not han­dling the com­modi­ties are not enti­tled to an exemp­tion allow­ing them to trade in the com­modi­ties. Com­mod­ity Index Funds, such as the pop­u­lar S&P GSCI (S&P Gold­man Sachs Com­mod­ity Index) have got­ten such exemp­tions, allow­ing investors to pile in this way.
 

Briese says the unwind­ing of these posi­tions could have dire con­se­quences for investors, large and small.
 

LISTEN TO THE INTERVIEW: [MP3] Stephen Briese, CommitmentofTraders.org, June 19, 2008, 9 min. 18 sec.

About the Com­mit­ment of Traders reports: 
The Com­mit­ments of Traders (COT) report is a very use­ful tool to use when trad­ing com­modi­ties, yet most traders don’t know how to prop­erly use this gem of weekly infor­ma­tion. Steve Briese is con­sid­ered an expert in this field of study and he gives the read­ers of The Com­mit­ments of Traders Bible a log­i­cal under­stand­ing of how the pro­fes­sion­als move the com­mod­ity mar­kets and how you can take advan­tage of those opportunities.

Tags: Briese, CME, commitmentsoftraders.org, Commodities, Commodity, Commodity Indexes, COT, Crude Oil, energy, Gold, Information, interview, Investment Management, iShares GSCI, Markets, negative feedback traders, Nymex, oil, risk, S&P GSCI, Trading
Posted in Commodities, Energy & Natural Resources, Gold, Markets, Oil and Gas | 1 Comment »

International Markets Snapshot

Tuesday, June 24th, 2008

Tags: Australia, Bolsa, Brazil, BRIC, BRICs, CAC 40, Canadian Market, Chart, China, DAX, Euro, France, FTSE, Germany, Hong Kong, HSI, IBEX, India, International, Italy, Japan, KLSE, KOSPI, Kuala Lumpur, Malaysia, Markets, Mexico, MIB 30, Nikkei 225, OMX, risk, Russia, Russian Trading System, Sensex, Shanghai Composite, Singapore, SMI, South Africa, South Korea, Spain, Straits Times, Sweden, Switzerland, Taiwan, Top 40, Trading, TWSE, UK
Posted in Markets | Comments Off

Interview: Nick Barisheff, Bullion Management Group Inc.

Tuesday, June 17th, 2008

Exclu­sive Inter­view
Nick Bar­ish­eff,
Pres­i­dent and CEO,
Bul­lion Man­age­ment Group Inc.

This week we inter­view Mr. Nick Bar­ish­eff, Pres­i­dent & CEO, Bul­lion Man­age­ment Group, and dis­cuss with him the impor­tance of gold bul­lion. Mr. Bar­ish­eff founded Bul­lion Man­age­ment Group Inc. in 1997, and is the port­fo­lio man­ager of BMG Bul­lion­Fund, Canada's only open-ended fund invest­ing purely in gold, sil­ver, and plat­inum bullion.

For a PDF version, click here:[PDF] Inter­view with Nick Bar­ish­eff, BMG Inc.  Here is the inter­view: 

GreenLightAdvisor.com: What’s the most impor­tant thing peo­ple need to under­stand about gold?
 
Nick Bar­ish­eff: Many peo­ple think gold is a com­mod­ity like cop­per, zinc or pork bel­lies, but it has 3,000 years of his­tory as money. It was money that no gov­ern­ment cre­ated by edict.  It was just adopted for usage by itself, and it was and still is the best form of money.  Cur­rently, we have a 37-year global exper­i­ment in paper money.  All prior paper money exper­i­ments ended in hyper­in­fla­tion, with the cur­ren­cies becom­ing worth­less.  All pre­vi­ous hyper­in­fla­tions were con­tained within a sin­gle coun­try, but this time, because of the reserve sta­tus of the US dol­lar, it is likely to be global in nature.

Right now, the price of gold is ris­ing while most cur­ren­cies are los­ing pur­chas­ing power as well as their value against gold.  Gold comes back into its mon­e­tary role when there's a loss of con­fi­dence in the finan­cial sys­tem or in paper money, and that's when peo­ple are attracted to it.
Before 1971, the mon­e­tary sys­tem was gov­erned by the Bret­ton Woods Agree­ment. Under that agree­ment, the US dol­lar was backed by gold, and other cur­ren­cies were pegged to the dol­lar.  Other coun­tries could trade their US dol­lars for gold.  Essen­tially, US gold indi­rectly backed all other cur­ren­cies. Then things changed.  As the US was get­ting into the Viet­nam War and into Pres­i­dent Johnson's pol­icy of guns and but­ter, US gold reserves started declin­ing.  Coun­tries hold­ing dol­lars were pre­sent­ing their US dol­lars and ask­ing for gold in return, and that led to US gold reserves drop­ping from a peak of 22,000 tonnes to 8,800 tonnes. On August 15, 1971, Pres­i­dent Nixon “closed the gold win­dow” and stopped the exchange of US dol­lars for gold.  Clos­ing the gold win­dow was a euphemism, but basi­cally the US declared bank­ruptcy. When you can’t meet your oblig­a­tions when they are due, that’s what it is. So from that point in time, we’ve had 37 years where the entire world has been on a global fiat cur­rency mon­e­tary system.

