What's Behind the Move in Gold and Silver Prices

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The euro rescue plan announced pre-market Monday morning has yet to calm jittery financial markets. Gold hit a record high yesterday on rumors that Germany was planning on leaving the currency union and going back to using Deutsche marks. Silver has benefited from a U.S. government investigation of JP Morgan and its possible manipulation of global silver trading.

Gold has been rising for several years now against all major paper currencies and this indicates a massive global devaluation of fiat money (currencies that are not backed by hard assets) is taking place. We are still only in the early stages of that devaluation. When the Greek debt crisis surfaced, gold fell from December to February. Superficially, this makes sense because gold usually trades with the euro and the euro was dropping. After February, gold recaptured its usually safe haven status and starting rising as the euro continued to fall. The trade-weighted U.S. dollar was of course going up at the same time. The dollar is also traditionally a safe haven whenever there is a crisis in the world. In this case though, the dollar is hardly more sound than the euro and a good case can be made that U.S. government finances are even worse than Greece's.

There is no question that the euro currency union cannot continue to operate the way it has up to this point. When the eurozone was created, there seems to have been no consideration of how matters would be handled if problems arose - a truly amazing lack of foresight. The Greek debt crisis also revealed that the eurozone authorities were unwilling to take necessary action to enforce the standards supporting their currency. Greece lied to the EU about it fiscal position for years and its budget deficit to GDP ratio for 2009 is more than four times what is permissible by currency union rules. If this doesn't get it thrown out of the union, it appears that nothing could ever happen that would get a country removed from the eurozone. This is how the rumors that Germany would withdraw from the euro could take hold and gain some credence. At this point in time though, there is a zero percent chance that this would take place. Such an action would create a crash in the world financial system that would be much greater than what occurred after Lehman's collapse. The authorities are well aware of this.

Silver, which trades with gold, has its own unique issues. News sources on May 9th reported that parallel civil and criminal investigations had been launched into whether or not JP Morgan has engaged in manipulative practices to keep down the price of silver. The CFTC (Commodities Futures Trading Commission) is looking into civil charges, and the Department of Justice's Antitrust Division is handling the criminal probe. The CFTC has had complaints for years that a few big banks were manipulating silver prices, but just as the SEC ignored complaints against insider Bernie Madoff, the CFTC paid no attention. The CFTC hearings this spring on the silver market blatantly exposed the corrupt practices taking place. Nevertheless, the mainstream media ignored the story (just as a number of press outlets had the Madoff story for years, but failed to publish it). The hearings did get a lot of attention from blogosphere and on You Tube however and this may have finally put enough heat on the CFTC to take action.

From a technical perspective, gold has broken out from a cup structure (without a handle). Going to new highs is always a sign of strength.  Gold price action is being fed by and is in turn feeding a great deal of bullishness.  Too much bullishness though is not a good sign. The dangers for gold are a recovery in the euro (which is extremely oversold) and the market gaining some confidence in the bailout. The situation in Europe is likely to calm down into the summer. In the long-term problems will resurface however. Investors should also keep in mind that the IMF has a lot of gold and has decided to start selling it to pay for its programs (such as the euro bailout for instance). These sales can cause gold to experience a sharp and sudden price drop.

Investors can purchase gold and silver through ETFs (exchange traded funds). Gold ETFs that hold physical metals include GLD, IAU, and SGOL. Silver ETFs include SLV, USV and SIVR. The euro ETF is FXE and the trade-weighted dollar ETF is DXY.

Disclosure: Not relevant.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Quadruple Witching Today; Fraud Update

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Today is quadruple witching, the once every quarter event when equity options, index options, single stock futures and index futures expire. The market will tend to move either up or down to minimize the value of the expiring options. Reversals to undo those moves frequently take place early the next week. After four days of closing below its 200-day moving average, the Dow jumped above this resistance line this morning and it needs to close there today and stay above it next week for the market to be healthy. The US dollar is steady at 80.46 this morning, gold, silver and oil are up slightly.

The big news today is that Texas billionaire Allen Stanford had been indicted and arrested. Stanford is accused of running an $8 billion Ponzi scheme. The SEC first received complaints against Stanford in 2001. The ever on the ball SEC only took four years to launch an investigation. After 'only' four years after the investigation began in 2005, the SEC filed civil fraud charges against Stanford four months ago. It is rumored that Stanford has connections to the CIA.

