Sunday, September 9, 2012
Table Forexpros weekly economic data
provide daily updates of key economic events and global trading during vacations next week.
Today's oil price
$96.29 per barrel
Daily change of 1.51 ( 1.59% )
Oil Quote Updated Sep-09-12 9:00 AM
Tips For Mortgage Debt Forgiveness
Tax season is almost upon us which means there are some concerns with canceled debts. If you have undergone debt consolidation or another type of debt relief program you may wonder what is taxable. It should be mentioned that canceled debt is typically taxable; however, there are suggestions with regards to mortgage debt forgiveness.
Homeowners who underwent partial or full debt forgiveness during 2007 to 2012 may find they are not going to be taxed for the mortgage debt forgiveness. The IRS has provided 10 facts about mortgage debt forgiveness to better help your taxes this year. Keep in mind that it is always best to speak with an accountant to ensure you are filing your taxes properly, especially when you have something like mortgage debt forgiveness to worry about.
Debt forgiveness is usually taxable income. Yet, the Mortgage Debt Relief Act of 2007 will help you exclude up to $2 million of debt that was forgiven on your principal residence. Basically your credit card debt will not be covered as taxable or not taxable income. In fact debt consolidation options are not going to affect your taxes. If you file a separate return as a spouse you will find the limit is only $1 million.
Debt that was reduced by mortgage restructuring or mortgage forgiveness on a foreclosure is also excluded from taxes.
As mentioned, the mortgage debt forgiveness concept allows you to exclude canceled debt from your taxes, but you need to qualify. The debt that was cleared means any income from it would need to be used to buy a new home. If you did not buy a ready made home then building or improving your principle residence with that income would be acceptable.
Any refinanced debt income that you obtain needed to be used for improving your residence if you want to exclude that money as income. If you used any money you received from the forgiveness or restructuring of the loan to pay off credit cards or other debt it will not be excluded in your taxes.
In other words, with your mortgage debt forgiveness where you may have been given income to help you buy a new home or keep the one you have, if you had excess money from the situation it had to go back into your home and not to another debt.
There is a special form to fill out if you are excluding any money from your income due to debt forgiveness. It is important to use the Form 982, which is another reason an accountant is a good idea in this type of situation.
Given that there are other types of debt relief it is important that you understand what will or will not affect your taxes. From the above you know money used from debt forgiveness on your home will be excluded, but not debt relief for your credit cards. Any extra income of that nature needs to be recorded. If the debts are canceled without an increase in income then you do not have to worry.
Are You LOCked Into A Collateral Mortgage?
A collateral mortgage is a mortgage with a line of credit (LOC) embedded in it. Why should you care? The mortgage benefits and risks are now those of the mortgage and other forms of debt (an example being the line of credit) even if this debt is not used. If you can access credit in some way, you have to be approved to use it, and whether or not you use it, the risks are viewed the same way by the bank. In the case of a credit card, you would have to be approved before you start spending any money. What are the benefits of the collateral mortgage? If you have other forms of debt other than your traditional mortgage, and need access to cash frequently, this product may be useful to you because you pay fewer fees and you have access to extra money more easily. The reason why fees are less is because approval for the existing debt and future debt is made available at one time, which reduces legal fees and administration. What are the problems? Since a collateral mortgage registers your entire value of your home and 25% over and above that value providing you have 20% equity in it (1), you cannot easily switch your lender unless you discharge the whole mortgage. With a conventional mortgage, or can borrow on any amount over and above the mortgage amount if you have equity or collateral to back it up - an example being a second mortgage. In a collateral mortgage, doing this will usually involve mortgage penalties and legal fees. If you want to borrow more money, you have to go to the same bank for all of your borrowing needs. If you miss mortgage payments or go into default, the bank can raise your interest rate up to 10%. This cannot be done with the conventional mortgage. What to do? Read the fine print on the mortgage contract. Take time before you sign it. If you know a lawyer who understands mortgage contracts, have them go over it to make sure nothing was missed. Get educated as much as you can so you know what questions to ask. If you don't know the terminology, ask the lender about hypothetical situations and what the options are. As an example, if you ask "if I wanted to take out a second mortgage, how does that work?" If they say that is already approved, this is more likely to be a collateral mortgage. You could also ask "if I wanted a line of credit, how would I get one?" If the lender says you already have one, this may also be an indicator that you have a collateral mortgage.
Best Mortgage Modification Services - Save Upto 50% On Monthly Payments
The Obama mortgage modification service has two vital components for helping homeowners, who are financially distressed, in avoiding possible foreclosures. One of them is the home loan modification program and the other one being the home refinancing schedule. For modifying mortgages, borrowers must have missed few monthly payments or need to be at an imminent risk of a mortgage loan default. If eligible, a borrower can keep his home for long by paying manageable monthly installments regularly. On the other hand, home refinancing mechanism is provided to homeowners who are underwater on their existing mortgage loans on account of fallen values of their homes but regular on monthly payments for the past 12 months. Refinancing will allow such homemakers to reduce monthly payments to affordable levels and thus, retain homes.
Nevertheless, there may be some difference on the qualification criteria that apply to both these home saving alternatives for mortgage modification loans. If a homeowner is faced with a foreclosure he can modify mortgage only if the below mentioned conditions are being met.
1. Current home had been secured prior to January 1, 2009.
2. Mortgage must not be guaranteed by Fannie or Freddie.
3. Borrower must be delinquent on payments or fear he might go that way.
4. Unpaid mortgage loan balance cannot exceed $729,750 for single unit home.
5. Applicant has to be primary resident in the home for which mortgage is to be modified.
6. Homeowner must draft and sign a letter highlighting financial hardship situation with valid reasons.
7. If Debt-To-Income (DTI) ratio is more than 55%, borrower will have to undertake course in debt counseling.
On the other hand, if a homeowner is "underwater" on mortgage, he may seek refinancing mortgage modification services provided the following conditions are satisfied.
1. Mortgage must be owned or guaranteed by Fannie or Freddie
2. Borrower must be current on monthly payments for the past 1 year.
3. Homeowner cannot draw cash from new loan for repaying other debts.
The remaining guidelines will remain the same but still the task of identifying the right option for your situation may appear challenging. Not many borrowers can qualify that easily considering the complex and hard to interpret eligibility guidelines as well as process requirements. Hence, for deciding the correct home foreclosure prevention alternative, it could be better if borrowers took advantage of help which is easily available on the internet. Just make sure that you are working with a mortgage service provider that is reliable and reputed.
Nevertheless, there may be some difference on the qualification criteria that apply to both these home saving alternatives for mortgage modification loans. If a homeowner is faced with a foreclosure he can modify mortgage only if the below mentioned conditions are being met.
1. Current home had been secured prior to January 1, 2009.
2. Mortgage must not be guaranteed by Fannie or Freddie.
3. Borrower must be delinquent on payments or fear he might go that way.
4. Unpaid mortgage loan balance cannot exceed $729,750 for single unit home.
5. Applicant has to be primary resident in the home for which mortgage is to be modified.
6. Homeowner must draft and sign a letter highlighting financial hardship situation with valid reasons.
7. If Debt-To-Income (DTI) ratio is more than 55%, borrower will have to undertake course in debt counseling.
On the other hand, if a homeowner is "underwater" on mortgage, he may seek refinancing mortgage modification services provided the following conditions are satisfied.