Since 1971, when the dol­lar was freed from the con­straints imposed on a cur­rency backed by gold, the US has expe­ri­enced increas­ing fed­eral gov­ern­ment and cur­rent account deficits.  The US is now bor­row­ing $800 bil­lion annu­ally to fund its con­sump­tion of foreign-made goods and com­modi­ties, and the fed­eral gov­ern­ment is run­ning a deficit of almost $350 bil­lion.  At some point, for­eign­ers will become unwill­ing to con­tinue fund­ing US expen­di­tures, forc­ing the Fed­eral Reserve to expand the money sup­ply at a faster pace.  This will result in ris­ing infla­tion, ris­ing inter­est rates and a con­tin­u­ous decline in the US dol­lar.
 
GLA: We’ve had the fastest money sup­ply growth in almost 40 years that’s result­ing in increased infla­tion. Why would an investor want to go into T-bills, given that inter­est rates don’t even cover half of the stated infla­tion rate, which we know isn’t even the real infla­tion rate?
 
NB: For the first time in his­tory, we have an unlim­ited abil­ity, by all cen­tral banks, to print,  how­ever much money we want, so to speak.  Apart from the US M3 money sup­ply grow­ing at about 20%, we also have India and China grow­ing theirs at about the same rate. China is at 18%, India is at 20%, and Rus­sia is at 45%. As China or India sell goods to the US, they take in US dol­lars and they print yuan or rupees against those US dol­lars.  Japan's a lit­tle dif­fer­ent; there, indi­vid­u­als and cor­po­ra­tions can take their US dol­lars and buy US assets them­selves. In China you have to turn your US dol­lars in to the cen­tral bank.

In today’s infla­tion­ary envi­ron­ment, many who invest in fixed income invest­ment do not appre­ci­ate that instead of being “safe” invest­ments, they are in fact guar­an­teed losses of pur­chas­ing power when you take infla­tion and tax­a­tion into account.  We have done some analy­sis into a sys­tem­atic with­drawal from our Fund for those investors requir­ing income.  Based on the fact that pre­cious met­als have a long track record of stay­ing ahead of infla­tion, an investor would be far bet­ter off in pre­cious met­als in terms of main­tain­ing prin­ci­pal after infla­tion and hav­ing more after-tax cash flow to spend.
 
GLA: What did you think of John Embry’s (Sprott Asset Man­age­ment) recent arti­cle about the manip­u­la­tion of the price of gold? His asser­tion was that the cen­tral banks are delib­er­ately keep­ing gold below $1,000 per ounce.
 
NB: John and Eric Sprott have recently writ­ten an exten­sive report called Not Free, Not Fair.  The report brings forth a great deal of evi­dence that the pre­cious met­als mar­kets may be manip­u­lated.  While it may seem like there’s a con­spir­acy to sup­press the gold price, I think it’s sim­pler than that.  It's a well know fact that it is the job of cen­tral banks to man­age their country’s cur­rency, that’s part of their man­date.  Cen­tral banks under­stand that gold is a cur­rency, but one that they can't expand as eas­ily as paper money.  I don’t think there is any lack of under­stand­ing on the part of cen­tral bankers that gold is an alter­na­tive cur­rency.
 
GLA: Isn’t gold con­sid­ered to be just a com­mod­ity with no real mon­e­tary role any­more?
 
NB:  I'd like to refer to an arti­cle by Tony Fell , and it’s par­tic­u­larly inter­est­ing, given that he was chair­man of RBC Cap­i­tal Mar­kets at the time of writ­ing. He talks about how gold has three attrib­utes: it’s a com­mod­ity, a store of value and a cur­rency. He says so many peo­ple now think of gold only as a com­mod­ity or jew­ellery, or as an archaic relic, that there’s a feel­ing of “who needs it any­more?”  Peo­ple don’t think of it as money.
 
How­ever, the daily sales vol­ume gives a con­clu­sive indi­ca­tor that gold is much more than an indus­trial com­mod­ity. The phys­i­cal turnover of gold by mem­bers of the UK’s Lon­don Bul­lion Mar­ket­ing Asso­ci­a­tion is about *$25 bil­lion per day. We’re talk­ing about net turnover between the LBMA mem­bers. The vol­ume is esti­mated at 7–10 times that amount. 
 
It’s pretty clear that these are cur­rency trans­ac­tions. That's why gold, sil­ver and plat­inum trade on the cur­rency desks of all the banks and bro­ker­ages, not the com­mod­ity desks.
What peo­ple need to know is that gold is a cur­rency [like dol­lars or euros or yen]. Gold is not trad­ing at these vol­umes as a com­mod­ity or as some archaic relic.
 