While Stanford was being indicted, uber fraudster Bernie Madoff settled civil fraud charges with the SEC in his $65 billion Ponzi scheme (something the SEC supposedly failed to notice for a few decades). Even though Madoff has admitted guilt in criminal proceedings, the SEC allowed him to settle its charges against without admitting any wrongdoing! Legal experts were reported as being 'dumbfounded' by this move. Indeed it doesn't make any sense unless the SEC is trying to protect itself and its own involvement in the Madoff scam. Madoff sat on SEC committees. He will be sentenced on June 29th.

If the SEC doesn't find major frauds that can damage the entire financial system, what does it do? It spends its time catching dentists in New Jersey who get tips from their clients and buy a few thousand dollars in options. These small one time transgressions are essentially irrelevant, but make great publicity. The massive ongoing crimes are ignored. It also looks like the SEC may be participating in the criminal activities that it's supposed to be stopping. If it was closed down tomorrow, would investors be any less safe?

NEXT: The Simple Arithmetic of Hyperinflation

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Today's Economic Lunacy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

If ever there was ever any doubt that lunatics are running the economic asylum, we received more than enough confirmation of it today. Fed chairman Ben Bernanke expressed confidence that the current recession (actually depression) could end in 2009. It has been revealed that much of the AIG bailout money went to pay other banks and brokers who were also receiving bailout money and for executive bonuses. OPEC caved into pressure from the West not to cut oil production because it would hurt the world economy, as if this could somehow undo all the damage the Central Bankers were doing.

Fed Chair Ben Bernanke made his remarks about the recession on 60 Minutes (they should have resurrected the 1960's classic show, 'The Twilight Zone', for his commentary). While media headlines this morning blared that Bernanke said the recession would be ending in 2009, he actually added the important caveat that this would only happen if the banking system is stabilized. A realistic assessment of the chances of that happening can not be found in most press coverage. Bernanke further stated (try not to laugh) the largest U.S. banks are solvent and "they are not going to fail". The large U.S. banks are of course insolvent, although it is true that they are not going to fail because the government will pump an infinite amount of money into them if necessary to prevent this from happening. U.S. taxpayers should not worry about this however. Bernanke assured us last night that the bailout aid is not coming directly from tax funds and is "more akin to printing money than it is borrowing." Isn't that the approach the Weimar Germany and Zimbabwe took?

Government money printing is bad enough as is, but the news out of AIG over the weekend shows just how much of this is going to waste (hey, don't worry, they can always print more... and they will). Of the $170 billion that AIG received in government bailout funds, $105 billion went to pay other banks, including many foreign banks. Many of the U.S. banks were already receiving other government bailout money as is. As for the foreign banks, why is the U.S. bailing them out? Adding insult to injury, AIG is also using its bailout money to also pay executive bonuses. It claims that it is legally obligated to do so. Personally, I would like to see those contracts that state government money must be used to pay these bonuses. I think this problem could easily be solved if the people running AIG spent some time with Bernie Madoff in his new home.

Since the ordinary rules of basic economics are being ignored everywhere else, why should they apply to oil production. At its meeting on Sunday, OPEC did not cut production quotas again, but instead said it would aim to enforce the already existing cuts. In the last several months OPEC has announced a 4.2 billion reduction in quotas and it is estimated there has been 80% compliance. They are now trying to get the extra 20% or 800,000 barrels a day. Oil production is being cut elsewhere as well, including the U.S., and this is happening because it simply isn't profitable to produce oil under $40 a barrel in many places. And no amount of wishing, hoping and jawboning is going to make this happen. The rules of economics always win in the end. Someone should tell Ben Bernanke.

The New York Investing meetup is having its second class in Technical Analysis on Tuesday. If you are in the New York area, you should be attending (space is limited and by invitation only to members of the group, if you didn't get an invitation email me through the website).

NEXT: When Bad News is Good News and Vice-a-Versa

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

SEC Discovers Fraud Exists/Smart Money Buys Gold

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Yesterday, SEC officials raided the offices of R. Allen Stanford, a Texas billionaire listed as one of the 400 richest by Forbes magazine, and froze the assets of three companies he controls. The SEC is accusing Stanford of perpetrating an $8 billion investment fraud, something that would have had to have been conducted over many years if not decades because of its size. The fraud was centered around CD's, usually considered the safest of investments, with higher than the going rate of return. Just as with the Madoff investment scam, the too good to be true returns were a fantasy. At the same time that the Standford fraud news appeared, figures for gold consumption in 2008 were released and they indicate that the smart money was loading up on the precious metal last year.