1. Mortgage must be owned or guaranteed by Fannie or Freddie
2. Borrower must be current on monthly payments for the past 1 year.
3. Homeowner cannot draw cash from new loan for repaying other debts.
The remaining guidelines will remain the same but still the task of identifying the right option for your situation may appear challenging. Not many borrowers can qualify that easily considering the complex and hard to interpret eligibility guidelines as well as process requirements. Hence, for deciding the correct home foreclosure prevention alternative, it could be better if borrowers took advantage of help which is easily available on the internet. Just make sure that you are working with a mortgage service provider that is reliable and reputed.
Mike Niehuser's Gold Investing Lessons From Banking School
Disclosure:
1) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
2) The following companies mentioned in the interview are sponsors of The Gold Report: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Mike Niehuser: I personally and/or my family own shares of the following companies mentioned in this interview: High Desert Gold Corp. and Alexco Resource Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
Mike Niehuser, founder of Beacon Rock Research, incorporates his banking school background into his mining industry analysis. In this exclusive interview with The Gold Report, he assesses the macroeconomic situation from a banker's perspective, explains why he is convinced gold is ready to take off and shares the names of companies poised to profit from mining in the northwestern United States.
The Gold Report: You were at the Pacific Coast Banking School last Friday when gold prices dipped and then surged on Federal Reserve Chairman Ben Bernanke's comments. Why are you attending banking school?
Mike Niehuser: In a former life I was a real estate construction lender; I attended a mid-career banking school and found out there that I am not a banker. I also learned how to analyze banks and in 2000 transitioned to become a bank analyst. In 2004, I fell in love with the mining industry. I never forgot the school and was awarded faculty status eight years ago for providing lecture capture for long-distance learning. Staying active in the school has allowed me to see outside the bubble and this I hope has made me a better mining analyst. The skills as a banker-assessing project, credit and market risk-have helped me to compete as an analyst.
TGR: Regarding Bernanke's comments, how does this impact your forecast on gold prices?
MN: I think Bernanke's comments, as unclear as they were, demonstrate how polarized the world is in its thinking. The markets are looking for leadership and direction, something investors can trust to plan their investments. This became clear to me at banking school. One direction is to stable money, the other indecisive course will reap the whirlwind. I'm still holding to my original forecast for 2012 of gold ranging from $1,400 to $1,700/ounce [oz] with the potential for some catalyst to push the upside to reach $1,800 to $1,900/oz. While it may appear lame to reiterate what has already occurred, I am quite confident we could see a move to stabilize near the upside of the forecast toward the end of 2012. Due to the election, we may expect significant volatility through the end of the year. It should come as no surprise if silver traces a similar pattern.
TGR: In light of your involvement with the banking industry, how do you think bankers feel about the possibility of more quantitative easing and its impact on interest rates and inflation?
MN: There are individuals who feel strongly one way or another, but strangely indifferent overall. There are hints that all is not well. I am not talking about concerns we might have for deficits, increasing national debt and inflation, but concerns about the public perception of bankers as a class and on their careers with the impact of legislation like the Dodd-Frank Act that has not even been written. Bankers appear to be coming out of a state of denial on Dodd-Frank, but I believe they understand that it will lead to a declining return on equity and being required to hold more capital, receiving lower returns on investment and falling stock prices.
There is also a split between large banks and community banks. This should lead to consolidation and the unforeseen consequence of even larger banks that are "Too Big to Fail," which, in my opinion, creates even more systematic risk.
Interestingly, some bankers see low interest rates as a new normal that present selling opportunities to their customers. There are people on both sides. On the whole, bankers would rather have the Fed on their side openly, if they want to have access to funds and support for their banks. I fear with Dodd-Frank the banking industry is becoming more of an arm of the government than an investible class of investments. As long as politicians and their regulators, in the name of risk reduction, continue to pick winners and losers, there will be unintended consequences. On the whole, they appear to be in a bubble and to have convinced themselves that they have the ability to shed inflation or interest rate risk on their balance sheets.
TGR: Do most of the bankers you know feel that the general economy is in recovery mode?
MN: Yes, it would seem so. Most of the loans going bad today are small compared with just a few years ago. Not a lot of new loans are being created. It was said by one instructor that, "You have got to be terminally stupid to have a new loan go bad in the first year." As things are less negative or at least stabilized, bankers' careers are in less danger and this is how they view the world. This is interesting for a number of reasons. From a microeconomic perspective of demand and supply, artificially low interest rates would actually create a shortage of credit, just as price controls create shortages. Once again, just thinking of additional requirements brought on by Dodd-Frank, the over-regulation will likely lead to unforeseen consequences, distorting markets and misallocating credit. Imagine being a lender with stiff penalties to be assessed by the unaccountable Consumer Financial Protection Bureau or having lawyers regularly sitting in with regulators on bank audits. The culture of banking is to reduce risk, and Dodd-Frank is a healthy dose of reputation, regulatory and political risk. In any event, this will suppress lending and economic growth in the economy, which will lead eventually to more imports or higher prices.
TGR: What is the general sentiment among bankers regarding investing in gold? Does the banking community regard the possibility of making gold a Tier 1 asset a real possibility?
MN: This was strange; in past years some students mentioned gold, but I didn't hear anyone talk about gold over the session except the economics professor. This was particularly odd because the school was held during the Republican National Convention, with its proposal to complete a study on the gold standard. One would think it would come up in conversation as this would impact the definition of the very lifeblood of the banking industry, money and leverage. I suppose this stems from a misunderstanding or lack of thought on their part of the definition of money. It was interesting that the recent partnership of PayPal and Discover came up. This advancement into mobile payments that skirt the banking system has the attention of both Warren Buffet and banks as technology innovates ahead and outside the banking system, challenging our understanding of money. It was also interesting that gold as a Tier 1 asset never came up. When I prodded some of the knowledgeable instructors on the subject, they said simply that this idea had been around but it never really went anywhere, except maybe in Europe.
TGR: How do you account for the indifference of a group of financial professionals toward gold, considering the higher prices over the last decade?
MN: I think the greatest pearl of wisdom I took away from being a student at the school in the 1990s was that people are different. They may look alike but they are different, not just because of their education or background, but how they process information and make decisions. People are individuals and they can be counted on to act one way or another in their own self-interest, and particularly in how they see the world. This is what makes markets so difficult to predict and makes it impossible to craft policies that micromanage business, investment decisions or personal behavior. On the other hand, groups of people bind themselves into special interests that in a silo or bubble become increasingly unstable over time. This is more than armchair philosophy. Demographics and an expanding culture of entitlement have hurt Europe beyond repair and are driving politics and economic trends in the U.S., perverting the role of money in an efficient economy, which is clearly the best case for higher gold prices in the near to long term.
TGR: Why does this make you so sure that this will lead to higher gold prices?
MN: It's just my opinion, but the world appears to be polarizing. I am in the minority where I come from, sort of a combination of a Classic Liberal, Austrian School, Friedmanite, Supply-Sider. I think, like Frédéric Bastiat, that the Law is to protect the individual's life, liberty and property. This requires free will, choice and belief in the virtues of mutually agreed upon free exchange, an economy regulated to eliminate deception and reinforce trust. Stable money is essential here and gold is the very essence of trust that all people desire. The other side is driving the boat in Europe and the United States. They work their own book and believe that they are smarter and can organize society. They believe demonizing the 1% and co-opting the bottom 50%, thereby destroying capitalism-moral capitalism-is actually going to benefit them. After they get done taxing the rich and destroying the economy, the only option left is to enforce redistribution of wealth through inflating the currency. It may be too late to turn back. I think this is why the U.S. Presidential election is so important and historic for the global and national economies.