GLA: What are your thoughts on tech­ni­cal analy­sis, given that gold is a cur­rency?
 
NB: Tech­ni­cal analy­sis works if you’re look­ing at widely dis­trib­uted stocks like the S&P 500, for exam­ple, where there are many, many trans­ac­tions that accu­rately reflect pub­lic sen­ti­ment. The price of gold, how­ever, can be impacted by one coun­try, or one very wealthy indi­vid­ual who wakes up one morn­ing and decides to buy, and then you can throw the charts away. Or when a gov­ern­ment decides to sell or a gov­ern­ment inter­venes. I’ve looked at tech­ni­cal analy­sis for gold in the past and tried to back-test with var­i­ous tech­niques and found that they don’t work more often than they do.  In the most recent case, there is no jus­ti­fi­ca­tion for the drop in gold price; it should have been ris­ing because noth­ing has fun­da­men­tally changed. In fact, the fun­da­men­tals got worse and the gold price should have ral­lied.  None of the prob­lems went away; noth­ing was solved; the con­di­tions are as bad as or worse than they were pre­vi­ously. So the drop in gold’s price has been a false decline.
 
GLA: So, it’s the value of paper cur­rency that changes, not the value of gold [so to speak]?
 
NB:  One of the attrib­utes of gold as money is that you can't sim­ply cre­ate it at will, like paper money. It’s no one else’s promise of per­for­mance and it’s not some­one else’s lia­bil­ity. It’s not going to zero, no mat­ter what.  And, whether we're mov­ing the mea­sur­ing stick of infla­tion or defla­tion really doesn't mat­ter, because the way gold should be mea­sured is in terms of pur­chas­ing power.  It doesn't mat­ter if gold is priced at $1,000 in paper money per ounce or $2 in paper money per ounce, it will retain its pur­chas­ing power in either cir­cum­stance.
 
The first impor­tant step in the big pic­ture of under­stand­ing gold is that it is a store of wealth with a 3,000 year his­tory, and it’s money. Over the long term, it retains its pur­chas­ing power. That's why they say that an ounce of gold will always buy a man's suit.
 
Apart from that, the US dol­lar is down 85% in pur­chas­ing power since 1971. In 1971 you could buy a car with 100 ounces of gold; a car was about $3,500 and gold was $35 an ounce.  With 1,000 ounces, or about $35,000, you could buy a house. Today, you could buy sev­eral cars or a lux­ury car with 100 ounces, and a man­sion with 1,000 ounces.  You could also buy more units of the Dow Jones Indus­trial Aver­age with your ounce today than you could in 1971. So that ounce has pre­served its pur­chas­ing power while cur­ren­cies have lost over 80% of their value.
 
GLA: Appar­ently, in the last 40 or 50 years, there’s only been three years that there was net sell­ing by gold investors, three years out of almost half a cen­tury. Is this true?
 
NB: Peo­ple who hold bul­lion tend to hold it for a long time, as the core of their entire wealth.  It’s not sold once you under­stand its basic char­ac­ter­is­tics, because you have to have a rea­son to sell it, you have to use it to buy some­thing bet­ter.  I tend to look at invest­ment per­for­mance as to whether I end up with more gold ounces or less gold ounces rather than per­cent­age returns; you get a dif­fer­ent con­clu­sion then. For exam­ple, if you had invested 44 ounces in the Dow in 2000, you would now get back only 14 ounces.
 
This cur­rent cycle is not a con­ven­tional bull mar­ket in pre­cious met­als; I think we’re in the midst of a change in the global mon­e­tary sys­tem. This is not going to be like a typ­i­cal com­mod­ity cycle where we go up for four years and down for four years; I think we’re wit­ness­ing a tran­si­tion into another mon­e­tary sys­tem, what­ever form that may take. At the end of this period the US dol­lar will no longer be the world’s reserve cur­rency.
 
GLA: What hap­pens if the US dol­lar ceases to be the stan­dard?
 
NB: What hap­pened when the British pound ceased to be the stan­dard?  It just ceased to be the stan­dard.  Its decline in value is still ongo­ing.  It’s hap­pened to every empire through­out his­tory: the British, the Roman, the Greek, the Span­ish, the Per­sian, and the Chi­nese. Every sin­gle empire ended up debas­ing their cur­rency in order to main­tain the empire.
 
GLA:  Is gold likely to increase fur­ther going for­ward or has it topped and investors have missed out?
 
Cur­rently, we have a lot of noise in terms of the credit con­trac­tion, real estate bub­ble, record high debt at all lev­els, dan­ger­ous deriv­a­tives vul­ner­a­bil­i­ties and unsus­tain­able US cur­rent account and trade deficits.  These could still blow up into big­ger prob­lems at any time. How­ever let’s hope they get resolved or at the very least post­poned some­how.
 
