Toothless CFTC Tries to Bite Gold and Silver

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 U.S. CFTC (Commodity Futures Trading Commission) announced on January 14th that it was going to investigate trading in the gold and silver markets. This follows the commission's high profile hearings on speculation in the oil and natural gas markets held in the summer of 2009. Those led to the demise of the popular ETF, DXO and caused the natural gas ETF UNG to trade so irregularly that it no longer behaved like an ETF.  Both of these were investment vehicles for the small investor. Big-time speculators went on their merry way untouched and unscathed by the CFTC's action that was supposedly aimed at protecting the public. Anyone who was the least bit cynical might conclude that the CFTC's actual purpose was to protect the profits of the large commercial users of the commodities it regulates.

The CFTC efforts in investing oil and natural gas were in reality a thinly veiled attempt at price controls. Governments almost without exception resort to price controls when inflation becomes a threat. Price controls are of course extremely effective - not in controlling prices, but in creating shortages and driving prices much higher than they would have been if controls hadn't been implemented. Governments never learn however. In the short-term, the CFTC managed to drive natural gas prices to the low levels that were common in the 1990s. Natural gas was already trading at multi-year lows before the CFTC investigations and half of all natural gas rigs in the U.S. had already been shut down. The impact on natural gas was only collateral damage though from the CFTC's real target, which was oil.

Nothing has a greater impact on consumer prices than does oil and governments know that controlling its price is one of the keys to controlling inflation. Around the same time that the U.S. CFTC announced its hearings, the prime minister of England, Gordon Brown, and the president of France, Nicolas Sarkozy made a joint proposal that an international body of government bureaucrats should set the price of oil instead of the free markets. They suggested the price should be kept in the $70 to $80 range. For those who don't recall, Gordon Brown was the British government bureaucrat that sold half the UK's gold for under $300 in 1999 and the early 2000s. Gold has since quadrupled from the price where he sold it, so the UK didn't get that profit. The U.S. dollars that Brown bought from the gold sale then subsequently lost at least 30% of their value. This is the type of market 'genius' that government brings to the table. Would you like to let a government bureaucrat make investing decisions for your 401K?

The CFTC has more ability to impact oil and natural gas than it does gold and silver. ETFs that deal with energy commodities have to do so through some type of futures trading. Oil and natural gas cannot be easily stored as is the case with gold and silver. While there are ETFs for both gold and silver that only trade futures, there are 11 ETFs globally that buy physical gold. None of them store that gold in the United States. They are beyond the reach of the CFTC and the claws of the U.S. government, which for those who don't remember confiscated all of its citizens gold in 1933 and silver in 1934. In aggregate, the gold ETFs have become the sixth largest holder of gold worldwide since the first one was created in March 2003. They hold more gold than China, but less gold than France. In several more years, they could easily have more gold in storage than any central bank.  

Both oil and gold are completely international commodities (natural gas trades in regional markets). If regulation becomes too onerous in the United States, trading can and will shift elsewhere, just as trading in ETFs will shift from those that invest with futures to those that hold physical metal. When the CFTC made its announcement that it would be investigating gold and silver trading, the London Metal Exchange said it would offer clearing for gold over-the-counter (OTC) contracts in London by the second half of 2010. Hong Kong, Singapore, Zurich, Sydney, Tokyo, and Mumbai would probably like to have the trading business too if it leaves the U.S. commodity markets. The CFTC's action is just another government- motivated attempt to prop up the U.S. dollar by trying to hold the price of gold down. It won't work. The CFTC doesn't have the power to make it happen. Prices will eventually have to move to the point that the market dictates, just as they always do. 

Disclosure: Long gold and silver

NEXT: Lessons for Investors from the U.S. Senate Race

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.

Government Price Controls in the Making

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:

British Prime Minster Gordon Brown and French President Nicolas Sarkozy had a article in the Wall Street Journal yesterday entitled, " Oil Prices Need Government Supervision". In this article they recommend that "the Expert Group of the International Energy Forum take the lead in establishing a common long-term view on what price range would be consistent with the fundamentals." They claim at many points in the article that producers and consumers benefit from price stability and the hand of government is needed to assure this. Obviously, their knowledge of history doesn't extend beyond yesterday's lunch.

The Brown/Sarkozy idea was tried on a mass scale in post-war communist Eastern Europe. The government kept prices very stable. That consumers benefited from the chronic shortages that resulted is doubtful. Industrial production was highly inefficient and ultimately fell apart. Some of the worst hyperinflations in history followed in the 1990s. Yes, there is certainly a lot of evidence from the real world that 'government supervision' of markets works well. Brown and Sarkozy hope to bring these benefits to YOU. Note to Brown and Sarkozy: There is already a mechanism for finding the correct long term price for any item - it's called the free market. Just because you don't like that price, doesn't mean it's the wrong price.