TGR: That's a pretty negative perspective.
MN: Yes, I know, and I'm an optimist. At the current birth replacement rate the world population will voluntarily decrease without wars and pestilence for the first time in human history. The population of the world is expected to start declining around 2050. This is a big deal for Europe, India and China, and less so for the U.S. An aging population is likely to politically guarantee distribution and easy money, which is good for gold.
On the other hand, in the United States, the baby boom each day is declining in importance compared to an equal size group, right around 75 million, born between 1982 and 2000. This group plus immigrants pursuing the American brand of moral capitalism is seeking a better future than the one I just portrayed. This group will outgrow the hang-ups of the aging and increasingly irrelevant baby boomers. Keynesianism has periodically relied on tricking people with easy money and counting on "money illusion." Then they count on wage and price controls, which always have and will always fail. Young people will figure this out-if only the hard way. This is my children's generation, but despite my negative prognosis, for them I am intensely positive. Until they move into leadership, gold is the best hedge for the market distortions caused by social justice.
TGR: You're from Portland, Oregon, and are an advocate of the business development in the northwestern U.S. Don't most of the locals feel negatively about expansion of mining in that general region?
MN: The funny thing about the Occupy Movement is that Portland has been occupied for decades. Private sector jobs here have declined for over 10 years. Decades ago environmentalists worked their book and succeeded in destroying the lumber industry. They had no concern for the communities, schools and lives they upset. As an optimist, my money is on entrepreneurs, including those in the mining industry, that continue to contest monopolies and special interests. Most people who feel negatively live in the cities. My son calls these the "haves" in the "moneyburbs." These folks just are not educated to understand that they could not exist without mining. Until the population of the planet begins to shrink, mining will become increasingly more important and so will the need to educate both investors and the uninformed. I built my business on this idea and I love my job.
TGR: Is there a significant core group of resource investors in that part of the U.S.?
MN: Yes, primarily adults in eastern Washington, Idaho and Montana. They may be outnumbered by Californians, but the legacy of mining has not totally disappeared. In these areas even politicians recognize the importance of wealth-creating, good-paying jobs that fund schools and communities.
TGR: With lackluster economic growth throughout the West, do you see mining projects in Oregon, Montana, Idaho and Utah progressing through the permitting process more quickly now?
MN: No, but there is a real effort in Montana to boost jobs in the energy sector. They probably see how neighboring states are benefiting. I suspect this is having some spillover to Montana, but it is a start. Idaho is pretty consistent. We are even starting to see some very real activity in Oregon after decades of inactivity. This is primarily a function of metal prices drawing entrepreneurial mining companies with willing allies in county government who have not given up on their communities. State governments are starting to look more favorably on mining but this may require a change at the top. Once again, a change in national leadership would be immensely positive for the mining and energy sectors, and we could have Friedman-like policies and expect a burst of economic activity as we saw under Ronald Reagan in the 1980s.
TGR: Do you have some American mining projects that you are excited about?
MN: We visited High Desert Gold Corp.'s Gold Springs project on the Nevada-Utah border about a year ago. High Desert has a district-size land position and has completed comprehensive geophysical surveys complementing already successful preliminary drill and sampling programs. There were several historic producers on the property and management appears to be pulling all this together to understand the project. This has led recently to bonanza-grade gold results. The company is waiting for assays on other promising targets. We believe High Desert is also well managed and maintains a competitive capital structure. While High Desert has established a modest initial resource, we anticipate this is just the first of numerous resources at the project. We also see the market taking note and responding to potential high-grade drill intercepts.
We've toured the Yukon. Although Alexco Resource Corp.'s Keno Hill silver project is in the Yukon, it is populated by American management. This remains one of my favorite companies based on the quality of management, its high-grade silver resource in the politically stable Yukon, and its potential production and exploration profile.
With lower metal prices and a statistically challenging production quarter, disappointed investors took the stock price down to a two-year low. We believe it is nearly impossible to repeat the same performance as in the second quarter, and with metal prices showing upward potential, we anticipate a much stronger finish to 2012 and Alexco meeting its guidance for silver production positively surprising investors. We also took the opportunity following the release of second quarter results to increase our position.
TGR: Any companies in the U.S. that are ready to surprise?
MN: After the Independence Day holiday we visited North Bay Resources Inc.'s Ruby gold mine in the Sierra Nevada northeast of Sacramento, in the northern extension of the California Mother Lode. This is a fully permitted, past-producing underground placer and lode gold mine. The Ruby was in production until World War II. The mine at that time was enjoying the greatest operating results. The mine and equipment have been maintained in exceptional condition and, pending completion of financing and completing rehabilitation of underground workings, should move back into production.
While modest in appearance for its early production potential, management is preparing to reopen the mine and begin gold production while initiating an exploration program to further expand and delineate the resource. We see long-term potential with Ruby, but more important for our purposes, the potential to surprise investors with a new producing gold mine in California is compelling.
TGR: That's a great note to end on. Thanks for your time.
Mike Niehuser is the founder of Beacon Rock Research LLC, which produces research for an institutional audience and focuses in part on precious, base and industrial metals, and alternative energy. Previously a vice president and senior equity analyst with the Robins Group, he also worked as an equity analyst with The RedChip Review. He currently holds faculty status with the Pacific Coast Banking School and is on the board of the Oregon International Airshow. Niehuser holds a bachelor's degree in finance from the University of Oregon.
1) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
2) The following companies mentioned in the interview are sponsors of The Gold Report: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Mike Niehuser: I personally and/or my family own shares of the following companies mentioned in this interview: High Desert Gold Corp. and Alexco Resource Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
Mike Niehuser, founder of Beacon Rock Research, incorporates his banking school background into his mining industry analysis. In this exclusive interview with The Gold Report, he assesses the macroeconomic situation from a banker's perspective, explains why he is convinced gold is ready to take off and shares the names of companies poised to profit from mining in the northwestern United States.
The Gold Report: You were at the Pacific Coast Banking School last Friday when gold prices dipped and then surged on Federal Reserve Chairman Ben Bernanke's comments. Why are you attending banking school?
Mike Niehuser: In a former life I was a real estate construction lender; I attended a mid-career banking school and found out there that I am not a banker. I also learned how to analyze banks and in 2000 transitioned to become a bank analyst. In 2004, I fell in love with the mining industry. I never forgot the school and was awarded faculty status eight years ago for providing lecture capture for long-distance learning. Staying active in the school has allowed me to see outside the bubble and this I hope has made me a better mining analyst. The skills as a banker-assessing project, credit and market risk-have helped me to compete as an analyst.
TGR: Regarding Bernanke's comments, how does this impact your forecast on gold prices?