But there are two fac­tors that are not change­able in all of this.
 
First: The US has to print money on an accel­er­at­ing basis. Has to – because of the under­funded Social Secu­rity and Medicare oblig­a­tions – which at present are about $60 tril­lion. If you took all of the net earn­ings of US indi­vid­u­als and com­pa­nies it would not be enough to pay that off. You can’t tax peo­ple enough and polit­i­cally you can­not tell every­body, “Sorry, we can’t give you your Social Secu­rity – we don’t have the money. And no Medicare either.” So they have to keep print­ing money.
 
Sec­ond: The issue of Peak Oil – it used to be a debate as to when the pro­duc­tion of oil would peak. Now it looks like that has already hap­pened, in March 2006.  As a result we have a sit­u­a­tion where oil pro­duc­tion is declin­ing while demand is increas­ing, par­tic­u­larly from India and China.  This will result in ever-increasing oil prices, and also increas­ing prices for almost every prod­uct and ser­vice.
 
As these two forces – increased money print­ing and peak oil – inter­act, the result is a declin­ing dol­lar along­side con­stantly increas­ing oil prices.  This leads to even greater oil price increases in an effort to off­set the dol­lar decline.  These two highly infla­tion­ary fac­tors are work­ing in tan­dem, and they can’t be changed.
 
There­fore, as oil rises and the dol­lar declines, com­modi­ties – and par­tic­u­larly pre­cious met­als – will con­tinue to rise.
 
GLA: What’s the rela­tion­ship between oil and gold?
 
NB: There’s not nec­es­sar­ily a great deal of cor­re­la­tion between the two in the short term. How­ever, in the longer term, the cor­re­la­tion has been in the order of about 16 bar­rels of oil for every ounce of gold.
 
GLA: Has that been con­sis­tent long term and what is the out­look for pre­cious met­als?
 
NB: With only short-term fluc­tu­a­tions, this ratio has held up over the long term. At this point the price of gold is under­val­ued com­pared to the price of oil. Gold should be closer to $1,500 an ounce if you use this mea­sure.
 
On top of this kind of infla­tion­ary issue erod­ing finan­cial con­fi­dence, we’re at peak pro­duc­tion in gold. When the price of gold was low, min­ers employed high-grading to get the most eas­ily attain­able gold out of the ground. As the price rises, min­ers resort to lower-grade min­ing, which has become worth­while – but in some cases you have to sift through tonnes of ore for each ounce.
Plat­inum, for instance; it takes six months to get an ounce of plat­inum out of roughly 10,000 tonnes of ore. Right now, almost all the plat­inum pro­duced orig­i­nates in South Africa, and the mines are miles under­ground, and elec­tric­ity inten­sive. Power short­ages in South Africa are inter­fer­ing with pro­duc­tion and slow­ing things down. All these forces are com­ing together, slow­ing pro­duc­tion and dri­ving up prices.
With sil­ver, most of the above­ground reserves have been depleted – most of the sil­ver that is pro­duced is con­sumed each and every year. Sil­ver also has two demand dri­vers – mon­e­tary and indus­trial. The num­ber of indus­trial appli­ca­tions are grow­ing every year while the mon­e­tary demand has also been grow­ing in the past few years. It is impor­tant to remem­ber that “sil­ver” means “money” in sev­eral lan­guages.
 
GLA: Why is gold so impor­tant as an ele­ment of diver­si­fi­ca­tion for investors?
 
NB: Take a look at the cycle from 1968 to 1982 – dur­ing that time it took stocks the whole 14 years to break even.  If you fac­tor infla­tion into it, it actu­ally took until 1995. So stocks didn’t look so good in the past cycle, and they are not look­ing very good now. The DJIA is well below its inflation-adjusted highs. Its per­for­mance is much worse when mea­sured in gold ounces. The DJIA has declined from a high of 44 ounces of gold in 2000 to about 14 today, but if you look at a chart the Dow appears to be at new highs.  It’s like tak­ing the Zim­babwe stock mar­ket and say­ing, “Look how well Zim­bab­wean stocks have done; the mar­ket was up 8,000%.”  But what if we adjust for the 100,000% infla­tion in that coun­try? Not so good, is it?
 
BMG Bul­lion­Fund is inter­nally diver­si­fied.  We buy phys­i­cal gold, plat­inum, and sil­ver in equal amounts. While some peo­ple like to focus on gold, they would miss out on the fact that sil­ver and plat­inum have both out­per­formed gold since the begin­ning of this cycle in 2002.
 
GLA: What do you do about infla­tion?
 