Unlike price controls, which is what Brown and Sarkozy are recommending even though they didn't use the term in their article and which NEVER work, there are solutions to the problems they have with the price of oil. Businesses and consumers are paying too high a price in their countries? Well they can cut the extremely high taxes that their governments place on fuel. The price of oil is going up too much. Well, stop letting it be priced in U.S. dollars or tell the U.S to stop running $2 trillion budget deficits and engaging in money printing through quantitative easing. Mr. Brown should follow this advice himself, since Britain is in possibly worse financial shape than the U.S. Don't expect any of these solutions that would actually solve the problem to be implemented though. That would require some real leadership. It is much easier to blame speculators for prices rises and this is the tack the governments have always taken throughout history.

Why should anyone listen to Brown or Sakozy as is? Do either of them have any record of economic success? I don't recall reading about any French 'economic miracle' in the last few years. As for Brown, he was the one that sold half of Britain's gold for $260 an ounce in 1999 and then bought a big chunk of U.S. dollars with the proceeds. The dollars lost a lot of their value subsequently while gold prices were rising to a $1000. The man is obviously an economic 'genius'. Britain also had a worse subprime housing crisis than the U.S. Banks there gave 125% mortgages to people who couldn't pay them back. When someone has done stupid things over and over and over again, it is generally a good idea not to follow their advice.

Nevertheless, you can safely assume that price controls will eventually be implemented because governments that create inflation are governments that try to take the easy way out. You can also safely assume that they will cause shortages. You can also safely assume that prices will subsequently rise much higher than anything previously imagined. You can also safely assume that if Western countries clamp down on free market trading, it will simply move elsewhere (to Dubai, the Far East or possibly any number of offshore money havens). Governments never learn and Brown and Sakozy's article yesterday is just more evidence that things are not going to be any different this time than they have been hundreds of times before in the past.

NEXT: Energy, Commodities and the U.S. Dollar

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.

Dollar and Gold, Power Struggle Continues

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 U.S. dollar turned around overnight and is now testing the 80.00 level. Gold rebounded to 960 and silver to 15.30. Oil is back in the mid 69's. Media reports are stating that traders are questioning whether the dollar rise in the last few days was justified. Considering that there is no fundamental reason for it, for once the media might be right (don't get too excited, it's just a random coincidence). While fundamentals don't explain the recent action in the dollar, gold, silver and oil, technicals do. Gold, silver, and oil all hit important resistance levels. At the same time, the U.S. dollar hit an important support point. A reversal should be expected when these things happen.

The key question is how far will the counter moves go and for how long. At this point, it is not possible to say. It could be anywhere from a few days to several weeks. The price move may be minimal or to any of the Fibonacci retracements of the most recent rally for gold and silver or for the recent sell off of the trade-weighted dollar. Oil is somewhat different story and is trying to still wrap up its rally from 33 by going to the 75-78 range. It needs to break above 70.80 first. Once it does, the mid-70's should be inevitable.

It is amazing the dollar can't rally today again such extremely weak currencies as the pound. Not only do the British have a worse sub-prime crisis than the U.S and are engaging in quantitative easing as well, but prime minister Brown is in danger of being ousted from his post (on second thought, that may be one for the pound). Yet, the market is selling off the dollar against the pound. The Euro is rallying as well, even though Standards and Poor's recently downgraded Ireland's credit rating and German industrial production came in below expectations last night. As bad as things are in Britain and the Eurozone, the market is saying they are worse in the U.S. (personally, I think the market may be on to something).

We will know that gold and silver have won the game when the trade-weighted dollar falls below 78.33. Gold should break above 1000 right around that point and silver above 16. Expect the Fed and world's central bankers to keep weighing in on behalf of the dollar though. There is a G8 meeting this weekend and this will be the perfect opportunity for more pro-dollar PR cheerleading efforts. We will have to see if they can outdo Bernanke's threat or raising interest rates by the fall. If they do, they will likely be laughed off the world stage.

NEXT: Oil Gasses Up; Bear Bites Dollar

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 U.S. Dollar, Gold and Oil

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 trade-weighted dollar was rallying this morning when European trading opened and gold, silver and oil fell in tandem. Actually it would be more accurate to say that two of its major components the Euro and British Pound were selling off (the Canadian Dollar and Yen were up slightly) after the European Parliament election over the weekend. The British Labour Party received only 15% of the vote and Gordon Brown is now in even greater danger of being ousted from his leadership (or lack thereof) position. Across the pond in Canada a significant quantity of gold, silver and other precious metals is unaccounted for at the Royal Canadian Mint. In the energy markets, the struggle between oil bulls and bears continues to heat up.