MN: I think Bernanke's comments, as unclear as they were, demonstrate how polarized the world is in its thinking. The markets are looking for leadership and direction, something investors can trust to plan their investments. This became clear to me at banking school. One direction is to stable money, the other indecisive course will reap the whirlwind. I'm still holding to my original forecast for 2012 of gold ranging from $1,400 to $1,700/ounce [oz] with the potential for some catalyst to push the upside to reach $1,800 to $1,900/oz. While it may appear lame to reiterate what has already occurred, I am quite confident we could see a move to stabilize near the upside of the forecast toward the end of 2012. Due to the election, we may expect significant volatility through the end of the year. It should come as no surprise if silver traces a similar pattern.
TGR: In light of your involvement with the banking industry, how do you think bankers feel about the possibility of more quantitative easing and its impact on interest rates and inflation?
MN: There are individuals who feel strongly one way or another, but strangely indifferent overall. There are hints that all is not well. I am not talking about concerns we might have for deficits, increasing national debt and inflation, but concerns about the public perception of bankers as a class and on their careers with the impact of legislation like the Dodd-Frank Act that has not even been written. Bankers appear to be coming out of a state of denial on Dodd-Frank, but I believe they understand that it will lead to a declining return on equity and being required to hold more capital, receiving lower returns on investment and falling stock prices.
There is also a split between large banks and community banks. This should lead to consolidation and the unforeseen consequence of even larger banks that are "Too Big to Fail," which, in my opinion, creates even more systematic risk.
Interestingly, some bankers see low interest rates as a new normal that present selling opportunities to their customers. There are people on both sides. On the whole, bankers would rather have the Fed on their side openly, if they want to have access to funds and support for their banks. I fear with Dodd-Frank the banking industry is becoming more of an arm of the government than an investible class of investments. As long as politicians and their regulators, in the name of risk reduction, continue to pick winners and losers, there will be unintended consequences. On the whole, they appear to be in a bubble and to have convinced themselves that they have the ability to shed inflation or interest rate risk on their balance sheets.
TGR: Do most of the bankers you know feel that the general economy is in recovery mode?
MN: Yes, it would seem so. Most of the loans going bad today are small compared with just a few years ago. Not a lot of new loans are being created. It was said by one instructor that, "You have got to be terminally stupid to have a new loan go bad in the first year." As things are less negative or at least stabilized, bankers' careers are in less danger and this is how they view the world. This is interesting for a number of reasons. From a microeconomic perspective of demand and supply, artificially low interest rates would actually create a shortage of credit, just as price controls create shortages. Once again, just thinking of additional requirements brought on by Dodd-Frank, the over-regulation will likely lead to unforeseen consequences, distorting markets and misallocating credit. Imagine being a lender with stiff penalties to be assessed by the unaccountable Consumer Financial Protection Bureau or having lawyers regularly sitting in with regulators on bank audits. The culture of banking is to reduce risk, and Dodd-Frank is a healthy dose of reputation, regulatory and political risk. In any event, this will suppress lending and economic growth in the economy, which will lead eventually to more imports or higher prices.
TGR: What is the general sentiment among bankers regarding investing in gold? Does the banking community regard the possibility of making gold a Tier 1 asset a real possibility?
MN: This was strange; in past years some students mentioned gold, but I didn't hear anyone talk about gold over the session except the economics professor. This was particularly odd because the school was held during the Republican National Convention, with its proposal to complete a study on the gold standard. One would think it would come up in conversation as this would impact the definition of the very lifeblood of the banking industry, money and leverage. I suppose this stems from a misunderstanding or lack of thought on their part of the definition of money. It was interesting that the recent partnership of PayPal and Discover came up. This advancement into mobile payments that skirt the banking system has the attention of both Warren Buffet and banks as technology innovates ahead and outside the banking system, challenging our understanding of money. It was also interesting that gold as a Tier 1 asset never came up. When I prodded some of the knowledgeable instructors on the subject, they said simply that this idea had been around but it never really went anywhere, except maybe in Europe.
TGR: How do you account for the indifference of a group of financial professionals toward gold, considering the higher prices over the last decade?
MN: I think the greatest pearl of wisdom I took away from being a student at the school in the 1990s was that people are different. They may look alike but they are different, not just because of their education or background, but how they process information and make decisions. People are individuals and they can be counted on to act one way or another in their own self-interest, and particularly in how they see the world. This is what makes markets so difficult to predict and makes it impossible to craft policies that micromanage business, investment decisions or personal behavior. On the other hand, groups of people bind themselves into special interests that in a silo or bubble become increasingly unstable over time. This is more than armchair philosophy. Demographics and an expanding culture of entitlement have hurt Europe beyond repair and are driving politics and economic trends in the U.S., perverting the role of money in an efficient economy, which is clearly the best case for higher gold prices in the near to long term.
TGR: Why does this make you so sure that this will lead to higher gold prices?
MN: It's just my opinion, but the world appears to be polarizing. I am in the minority where I come from, sort of a combination of a Classic Liberal, Austrian School, Friedmanite, Supply-Sider. I think, like Frédéric Bastiat, that the Law is to protect the individual's life, liberty and property. This requires free will, choice and belief in the virtues of mutually agreed upon free exchange, an economy regulated to eliminate deception and reinforce trust. Stable money is essential here and gold is the very essence of trust that all people desire. The other side is driving the boat in Europe and the United States. They work their own book and believe that they are smarter and can organize society. They believe demonizing the 1% and co-opting the bottom 50%, thereby destroying capitalism-moral capitalism-is actually going to benefit them. After they get done taxing the rich and destroying the economy, the only option left is to enforce redistribution of wealth through inflating the currency. It may be too late to turn back. I think this is why the U.S. Presidential election is so important and historic for the global and national economies.
TGR: That's a pretty negative perspective.
MN: Yes, I know, and I'm an optimist. At the current birth replacement rate the world population will voluntarily decrease without wars and pestilence for the first time in human history. The population of the world is expected to start declining around 2050. This is a big deal for Europe, India and China, and less so for the U.S. An aging population is likely to politically guarantee distribution and easy money, which is good for gold.
On the other hand, in the United States, the baby boom each day is declining in importance compared to an equal size group, right around 75 million, born between 1982 and 2000. This group plus immigrants pursuing the American brand of moral capitalism is seeking a better future than the one I just portrayed. This group will outgrow the hang-ups of the aging and increasingly irrelevant baby boomers. Keynesianism has periodically relied on tricking people with easy money and counting on "money illusion." Then they count on wage and price controls, which always have and will always fail. Young people will figure this out-if only the hard way. This is my children's generation, but despite my negative prognosis, for them I am intensely positive. Until they move into leadership, gold is the best hedge for the market distortions caused by social justice.
TGR: You're from Portland, Oregon, and are an advocate of the business development in the northwestern U.S. Don't most of the locals feel negatively about expansion of mining in that general region?
MN: The funny thing about the Occupy Movement is that Portland has been occupied for decades. Private sector jobs here have declined for over 10 years. Decades ago environmentalists worked their book and succeeded in destroying the lumber industry. They had no concern for the communities, schools and lives they upset. As an optimist, my money is on entrepreneurs, including those in the mining industry, that continue to contest monopolies and special interests. Most people who feel negatively live in the cities. My son calls these the "haves" in the "moneyburbs." These folks just are not educated to understand that they could not exist without mining. Until the population of the planet begins to shrink, mining will become increasingly more important and so will the need to educate both investors and the uninformed. I built my business on this idea and I love my job.