NB: First, it is impor­tant to look at real infla­tion. What is real infla­tion? The real num­ber is around 9%, not 3%. The cal­cu­la­tions the gov­ern­ment uses for the Con­sumer Price Index (CPI) are really mean­ing­less as a true infla­tion indi­ca­tor. The real def­i­n­i­tion of infla­tion is an increase in the money sup­ply that leads to an increase in prices. Prices do not increase on their own unless you have a short­age; when you increase the money sup­ply, what you’re really doing is debas­ing the cur­rency, and as the pur­chas­ing power of the cur­rency declines prices appear to be ris­ing. So with the US money sup­ply (M3) grow­ing at 20%, Canada’s grow­ing at 9%, and most other coun­tries’ grow­ing at around 15%, that’s going to result in ris­ing prices and real infla­tion.
 
If you take real infla­tion into account, Wain­wright Eco­nom­ics sug­gests that the appro­pri­ate bul­lion allo­ca­tion for a bond investor’s port­fo­lio is 18%, and for the equity investor’s port­fo­lio 40%, and that’s just to break even with infla­tion. Although this may sound incred­i­ble, think of the 1970s. How much bul­lion was required just to break even in an equity port­fo­lio?  Bul­lion went up 2,300%, while equi­ties were flat on a nom­i­nal basis. Infla­tion was 15%.
 
So with­out even get­ting wrapped up in a dis­cus­sion about the com­plex sub­ject of money, those two points are fairly straight­for­ward. Ibbot­son Asso­ciates con­firmed that pre­cious met­als are the most neg­a­tively cor­re­lated asset class to the tra­di­tional finan­cial assets, so it gives the biggest bang for the buck for the least amount of allo­ca­tion. In the process you also achieve a more bal­anced, diver­si­fied port­fo­lio. Advi­sors would do well to have an allo­ca­tion to pre­cious met­als to pro­tect their clients from under-diversification.
 
GLA: Do you think this pull­back in gold is an oppor­tu­nity to add to posi­tions at this time?
 
NB: Yes as long as there hasn’t been a major change in the fun­da­men­tals that drive the price. When these pull­backs occur, you always get some tech­ni­cal inter­pre­ta­tions, whether it’s con­ven­tional tech­ni­cal analy­sis or Elliot Wave, com­ing out with the idea that the bull mar­ket in pre­cious met­als is over and that it’s now going down for­ever and so on.
 
When these things hap­pen, you have to ask if any­thing changed fun­da­men­tally to jus­tify that decline.  If noth­ing changed fun­da­men­tally, the only con­clu­sion you can draw is that something’s wrong in the tech­ni­cal inter­pre­ta­tions.  In all like­li­hood the tech­ni­cal inter­pre­ta­tion is wrong because there’s been an inter­ven­tion by mon­e­tary author­i­ties. Tech­ni­cal analy­sis only works when the mar­kets are work­ing freely.
 
GLA: Well, what­ever it is they’re try­ing to do to knock the price down, once again, he who wins in the end is he who has the most ounces and the most shares. It’s got to have been a good year for you with gold prices up 10%, sil­ver up close to 19% and plat­inum prices over 30%.
 
NB: Yes, it has. We have grown assets year-over-year by 80% this year alone, so it’s been a sub­stan­tial increase, and performance-wise, we’re about 20% year-to-date.
 
GLA: Thank you very much for shar­ing your knowl­edge with us.
 
*All amounts expressed in US dol­lars, unless oth­er­wise noted.
For a PDF version, click here: [PDF] Inter­view with Nick Bar­ish­eff, BMG Inc. 
  

Tags: asset class, Banks, Barisheff, BMG Inc., Bullion, Canadian Market, Central Banks, Chart, China, Commodities, Commodity, Consumption, Correlation, CPI, Credit, Currency, Derivatives, DJIA, Dollar, Earnings, Economics, electricity, Euro, Fed, Federal Reserve, fiat, Fixed Income, Focus, Gold, Gold Bullion, India, inflation, interest rates, interview, Japan, M3, Markets, Medicare, Metals, Mining, oil, Oil Prices, physical gold, Platinum, precious metals, Rbc, Real Estate, risk, Russia, S&P 500, Silver, South Africa, Technical Analysis, The Big Picture, Trading, Trillion, UK, US Dollar, Value, Yuan
Posted in Bonds, Canadian Market, Commodities, Credit Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook, Silver, US Stocks | 1 Comment »

Oil: Higher Prices Lead to Lower Prices?

Saturday, June 14th, 2008

Will higher prices for crude oil lead to lower prices? The debate rages on in these days of oil north of $135.

Rob Fraim 's recent report (Mid-Atlantic Secu­ri­ties, Inc.) is worth seri­ous con­sid­er­a­tion as he has a good track record in this sphere, and sec­ondly, his is a common-sense approach. It comes our way cour­tesy of Invest­ment Post­cards Blog, one of the finest on inter­na­tional investing.The para­graphs below are extracts from his excel­lent report.

I have for quite a lengthy period of time – going back sev­eral years – been bull­ish on energy mar­kets and energy-related stocks. And for­tu­nately this has been a decent call.