The dollar's rise is off of a key support level at 78.33. If you look at a chart of the dollar, you see a very clear head and shoulders topping pattern. The neckline is at 79. Once the dollar reached this level, news reports that would help it reverse its downward momentum started gushing forth from the press. Most can be traced directly to the U.S. Treasury Department and the Federal Reserve. The Fed even intimated that it would start raising interest rates in the fall based on a projection of economic recovery starting then. While there is somewhat less than a zero chance of an increase in Fed Fund rates that soon, the dollar nevertheless rallied on the news.

The Canadian Mint story is something that has received scant if any attention in the U.S. press. Unlike Fort Knox, where the U.S. keeps its gold supply, the Canadian Mint is audited regularly. It has been at least 55 years since Fort Knox has been audited. There have been only a handful of reported thefts by employees at the Mint in the last 25 or so years. Most revealing is the case of a worker that supposedly stole only 85 ounces of gold in 1996. A charge of theft against the man was dropped for unexplained reasons and the mint was spared the humiliation of a trial that would have explained how the man snuck the gold past metal detectors, surveillance cameras and electronic sensors. Perhaps similar things don't happen at Fort Knox, it's not possible to say. It is much more likely that there is less gold there than reported because the U.S. government has sold off more of its gold than it publicly admits. Without an audit, we will never know.

Light sweet crude was as high as 70.32 at the end of last week and closed at 68.44 on Friday. It was at 67.59 in mid-day European trading this morning. The price dropped sharply mid-week, but it strongly rebounded on a Goldman Sachs report that oil would rally to 85 by the end of the year (somehow I suspect that Goldman has a big long oil position). I read this as Goldman will be selling its oil at the Fibonacci retracement around 77. It needs to set a somewhat higher target to be able to get out at that price. Smart traders will follow Goldman's lead and close out their long positions around that price as well.

NEXT: Dollar and Gold, Power Struggle Continues

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.

T & A and the GS-20 Summit

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:

Last Wednesday Treasury Secretary Paulson announced the T&A would be taken out of TARP (the Wall Street bailout bill passed in early October). The raison d'etre given by the Bush administration to congress for passing TARP was that only by purchasing troubled assets on bank balance sheets could banks be freed up to lend again and get the economy going. After the legislation was passed, congressional leadership from both parties announced with great fanfare how they were saving the American economy with this program. The ink was barely dry on the bill however, before Paulson announced that preferred stock was going to be purchased in troubled financial institutions instead. While the first $250 billion will still be earmarked for that purpose, Paulson has now decided that the remaining funds should be used to support financial markets that supply credit for credit card debt, auto loans and student loans. Of course next week, there might be a better way to save the American economy and the six week old program could be changed even again. If all this looks like no one in Washington has the slightest idea what they are doing, it's because they don't.

This is not to say that the new ideas for TARP are not an improvement on the original provisions of the bill which were essentially a form of welfare for Wall Street. Unlike welfare for the poor though, welfare for the rich comes with fewer limitations. While TARP has a provision for 'restriction' of bonuses, it doesn't eliminate them, nor does it force companies that can't continue to exist without government support to pay their executives salaries that top government officials would get. Nevertheless, over the weekend seven top Goldman Sachs (Paulson's old firm) managers graciously renounced their bonuses for 2008. Why they would have been getting bonuses when the company's stock has fallen 70% in the last twelve months is not exactly clear. CEO Lloyd Blankfein received a Wall Street record $68 million bonus last year when he was making the decisions that lead to this year's disastrous performance.

Like everything else in the contemporary economy, lack of effective ideas for handling the credit crisis is global as well. The GS-20 meeting of world leaders this weekend in Washington produced mostly a commitment to free trade and further monetary and fiscal stimulus (in other words governments throughout the world are going to print more paper money which will be backed by nothing other than their leaders hot air). British PM Gordon Brown, who decided to sell half of Britain's gold at the bottom of the market in 1999 and has presided over a worse subprime crisis than in the U.S., led the charge for increased stimulus measures. Other ideas bandied about included multinational supervision for global banks, more oversight for credit rating agencies and regulation for hedge funds. These useful suggestions didn't get much beyond the bandying stage however. Essentially anything concrete was put off until the next meeting in April. The do-nothing summit was immediately declared a success by President Bush.

Shortly thereafter, Japan announced a second quarter of negative GDP confirming it was in recession as the euro zone did last Friday. Since this was not exactly surprising news, Asian markets were little changed overnight, even despite the drop in the U.S. on Friday. The out of the blue rally in American markets last Thursday faded almost as quickly as it arriveed with the Dow down 3.8% and the Nasdaq down 5.0%. Technically speaking this was another crash day on the Nasdaq, but as I have said many times, no one pays attention anymore to just a 5% or 6% drop - and that includes world leaders.

NEXT: Trojan Horse of Earnings Surprises

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.