TGR: Is there a significant core group of resource investors in that part of the U.S.?
MN: Yes, primarily adults in eastern Washington, Idaho and Montana. They may be outnumbered by Californians, but the legacy of mining has not totally disappeared. In these areas even politicians recognize the importance of wealth-creating, good-paying jobs that fund schools and communities.
TGR: With lackluster economic growth throughout the West, do you see mining projects in Oregon, Montana, Idaho and Utah progressing through the permitting process more quickly now?
MN: No, but there is a real effort in Montana to boost jobs in the energy sector. They probably see how neighboring states are benefiting. I suspect this is having some spillover to Montana, but it is a start. Idaho is pretty consistent. We are even starting to see some very real activity in Oregon after decades of inactivity. This is primarily a function of metal prices drawing entrepreneurial mining companies with willing allies in county government who have not given up on their communities. State governments are starting to look more favorably on mining but this may require a change at the top. Once again, a change in national leadership would be immensely positive for the mining and energy sectors, and we could have Friedman-like policies and expect a burst of economic activity as we saw under Ronald Reagan in the 1980s.
TGR: Do you have some American mining projects that you are excited about?
MN: We visited High Desert Gold Corp.'s Gold Springs project on the Nevada-Utah border about a year ago. High Desert has a district-size land position and has completed comprehensive geophysical surveys complementing already successful preliminary drill and sampling programs. There were several historic producers on the property and management appears to be pulling all this together to understand the project. This has led recently to bonanza-grade gold results. The company is waiting for assays on other promising targets. We believe High Desert is also well managed and maintains a competitive capital structure. While High Desert has established a modest initial resource, we anticipate this is just the first of numerous resources at the project. We also see the market taking note and responding to potential high-grade drill intercepts.
We've toured the Yukon. Although Alexco Resource Corp.'s Keno Hill silver project is in the Yukon, it is populated by American management. This remains one of my favorite companies based on the quality of management, its high-grade silver resource in the politically stable Yukon, and its potential production and exploration profile.
With lower metal prices and a statistically challenging production quarter, disappointed investors took the stock price down to a two-year low. We believe it is nearly impossible to repeat the same performance as in the second quarter, and with metal prices showing upward potential, we anticipate a much stronger finish to 2012 and Alexco meeting its guidance for silver production positively surprising investors. We also took the opportunity following the release of second quarter results to increase our position.
TGR: Any companies in the U.S. that are ready to surprise?
MN: After the Independence Day holiday we visited North Bay Resources Inc.'s Ruby gold mine in the Sierra Nevada northeast of Sacramento, in the northern extension of the California Mother Lode. This is a fully permitted, past-producing underground placer and lode gold mine. The Ruby was in production until World War II. The mine at that time was enjoying the greatest operating results. The mine and equipment have been maintained in exceptional condition and, pending completion of financing and completing rehabilitation of underground workings, should move back into production.
While modest in appearance for its early production potential, management is preparing to reopen the mine and begin gold production while initiating an exploration program to further expand and delineate the resource. We see long-term potential with Ruby, but more important for our purposes, the potential to surprise investors with a new producing gold mine in California is compelling.
TGR: That's a great note to end on. Thanks for your time.
Mike Niehuser is the founder of Beacon Rock Research LLC, which produces research for an institutional audience and focuses in part on precious, base and industrial metals, and alternative energy. Previously a vice president and senior equity analyst with the Robins Group, he also worked as an equity analyst with The RedChip Review. He currently holds faculty status with the Pacific Coast Banking School and is on the board of the Oregon International Airshow. Niehuser holds a bachelor's degree in finance from the University of Oregon.
Peak Silver Redux
As prices at the pump gradually move back up, one finds no shortage of people calling for new financial regulations. Frequently blamed on speculators, higher gasoline prices are - as some politicians say - the result of lax laws regulating the financial system.
Nevertheless, can it really be only speculators that are driving up the price of oil? Surely, the petroleum market is deeper than that.
Without question, those with very deep pockets can drive up the price of just about any commodity, but typically only for a very short amount of time. Unless of course they have access to a virtually unlimited supply of paper money.
Monetary Stimulus
Today, monetary stimulus implemented by the Federal Reserve is transmitted primarily through incentivizing risk-taking and leveraging in the securities, derivatives and other risk asset markets.
Nevertheless, as Doug Noland recently put it:
"Traditionally, central bank stimulus would entail adding reserves into the banking system to effectively reduce the cost of funds, thereby incentivizing additional bank lending.
The U.S. financial authorities now have about 20 years of experience supporting the thesis that a dangerously powerful interplay exists between activist central banking, marketable debt and financial speculation.
Yet the Fed makes quite sure that its analysis avoids addressing the associated risks of its ever-increasing role in manipulating the pricing and trading dynamics of an ever-expanding quantity of securities, derivatives and market speculation."
Oil Versus Silver
Once past the stagflationary 1970's, oil prices remained relatively reasonable all the way up until the 2000's. Throughout the 1990's, the average American family enjoyed driving their minivans all around town with the price of gasoline fluctuating no higher than $0.80 a gallon.
Perhaps they are starting to wonder why those days of moderate gas prices now seem to be long gone. Why will gasoline never come back to $0.80 a gallon? Because the cheap oil is gone. Potential silver investors need to understand that the cheap silver will soon also be gone.
Throughout recent history, governments have subsidized energy consumption and production, so people consumed too much because it was kept too cheap. Now that all the easily found oil has been brought to the surface, the only oil remaining is harder to find and apparently considerably more expensive to produce as well.
Investors might wonder if the same situation may exist for silver. The widespread and expanding use of silver in electronics will be costly to recycle.
Also, an informal survey of dealers and buyers indicated that 40 ounces is the average amount of silverware held by those households who still possess it, although it remains difficult to assess how much of this source of silver was recycled in the 70's and early 80's. Nevertheless, compared to the previous generation, baby boomers seem much less likely to own real silverware.
Furthermore, having had its price manipulated by large banking interests using the futures markets, physical silver remained far too cheap throughout the 1990's and even into the early 2000's.
As the second decade of this new millennium begins an era where people are more dependent on electronics than at any other time in history, perhaps this will also be the ten years that lead silver to a new price boom analogous to oil's recent historical rise.
Basically, this demonstrates the very obvious problem involved with subsidizing the use of any valuable commodity - either directly or indirectly - that remains in finite supply.
Gold And Silver Making Breakout Move As Fed Prepares QE3
Silver is breaking out past $32 and the trend is moving higher as the Fed signals that it is now ready to pull the trigger and boost the economy, possibly as early as the next Open Market Meeting in the middle of September. Silver is regaining the 200 day moving average on a breathtaking move we called a few weeks ago. Even though we have the general equity markets at record highs, economic conditions all around the world are not showing evidence of a recovery … yet.
The equity markets rallying higher during an economic contraction may be forecasting a reflationary turnaround. Remember, a rising equity and bond market historically precedes an inflationary scenario.
Silver, which was by far the most receptive to QE2, broke out earlier this week and is continuing higher breaking resistance and downtrends. Learning from the silver price move after QE2, our readers have been informed for many weeks that we would believe the $26 area would hold and we would see an upside reversal breakout above $30.