So now what? Last week a $10+ jump in the price of crude in one day. Visions of $200 oil danc­ing in their heads. Arti­cles in the media about $15 gaso­line, out­cries about spec­u­la­tors dri­ving up the price of oil, and the inevitable some­what late-to-the-party rec­om­men­da­tions to pile into the energy sec­tor now.

Spoiler Alert: I’m going to sug­gest light­en­ing up posi­tions a bit in the energy sec­tor. Sorry for ruin­ing the sus­pense, but you’re busy, I’m wordy, and you were prob­a­bly going to skip to the end anyway.

I’m not sug­gest­ing a com­plete exit – since I still believe that we will have rea­son­ably high energy prices for the fore­see­able future and that energy com­pa­nies will be strong and prof­itable. How­ever, I also believe that the oil mar­ket in par­tic­u­lar has got­ten a lit­tle goofy and frothy and that we are due for a mean­ing­ful pull­back in crude – which is likely to impact the psy­chol­ogy and pric­ing for other energy mar­kets as well. We all know how it is when the “hot money” gets out of a sec­tor and how much volatil­ity that can create.

Do I think that oil is going to $50? Not a chance? Not $50, not $60, not $80. But I do think that there is a bet­ter than aver­age chance that we are going to revisit $100-ish and sta­bi­lize there for a while.

This being the case I am sug­gest­ing that reap­ing some prof­its and reduc­ing energy posi­tions a bit might be a wise move – at least on a trad­ing basis. Keep a core hold­ing for the long-term, but lighten up. Sell some stuff. Write some cov­ered calls. Hedge a bit. Main­tain the core but trade with part of your energy invest­ments. Do some­thing other than get whipsawed.

Why? A com­bi­na­tion of fun­da­men­tal, anec­do­tal, and emo­tional fac­tors actu­ally. (I might also throw in tech­ni­cal, psy­cho­log­i­cal, soci­o­log­i­cal, zoo­log­i­cal, anatom­i­cal, and astro­log­i­cal if I get really cranked up.)

Here are a few of the rea­sons why I am reach­ing this conclusion.

There are some indi­ca­tions that demand is actu­ally begin­ning to fall – some­what in the same way that it did in 1979 and 1980 when gas pump pain reduced gaso­line use by 5% and 6% respectively.

Miles trav­eled in the US are down – off 4.3% in March. In the last week of May – with Memo­r­ial Day week­end – gas buy­ing was down 3.9% from the pre­vi­ous year. Why the declines?

Con­sumers are adjust­ing their dri­ving and con­sump­tion habits. There is a real switch toward smaller, more energy-efficient cars and away from trucks and SUVs. In May of this year 4-cylinder cars made up 45% of sales ver­sus just 30% in 2005.

Anec­do­tally, trans­porta­tion com­pa­nies are adjust­ing as well. We had a con­ver­sa­tion with a truck­ing com­pany recently and they spoke of mea­sures that they have put in place to reduce fuel con­sump­tion. They are using mon­i­tor­ing and track­ing sys­tems and tech­nol­ogy to enforce the 55 mph limit on their dri­vers – instead of the “unof­fi­cial” 65 mph or so that was the norm before. They are very seri­ous about this and have enacted real dri­ver penal­ties for non-compliance. Dif­fer­ent stud­ies have shown dif­fer­ent results, but roughly speak­ing the dif­fer­ence between 55 mph and 65 mph is about a 10% improve­ment in fuel economy.

A poten­tially strength­en­ing US dol­lar can have a big effect. While we tend to focus on supply-and-demand met­rics and spec­u­la­tive forces when talk­ing about oil prices, the sim­ple fact is that a lot of the rise in oil prices has been not about oil infla­tion, but rather dol­lar defla­tion. The green­back has been in a down­ward spi­ral for months – cour­tesy of the credit cri­sis, prob­lems in the US econ­omy, and the long series of inter­est rate cuts. Now that rates have likely bot­tomed and as the US econ­omy comes out of panic/fear mode the odds favor some­what of a rebound in the dollar.

Jef­frey Saut at Ray­mond James – a strate­gist for whom I have the utmost respect – has adopted a more bull­ish stance on the dol­lar after years of warn­ing about dol­lar weak­ness. If he is right – as I sus­pect he is – dol­lar appre­ci­a­tion will bring down crude oil pric­ing – as the need is also less­ened for oil pro­duc­ers to keep prices high on crude, which is their pri­mary green­back denom­i­nated export.

Back to the sup­ply and demand issues, we know that real (or per­ceived) energy con­sump­tion in the emerg­ing economies in China and India has taken up all the sup­ply “at the mar­gin”. And it is those last few incre­men­tal per­cent­age points of usage data that make the dif­fer­ence between tight mar­kets (ris­ing prices) and looser ones (sta­ble to lower prices.) While the China and India growth sto­ries are real – and will be a con­tin­u­ing fac­tor – there are cer­tain things that speak to a mod­est less­en­ing of demand.