When news of the Madoff scam broke, only the incredibly naive would have thought it was the only one being perpetrated. Madoff's fraud indicated an SEC permeated with corruption. It is not far fetched to say that the SEC itself was in on the Madoff scam. Madoff himself sat on an SEC board. At least one (more likely several) former SEC regulator left the SEC and started a feeder hedge fund that funneled at least $7 billion into Madoff's operations. That fund changed its auditors every year (something which is not done) in an obvious attempt to hide what it was really doing. Even though Madoff's operations would have required that he was conducting more than 100% of the trades in the SP100 futures markets, the SEC didn't see anything suspicious about this. FINRA, the other regulatory agency that investigated Madoff, reported that parts of Madoff's firm had no customers, but was still making money. They didn't find anything impossible about that one either. The head of FINRA at that time is now the current head of the SEC.

The most recent statements from the SEC indicate they believe the Madoff scam began in the 1970s. In over three decades they noticed nothing. How long the $8 billion Standford scam has been going on is not yet known. However, it usually takes a long time to steal $8 billion. Stanford has significant operations in off-shore money haven Antigua, where he has been knighted. It is quite possible Madoff has stashed a lot of money at one or more off-shore locations himself. It takes a lot of money to bribe judges and other U.S. government officials after all.

Lost amidst all the fraud news was that gold demand hit a record in 2008, surpassing the $100 billion mark for the first time ever. Demand for the precious metal in the form of jewelry, for industrial uses, gold bars, coins, and gold exchange-traded funds, hit $102 billion, up 29% from 2007. Many of the buyers of Standford's 'safe' CDs may have shunned gold because it was 'risky' and the wanted 'cash flow'. Many of those people will lose everything. The actual smart money knows that paper assets are now the riskiest of all and has been loading up on gold behind the scenes for awhile now.

NEXT: Gold and Silver Rise, Oil Falls

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The January 8th Meeting of the New York Investing meetup

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The New York Investing meetup monthly meeting on January 8th had a record turnout of 200 people. The first talk was our view for the stock market in 2009. This was followed up by an excellent talk by Jeff Glenn on manipulation in the gold and silver markets. The final talk was on the latest scandals, including Madoff, Dryer, and Saytam compter, recent economic figures and then a review of some Saint Louis Fed charts that clearly show the financial sytem is in serious trouble.

While the indicators for the U.S. stock market were highly negative in the beginning of 2008, they were essentially neutral for 2009. A comparison was made of the charts for the major stock indices at the beginning of 2008 and 2009. In 2008 there was a large drop, while in 2009 almost everything went sideways. One way of interpreting this is that the market will move in an overall sideways pattern this year, albeit with possible big moves up and down. This does not mean the market can't go lower, it most certainly can. Our long term prediction is that it will. The Dow still has not hit major support at 7200 and this could happen even in the earlier part of this year. Lower lows are also possible. A flat market for the year can include the scenario of significant selling and recovery toward the opening price at the end of the year.

Jeff Glenn's talk on gold and silver manipulation helped clarify how central governments try to control the price of gold and silver through leasing. How much gold the U.S. actually owns is not really known, since there has been no audit since 1955. A lot of government action seems to take place with precious metals, but there is little transparency. Investors should ask themselves, "Why the need for secrecy?" Jeff also stated that he thought it very possible that gold could skyrocket one day because of a sudden revaluation by the government. I agree that this is indeed a realistic possibility. You will need to own gold and silver before this day arrives if it does occur.

The final talk was on the Madoff scandal and how incredible it was the SEC missed this obvious scam that seems to have gone on for decades. We also reviewed the accusations of major security fraud against Drier, the head of one of the largest New York law firms, and how Satyam Com hid its declining sales by lying about it cash holdings (something that is almost impossible to do because it requires multiple parties outside the company to be involved with the fraud). After that we warned the employment report and the GDP figures this month would be ugly. We wrapped up by showing updated charts on the Monetary Base and Banking Reserves from the St. Louis Fed.

Our next general meeting will be February 3rd and we will be having a guest lecture on investing in art.

NEXT: The U.S. Trade Deficit - There's Good News and Bad News

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Excess Liquidity to Solve Excess Liquidity Problem

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Almost everyone expects the U.S. Fed to lower interest rates by 50 basis points to 50 basis points today. Soon we will find out what will happen when there are no more rate cuts left as I asked rhetorically long ago in one of the New York Investing meetup's You Tube videos. We do know what has happened in the past because of excess liquidity with one bubble inflated after another because of fed policy. Each bubble leaves a trail of victims, many of whom should have known better. The list for the Madoff scandal keeps growing and the similarity to suspended belief that made Enron possible should be noted. While there were a few lone voices saying the emperor had no clothes, the top Wall Street players supported both and questioning from the media just didn't exist.