This technical breakout has occurred and is very bullish. Now it hits the newswires that Bernanke may discuss a new large scale asset purchase program (QE3). Many who sold their precious metals and mining stocks hoping to get in at lower prices are now scrambling to buy back in at higher prices. Thus we see a parabolic move in precious metals. However, the major miners and the small explorers are just beginning to make major breakout.
We have maintained the motto of patience and fortitude as other respected analysts abandoned the precious metals ship. We witnessed over the past few weeks a major transition of gold, silver and mining stocks from weak hands to strong hands.
Gold is now at a six month high as the mainstream begins to realize that the Fed will announce something big. The Fed needs to bring down unemployment before the elections in order to keep its own jobs.
As we have been saying for many weeks, QE3 is closer than most expected and that the Fed must do whatever it can to devalue the dollar to pay down soaring debts. This is extremely bullish for our precious metals and mining stock selections.
The Fed may follow China and other countries around the globe in making accommodative moves. This summer China began cutting interest rates for the first time in years. Do not forget two years ago at the end of August, Bernanke announced QE2, flooding the markets with $600 billion. Silver soared from $18 to $50. It seems that investors have already prepared for such a move as gold and silver stage technical breakouts, while the miners are just beginning to play catch up.
The equity markets rallying higher during an economic contraction may be forecasting a reflationary turnaround. Remember, a rising equity and bond market historically precedes an inflationary scenario.
Silver, which was by far the most receptive to QE2, broke out earlier this week and is continuing higher breaking resistance and downtrends. Learning from the silver price move after QE2, our readers have been informed for many weeks that we would believe the $26 area would hold and we would see an upside reversal breakout above $30.
This technical breakout has occurred and is very bullish. Now it hits the newswires that Bernanke may discuss a new large scale asset purchase program (QE3). Many who sold their precious metals and mining stocks hoping to get in at lower prices are now scrambling to buy back in at higher prices. Thus we see a parabolic move in precious metals. However, the major miners and the small explorers are just beginning to make major breakout.
We have maintained the motto of patience and fortitude as other respected analysts abandoned the precious metals ship. We witnessed over the past few weeks a major transition of gold, silver and mining stocks from weak hands to strong hands.
Gold is now at a six month high as the mainstream begins to realize that the Fed will announce something big. The Fed needs to bring down unemployment before the elections in order to keep its own jobs.
As we have been saying for many weeks, QE3 is closer than most expected and that the Fed must do whatever it can to devalue the dollar to pay down soaring debts. This is extremely bullish for our precious metals and mining stock selections.
The Fed may follow China and other countries around the globe in making accommodative moves. This summer China began cutting interest rates for the first time in years. Do not forget two years ago at the end of August, Bernanke announced QE2, flooding the markets with $600 billion. Silver soared from $18 to $50. It seems that investors have already prepared for such a move as gold and silver stage technical breakouts, while the miners are just beginning to play catch up.
Weekly Gold Report For September 8, 2012: Gold's Transformation
According to the World Gold Council, gold is being discussed and considered as part of the solution to the eurozone crisis. Natalie Dempster, Director of Government Affairs reviews the possibility that the ECB could consider creating a European Stability Fund that could be collateralized with gold.
As we are currently witnessing the biggest transition in the history of the eurozone, central bankers and leaders are looking at all the possibilities available in order to maintain economic stability, fiscal responsibility and political support for the region.
The eurozone's gold reserves currently stand at almost 10,000 tonnes, and its central banks have benefited greatly from their gold holdings over the past decade, in part thanks to gold's unique wealth preservation characteristics.
The European Commission itself suggested in a recent Green Paper on Stability Bonds that were Europe to move towards fiscal integration and issue a common euro bond, the credit quality of that bond could be enhanced by collateralizing it with gold.
This provides benefits at many levels. It could provide an alternative, economical solution to more effectively provide financing solutions to eurozone members under economic stress. It would enhance the face value; credibility and backing of the bond issuer. Lastly, by increasing the collateral base with gold, it would reduce the risk of the bond holder and therefore a much lower yield or interest rate would be required.
Within an appropriate structure, a gold-backed bond could be a credible and attractive proposal which could reduce sovereign borrowing costs to sustainable levels. This only serves to reaffirm gold's credentials as a unique and highly compelling reserve asset.
The collateralizing of gold is a benefit which the private sector has been quick to harness to great effect since the first waves of the financial crisis. Stemming from the inclusion of gold as "high quality liquid collateral" under the European Market Infrastructure Regulation, LCH.Clearnet and ICE Clear Europe have both started to accept gold as collateral for the clearing of derivatives contracts.
The Bank of International Settlements (BIS) has proposed by January 2013, to reclassify gold bullion as the safest and the highest quality of assets for central banks around the world as a Tier 1 asset.
A Tier 1 asset means that the yellow metal will be at the top of the pyramid right next to fiat currency and will benefit by this transformation to a negotiable collateral instrument just like any other security or fiat currency.
The central bank in the U.S., the Federal Reserve, recently released a memo to change the status of gold bullion in this country. (Source: Federal Depository Insurance Corporation, June 18, 2012.)
Currently, world central banks use gold as a risk asset that can be collateralized up to 50% of its market value to compensate for the risk gold bullion carries. As a Tier 1 asset, gold could enjoy the company and same status as other financial instruments. Banks now can use gold bullion as a diversification from other assets on their balance sheets.
The proposal and consideration to use gold as a solution to the world financial crisis and reclassification of gold bullion as a Tier 1 asset could have major long-term bullish implications for the price of gold. The current price of gold around the $1,740 per ounce could potentially double by 2016.
Let's take a close look at the gold charts and see what the technical picture is over the near term.
The December (Comex) gold contract closed at $1,737.60. The 52 week Range is $1,535 - $1,934.6. The market closing above the daily 9, 18 and 36 day MA's on a weekly basis, puts into perspective the near-term $1,900 target levels and the September 2011 highs of $1,934.6 per ounce.
The market's closing above the VC Weekly Price Momentum Indicator of $1,724 is bullish. Look to take some profits if long as we reach the $1,760 to $1,781 levels early this week. If stops are taken out here, we could see a sharp rally up to the $1,785 to $1,800 weekly resistance levels.
Buy corrections at the $1,702 and $1,666 levels to cover shorts and go long on a weekly reversal stop. If long, use the $1,666 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).
As we are currently witnessing the biggest transition in the history of the eurozone, central bankers and leaders are looking at all the possibilities available in order to maintain economic stability, fiscal responsibility and political support for the region.
The eurozone's gold reserves currently stand at almost 10,000 tonnes, and its central banks have benefited greatly from their gold holdings over the past decade, in part thanks to gold's unique wealth preservation characteristics.
The European Commission itself suggested in a recent Green Paper on Stability Bonds that were Europe to move towards fiscal integration and issue a common euro bond, the credit quality of that bond could be enhanced by collateralizing it with gold.
This provides benefits at many levels. It could provide an alternative, economical solution to more effectively provide financing solutions to eurozone members under economic stress. It would enhance the face value; credibility and backing of the bond issuer. Lastly, by increasing the collateral base with gold, it would reduce the risk of the bond holder and therefore a much lower yield or interest rate would be required.
Within an appropriate structure, a gold-backed bond could be a credible and attractive proposal which could reduce sovereign borrowing costs to sustainable levels. This only serves to reaffirm gold's credentials as a unique and highly compelling reserve asset.