When gov­ern­ment sub­si­dies in many Asian nations dis­ap­pear by year’s end, demand should slacken. And China, stock­pil­ing sup­plies for the com­ing Olympics, will likely shift gears and cut back on its energy pur­chases by August accord­ing to some. Now, today’s report regard­ing poten­tial demand from China speaks oth­er­wise, but then again I could find another item that would again talk about demand lev­el­ing off. It’s always a tug of war of course, but I am get­ting the feel­ing that the pic­ture is not nearly as one-sided as has been reported.

Fur­ther­more a slack­en­ing econ­omy here in the US should also take a lit­tle pres­sure off of the demand side of the equation.

While not the end-all of sup­ply prob­lems, there has been some mod­est pro­duc­tion growth – largely from Rus­sia. So all in all the sup­ply and demand bal­ance seems to be tip­ping back in a more favor­able direc­tion – at least for now – with some esti­mates and reports indi­cat­ing that we have moved from a deficit of 900,000 bar­rels a day that had to be made up by dip­ping into reserves, to a global “cush­ion” of 600,000 bar­rels a day.

I also won­der at what point polit­i­cal ide­olo­gies and envi­ron­men­tal con­cerns will crum­ble to voter dis­sat­is­fac­tion over painful energy prices – pos­si­bly open­ing up drilling in pre­vi­ously “off-limits” areas.

“There is no jus­ti­fi­ca­tion for the cur­rent rise in prices,” said Saudi Oil Min­is­ter Ali al-Naimi on June 9, 2008, call­ing for an energy sum­mit between pro­duc­ing and con­sum­ing nations. Now to be sure, we can take any­thing from OPEC nations with a grain of salt, but ulti­mately it serves the inter­ests of the oil pro­duc­ers for oil prices not to sky­rocket too far – since this would encour­age seri­ous con­ser­va­tion mea­sures and bring about fur­ther polit­i­cal pres­sure. While excess sup­ply capac­ity is not huge, Saudi Ara­bia itself has about 2,000,000 bar­rels per day in poten­tial pro­duc­tion expan­sion capability.

So with all of that in mind, do I think that we’re going to return to the days of cheap energy and a huge energy price decline – as occurred after the 1980 spike? Hardly. It was eas­ier to increase pro­duc­tion back then since oil fields were less mature and exploited. Also there were a lot more energy inef­fi­cien­cies (in cars, appli­ances, build­ing mate­ri­als and tech­niques) back then than there are now – areas that could be markedly improved eas­ily enough.

No, not cheap energy – just maybe cheaper by a bit. It would not sur­prise me to see $100 to $105 oil by the end of the year. That prob­a­bly equates to gaso­line in the $3.50-ish area.

Of course the unknown and unknow­able regard­ing crude oil is the geopo­lit­i­cal pic­ture. What if Israel bombs Iran and the Straits of Hor­muz are blocked? What about Nige­ria? And Hugo Chavez down in Venezuela? And Iraq? Ter­ror­ists! Floods! Plagues! Locusts! Well, as we saw last Fri­day those types of con­cerns (absent the locusts) have been mov­ing the energy mar­kets. Did any­thing really hap­pen on Fri­day – some­thing other than rhetoric – that fun­da­men­tally impacted the pic­ture? Not really. It was a spec­u­la­tion and fear-driven spike.

Now I’m not one of these folks who vil­i­fies spec­u­la­tors and blames them for high prices. It’s a free mar­ket and spec­u­la­tors actu­ally serve a pur­pose. But blame it or not, spec­u­la­tion does enter into the pric­ing pic­ture as spec­u­la­tors vie with actual users of the com­mod­ity for a rel­a­tively lim­ited pool of sell­ers. But like ’em or hate ’em, spec­u­la­tors give us our mar­ket tim­ing oppor­tu­ni­ties – to buy when peo­ple are sell­ing or sell when most are buy­ing. It just seems to me that more than a lit­tle of today’s $136/barrel price tag on oil price has geopolitics/fear/speculation writ­ten on it.

Last week I wrote about the (in my view) some­what silly finger-pointing and rant­ing about the role of spec­u­la­tors in hav­ing dri­ven up the price or energy and noted that ulti­mately spec­u­la­tors aren’t big­ger than the mar­kets and that supply-and-demand always wins out. Spec­u­la­tive moves can last longer and go fur­ther than we expect – and no one, me espe­cially, can hope to “top-tick” the mar­ket by sell­ing at the very peak. That’s why my rec­om­men­da­tion is not a 100% all-or-none exit from energy posi­tions, but instead an attempt to be level-headed and proac­tive by tak­ing advan­tage of spec­u­la­tive fever and “ring­ing the reg­is­ter” on por­tions of energy exposure.

Source: Rob Fraim,

Mid-Atlantic Secu­ri­ties, Inc, June 10, 2008.