Hedge funds were one of the many beneficiaries of U.S. government easy money in the 1990s and 2000s. In 1990, there were only 610 of them in the U.S, by the end of 2006, there 9462. Assets under management went from $38.9 billion in 1990 to $1.9 trillion in June of 2008, when according to Bloomberg they peaked. As of November 24th (long before the Madoff scandal) U.S hedge funds returns were down 22% on the year - some protection from the Bear Market! A number of hedge funds themselves invested with Madoff and their clients were generally charged 20% of profits and a one and half percent maintenance fee to get them in on the biggest Ponzi scheme in American history. Just another of example of Wall Street being filled with people who know other people, but know little about investing.

While hedge funds still remain beyond the reach of the average investor (and in many cases this is fortunate), the other big beneficiary of the credit bubble, mutual funds, are also suffering. In the six months between May and October, U.S. mutual funds had a decline of $2.5 trillion in assets. Much, but not all of this, was the result of the declining stock market. Money seems to be flowing into money market funds which hit a record $3.7 trillion last week and have hit records highs for the last 11 consecutive weeks. There also seems to be some shift of funds toward ETFs. Despite the declining market, ETF assets have grown by $104 billion in the first nine months of 2008. Perhaps the American public is slowly realizing that the mutual fund industry is obsolete and does little except take a slice of their investing money in exchange for lower than average market returns?

The New York Investing meetup continually points out that there is no free lunch and much of our investing predictions are based on this simple premise which is why they are so accurate. Don't think we don't get a lot of flack because of this because we do. Most people want to believe in the too good to be true premise (and the Madoff scandal makes it clear that the rich and well-connected are just as susceptible to this as everyone else) and the U.S. government through its interest rate policy, the Treasury through its bailouts and the mass media that refuses to question, all keep the illusion going. Most people of course also don't make money with their investments either. Instead they wind up eating the free lunch and invariably go hungry later on.

NEXT:

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Indecent Exposure: Madoff Caught Swimming Naked

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Warren Buffett's famous remark that you only know who's swimming naked when the tide goes out is particularly relevant at the moment with the ultimate Wall Street insider Bernard Madoff accused of operating a $50 billion Ponzi scheme (with an additional $17 billion just 'missing'). The hear no evil, see no evil SEC gets no credit for unmasking this multi-decade fraud, with Madoff confessing to his sons as his scheme fell apart and they in turn notifying the FBI. There are even reports of in-the-know Wall Streeters having invested with Madoff knowing his operation was fraudulent, but they had assumed that it was based on an insider trading scam - it being common knowledge on the Street that the SEC rarely investigates citizens above suspicion (one SEC employee was recently fired for trying to open just such a case) for this behavior.

Madoff is the former chairman of the Nasdaq and the founder of Bernard L. Madoff Investment Securities, a closely-held market-making firm that has operated since 1960. He also ran a hedge fund, which is the source of the supposed $50 billion in fraudulent losses (sustained during the time that former Fed chair Alan Greenspan repeatedly said there was no need to regulate hedge funds). Madoff's hedge fund business didn't register with the SEC until September 2006. What took it so long to do so is a good question. An even better question is, did they investigate the hedge fund since that date and if so why couldn't they uncover the largest fraud in American financial history? Madoff's Investment Securities is also market maker on Nasdaq and huge amounts of funds pass through that operation. Are those funds safe or have some of them been pilfered too?

Investors in Madoff's hedge fund are a who's who of big money people, banks and other hedge funds who should have known better. These include banks Santander, Royal Bank of Scotland, BNP Paribas, HSBC, Nomura and hedge funds Man Group, Tremont Capital Management and Fairfield Greenwich Group. Some big names that have surfaced so far as Madoff investors are Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services (49% owned by looking for a government bailout GM). A number of charities also entrusted their money to Madoff, Senator Frank Lautenberg's family charitable trust among them, and at least one has already closed down as a result.

The revelations of the Madoff fraud are somewhat reminiscent of Richard Whitney scandal during the Great Depression. Whitney was the president of the New York stock exchange from 1930 to 1935 and was also a citizen above suspicion just like Madoff. He was assumed to be a brilliant financier, but this image was also false. He turned to embezzlement to cover up his mounting business losses and to maintain his extravagant lifestyle. The authorities eventually caught up with him, although it didn't take nearly as long as it has with Madoff, and he wound up in Sing Sing. Revelations of financial misdeeds indeed became commonplace in the 1930s as the economy fell apart and you should assume that this will be the happening once again.

NEXT: Excess Liquidity to Solve Excess Liquidity Problem

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.