The collateralizing of gold is a benefit which the private sector has been quick to harness to great effect since the first waves of the financial crisis. Stemming from the inclusion of gold as "high quality liquid collateral" under the European Market Infrastructure Regulation, LCH.Clearnet and ICE Clear Europe have both started to accept gold as collateral for the clearing of derivatives contracts.
The Bank of International Settlements (BIS) has proposed by January 2013, to reclassify gold bullion as the safest and the highest quality of assets for central banks around the world as a Tier 1 asset.
A Tier 1 asset means that the yellow metal will be at the top of the pyramid right next to fiat currency and will benefit by this transformation to a negotiable collateral instrument just like any other security or fiat currency.
The central bank in the U.S., the Federal Reserve, recently released a memo to change the status of gold bullion in this country. (Source: Federal Depository Insurance Corporation, June 18, 2012.)
Currently, world central banks use gold as a risk asset that can be collateralized up to 50% of its market value to compensate for the risk gold bullion carries. As a Tier 1 asset, gold could enjoy the company and same status as other financial instruments. Banks now can use gold bullion as a diversification from other assets on their balance sheets.
The proposal and consideration to use gold as a solution to the world financial crisis and reclassification of gold bullion as a Tier 1 asset could have major long-term bullish implications for the price of gold. The current price of gold around the $1,740 per ounce could potentially double by 2016.
Let's take a close look at the gold charts and see what the technical picture is over the near term.
The December (Comex) gold contract closed at $1,737.60. The 52 week Range is $1,535 - $1,934.6. The market closing above the daily 9, 18 and 36 day MA's on a weekly basis, puts into perspective the near-term $1,900 target levels and the September 2011 highs of $1,934.6 per ounce.
The market's closing above the VC Weekly Price Momentum Indicator of $1,724 is bullish. Look to take some profits if long as we reach the $1,760 to $1,781 levels early this week. If stops are taken out here, we could see a sharp rally up to the $1,785 to $1,800 weekly resistance levels.
Buy corrections at the $1,702 and $1,666 levels to cover shorts and go long on a weekly reversal stop. If long, use the $1,666 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).
Oil And Gold Still Joined At The Hip: Be Wary
I saw this in Money Morning: Apparently gold is still "The Greatest Trade Ever" and that's because (A) the same old reasons (B) central banks are still buying (C) John Paulson is buying and he made a fortune betting the housing bubble was going to bust.
OK, but central banks don't always get it right and the fact John Paulson saw there was a housing bubble and put money on the bubble popping, does not prove that when he says gold is not a bubble...he will be right two times in a row.
This is a chart of the price of oil and the price of gold, superimposed for the past 10 years:
Do a straight-line regression on those numbers and you get an R-Squared of 69%, which means over that time 69% of the changes in the price of oil can be explained by the changes in the price of oil over that period, or the other way around.
Take those lines back to 1971 when gold was pretty much allowed to find its own level, leaving aside the accusations (so far not proven) that central banks manipulated markets to keep the price of gold down…there is an 84% R-Squared.
Of course that doesn't mean that's going to happen in the future and also that information does not tell you whether (in the past) the price of oil drove the price of gold or the other way around, or even if the price of both of them was driven by something else.
Personally, about three years ago, I thought that the price of gold (in dollars) was driven by the price of oil (in dollars), the logic there was that oil is the indispensable and irreplaceable driver of modern economy's, so its price in gold...real money...had to be constant over time.
Now I think it's a bit more complicated.
Take the price of gold in dollars (or if you are an Austrian, the value of dollars expressed in real money), over the past few years when the price of gold sky-rocketed, there has been a very good correlation between gold, and how much money the U.S. Government owes:
What happened in 2010 was that the appetite of foreigners for U.S. Treasuries went down relative to the total need, and so the central bank started buying.
So there is support for the idea that the driver of the price of gold is how much money the Fed prints to buy U.S. Treasuries. That's what Marc Faber is talking about when he says, "So long as Ben keeps printing money, I'm buying gold."
But perhaps that's not right, or at least only partially right? It's hard to tell, certainly from the chart.
My intuition is nagging away telling me that's too neat; there has to be a reason and I don't buy the idea that when the Fed prints that will automatically create inflation...velocity is an issue too, and the current price inflation in the U.S. can be just as easily explained by the drought, the subsidies on corn-to-ethanol, and the price of oil. In which case perhaps the black line is the right one?
Oh, and I know the U.S. Government debt is not just U.S. Treasuries, but recently the trend has been to stop raiding the pension funds, and although it's hard to get the numbers in a timeline, the total exposure pretty much follows the black line.
America needs to sell Treasuries to foreigners to finance its current account deficit. In the run up to the credit crunch that need was mitigated because the shadow banking system was selling "other than Treasury securities" to foreigners. In some way those sales can be considered to have been "exports" since the debt was non-recourse, and much of it won't get paid back.
But those days are gone, as of now securitization is dead and the only credit-worthy provider of securities in any bulk in the U.S. is the Federal Government.
A big driver of the current account deficit, is what America spends buying oil.
So perhaps that's it? The money America borrows to pay for importing oil causes the price of gold to go up via the requirement to sell Treasuries to foreigners to pay for the oil.
So what's happening now? For almost a year the price of gold went no-where, also the price of oil pretty much flat-lined.
One thing that happened was that America's oil dependency went down, first because it started producing (a little) more and second because it started consuming (a little) less; this is a chart of the production:
Source
The other thing is that the discovery of new ways to get natural gas out of the ground, has led to an over-supply. Prices are rock-bottom.
There are ways to use natural gas to replace oil. All the buses in Korea run on natural gas, trucks and trains can run on natural gas also, and in fact so can automobiles.
Right now, the infrastructure isn't there, also because there is practically no tax on gasoline, and no tax breaks for doing conversions, no one is switching.
But it is possible that once the U.S. government gets its act together and works out the cost-benefit of Americans not being dependent on foreigners' largess so they can drive to work in the morning, there may be a change of heart, including a challenge on the immutable right to have cheap gasoline.
Perhaps there is an expectation in the market that America might one of these days do something about the current account deficit, particularly in relation to the amount of money it has to borrow from foreigners, in order to pay for importing oil.
And that expectation might be what is cooling down the price of gold?
One other thing, according to me, oil is in a bit of a bubble now (not a lot of people agree with me).
Source
OK I've being saying that for a year, and although that analysis did call the inflections correctly, the price never went down to what I call a true-pop price.
I suspect that might have something to do with the Bomb-Bomb-Bomb-Bomb-Iran brigade, who apparently didn't work out yet that the "unintended-consequence" of that would likely be a huge spike in the oil price, which would not be good for the economy of a nation that is as dependent of the largesse of foreigners to buy oil, to keep running.
Sorry to sound like a broken-clock, but for me oil prices are going to need a "pop" before they can get back to their current other than market value (some people call that the fundamental fair value; personally I don't like the word "fair" in that expression because there is nothing "fair" about value). Either way, I think that's about $90 (Brent) right now.
And I wouldn't be surprised to see gold under $1,000 in the next two years, and yes I know that's a real minority view.
OK, but central banks don't always get it right and the fact John Paulson saw there was a housing bubble and put money on the bubble popping, does not prove that when he says gold is not a bubble...he will be right two times in a row.