Tags: Asia, Blog, China, Commodity, Consumption, Credit, Credit Crisis, Crude Oil, Dollar, Economy, energy, energy sector, Focus, Grain, India, inflation, International, Investment Postcards, jeffrey saut, Markets, Mid-Atlantic, naimi, oil, Oil Prices, risk, Rob Fraim, Russia, Saudi Oil Minister, Stuff, Subsidies, Trading, US Dollar
Posted in Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Chart: Loss of Purchasing Power and Money Supply Growth

Monday, June 9th, 2008

Cour­tesy: Nick Bar­ish­eff, Bul­lion Man­age­ment Group Inc. 

The above chart demon­strates the rela­tion­ship between the increase in money sup­ply as mea­sure by M3 and the loss of pur­chas­ing power of the US dol­lar. Using the offi­cial CPI the US dol­lar has lost about 82% of its value while the total money sup­ply has climbed from about $800 bil­lion in 1970 to $13 tril­lion today. The annual increases in total M3 are now more than the total money sup­ply was in 1970. If you use the old for­mula for the cal­cu­la­tion of the CPI, based on a fixed bas­ket of goods and ser­vices, with­out hedo­nic adjust­ments or sub­sti­tu­tions, the US dol­lar has lost about 95% of its pur­chas­ing power. For a detailed expla­na­tion of the changes that have been made to the method­ol­ogy now used to cal­cu­late the CPI see http://www.shadowstats.com/article/56.

http://www.bmsinc.ca/images/graphs/purchaseloss-l.jpg

Tags: Barisheff, BMG Inc., Bullion, Chart, CPI, Dollar, M3, M3 Supply Growth, Markets, Trillion, US Dollar, Value
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When Markets Collide: Barron's interviews el-Erian, Pimco's co-CEO

Sunday, June 8th, 2008

June 2, 2008 — Pimco’s Co-CEO and co-CIO, Mohamed el-Erian dis­cusses his new book, When Mar­kets Col­lide, with Barron’s, which puts today’s mar­ket acci­dents in a unique per­spec­tive. Both the Barron’s inter­view and his book are must reads. Here is an excerpt: 

What are the biggest things peo­ple missed? 

Under a "just-in-time" risk-management mind­set, peo­ple waited for the turn before tak­ing risk off the table. Hubris took over. Peo­ple believed these new deriv­a­tive prod­ucts would allow you to repo­si­tion your port­fo­lio after the turn as opposed to pre­emp­tively. But that wasn't a pos­si­bil­ity with credit prod­ucts and sub­prime, and losses were huge. Peo­ple mis­in­ter­preted what these instru­ments can do, and didn't retool significantly.

Who's the poster boy for this way of thinking? 

The book quotes Chuck Prince, [the for­mer CEO] at Citibank, on the front page of the Finan­cial Times, words to the effect that when the music stops it will be messy, but as long as it's play­ing he's on the dance floor danc­ing. Within weeks the music stopped and peo­ple couldn't get off the dance floor. In many of these sophis­ti­cated firms, the traders did things that nei­ther the mid­dle nor the back office could sup­port, and the result was very big losses. It's like pipes in your house that are very old. Every once in a while, one will rup­ture below and you have a very messy cleanup.

When Mar­kets Col­lide: Invest­ment Strate­gies for the Age of Global Eco­nomic Change, Mohamed el-Erian, co-CEO, Pimco

Tags: Barron's, Chuck Prince, Citigroup, Credit, Economic Change, El-Erian, Financial Times, interview, Markets, PIMCO, risk, When Markets Collide
Posted in Credit Markets, Markets | Comments Off

Gold vs. Mining Stocks

Tuesday, June 3rd, 2008

June 4, 2008 — Cour­tesy Nick Bar­ish­eff, Bul­lion Man­age­ment Group, www.bmsinc.ca.

The above chart shows the com­par­a­tive per­for­mance of the largest gold min­ing com­pa­nies com­pared to the per­for­mance of gold bul­lion. While some juniors and small pro­duc­ers may have out­per­formed bul­lion, their high risk and volatil­ity detracts from any mean­ing­ful com­par­i­son. While the major gold pro­duc­ers out­per­formed bul­lion from 2002 to 2006, bul­lion has out­per­formed these stocks since mid-2006. Gen­er­ally, min­ing stocks do cor­re­late to the price of bul­lion, but dur­ing times of weak­ness in the equity mar­kets they become cor­re­lated to the broad equity mar­kets. The ris­ing price of oil is a con­tribut­ing fac­tor to pro­duc­tion costs. In today's mar­ket, a fully diver­si­fied port­fo­lio should hold equi­ties for spec­u­la­tive growth and, as core hold­ings, fully allo­cated, seg­re­gated bullion.

Tags: Barisheff, Bullion, Chart, Gold, Gold Bullion, gold stocks, Markets, Mining, mining companies, mining stocks, oil, physical gold, Rally, risk
Posted in Energy & Natural Resources, Gold, Markets, Oil and Gas | Comments Off