This is a chart of the price of oil and the price of gold, superimposed for the past 10 years:
Do a straight-line regression on those numbers and you get an R-Squared of 69%, which means over that time 69% of the changes in the price of oil can be explained by the changes in the price of oil over that period, or the other way around.
Take those lines back to 1971 when gold was pretty much allowed to find its own level, leaving aside the accusations (so far not proven) that central banks manipulated markets to keep the price of gold down…there is an 84% R-Squared.
Of course that doesn't mean that's going to happen in the future and also that information does not tell you whether (in the past) the price of oil drove the price of gold or the other way around, or even if the price of both of them was driven by something else.
Personally, about three years ago, I thought that the price of gold (in dollars) was driven by the price of oil (in dollars), the logic there was that oil is the indispensable and irreplaceable driver of modern economy's, so its price in gold...real money...had to be constant over time.
Now I think it's a bit more complicated.
Take the price of gold in dollars (or if you are an Austrian, the value of dollars expressed in real money), over the past few years when the price of gold sky-rocketed, there has been a very good correlation between gold, and how much money the U.S. Government owes:
What happened in 2010 was that the appetite of foreigners for U.S. Treasuries went down relative to the total need, and so the central bank started buying.
So there is support for the idea that the driver of the price of gold is how much money the Fed prints to buy U.S. Treasuries. That's what Marc Faber is talking about when he says, "So long as Ben keeps printing money, I'm buying gold."
But perhaps that's not right, or at least only partially right? It's hard to tell, certainly from the chart.
My intuition is nagging away telling me that's too neat; there has to be a reason and I don't buy the idea that when the Fed prints that will automatically create inflation...velocity is an issue too, and the current price inflation in the U.S. can be just as easily explained by the drought, the subsidies on corn-to-ethanol, and the price of oil. In which case perhaps the black line is the right one?
Oh, and I know the U.S. Government debt is not just U.S. Treasuries, but recently the trend has been to stop raiding the pension funds, and although it's hard to get the numbers in a timeline, the total exposure pretty much follows the black line.
America needs to sell Treasuries to foreigners to finance its current account deficit. In the run up to the credit crunch that need was mitigated because the shadow banking system was selling "other than Treasury securities" to foreigners. In some way those sales can be considered to have been "exports" since the debt was non-recourse, and much of it won't get paid back.
But those days are gone, as of now securitization is dead and the only credit-worthy provider of securities in any bulk in the U.S. is the Federal Government.
A big driver of the current account deficit, is what America spends buying oil.
So perhaps that's it? The money America borrows to pay for importing oil causes the price of gold to go up via the requirement to sell Treasuries to foreigners to pay for the oil.
So what's happening now? For almost a year the price of gold went no-where, also the price of oil pretty much flat-lined.
One thing that happened was that America's oil dependency went down, first because it started producing (a little) more and second because it started consuming (a little) less; this is a chart of the production:
Source
The other thing is that the discovery of new ways to get natural gas out of the ground, has led to an over-supply. Prices are rock-bottom.
There are ways to use natural gas to replace oil. All the buses in Korea run on natural gas, trucks and trains can run on natural gas also, and in fact so can automobiles.
Right now, the infrastructure isn't there, also because there is practically no tax on gasoline, and no tax breaks for doing conversions, no one is switching.
But it is possible that once the U.S. government gets its act together and works out the cost-benefit of Americans not being dependent on foreigners' largess so they can drive to work in the morning, there may be a change of heart, including a challenge on the immutable right to have cheap gasoline.
Perhaps there is an expectation in the market that America might one of these days do something about the current account deficit, particularly in relation to the amount of money it has to borrow from foreigners, in order to pay for importing oil.
And that expectation might be what is cooling down the price of gold?
One other thing, according to me, oil is in a bit of a bubble now (not a lot of people agree with me).
Source
OK I've being saying that for a year, and although that analysis did call the inflections correctly, the price never went down to what I call a true-pop price.
I suspect that might have something to do with the Bomb-Bomb-Bomb-Bomb-Iran brigade, who apparently didn't work out yet that the "unintended-consequence" of that would likely be a huge spike in the oil price, which would not be good for the economy of a nation that is as dependent of the largesse of foreigners to buy oil, to keep running.
Sorry to sound like a broken-clock, but for me oil prices are going to need a "pop" before they can get back to their current other than market value (some people call that the fundamental fair value; personally I don't like the word "fair" in that expression because there is nothing "fair" about value). Either way, I think that's about $90 (Brent) right now.
And I wouldn't be surprised to see gold under $1,000 in the next two years, and yes I know that's a real minority view.
Trading Range For Crude
Energy: A $4 trading range on the week for crude oil but prices were virtually unchanged on the week. Prices tried to penetrate $94 all week unsuccessfully closing out the week at the trend line. I am still expecting downside with a target of $90. RBOB gained 15 today to close above $3/gallon and trade at a fresh 2012 high. Exit all bearish trades looking to reestablish once we break below the 8 day MA - in October at $2.96. Heating oil continues to dance around the 8 day MA. I'd like to see a break of the 18 day MA into next week. It will likely take weakness in the entire energy sector for this to play out. Natural gas broke down today losing 3.4% closing back under the 100 day MA. Use that level as resistance now. Based on recent trade recs I've been stopped on both sides so I'm walking away until the dust settles.
Stock Indices: Very little follow through based on yesterday break out action in the stock market. But that is attributed to the unfavorable jobs number this morning. Well I think a bad number could mean QE so who knows in this market? What I do know is I'm on the sidelines and have advised clients with big stock positions to lighten up the whole way up as I do not think it is sustainable.
Metals: Egg on my face ... I'll be the first to admit I thought metals had reached an interim top and I'm wrong. Gold gained 2% today and nearly 5% in the last 5 days. This lifts prices to 6 month highs. I missed this most recent leg and would not be a fresh buyer until prices retraced. For now $1700 is eyed as support with $1670 under that level. Silver gained over 3% today with prices approaching $34/ounce also at 6 month highs. Support is seen just under $33 with next upside target of $35. I have no client exposure as I told traders to get off this train too early. High to low in 2012 copper completed a 50% Fibonacci retracement gaining over 20 cents this week. A strong correlation exists to the stock market currently so I don't think we will get much more.
Softs: Cocoa may be running out of gas. I say this because even in the face of a falling dollar today cocoa could not get out of its own way. I'm still searching for a sign to get short. Sugar advanced 2.7% today on decent volumes. After getting stopped on fresh lows I'm not ready to advise longs just yet but maybe next week with more evidence. I'm still expecting a break in cotton but first let's see a trade under the 50 day MA for confirmation. Coffee gained 3% today but just on dollar weakness as I see nothing positive in coffee. After a bounce I may have some bearish suggestions ... stay tuned.
Treasuries: 30-year bonds failed to hold onto early gains trading below but closing just above its 20 day MA. Expect more selling into next week. 10-year notes are exhibiting the same action but at a smaller degree. This environment in my opinion is perfect for establishing a NOB spread (short 30-year long 10-year 1:1).
Livestock: After 3 negative weeks live cattle finished higher this week. I expected prices to roll over here but with stock investor upbeat maybe they are eating more beef. No seriously - when equities turn south cattle should follow ... I was early on both I guess. As long as the 20 day MA supports prices could grind higher without my clients. Feeder cattle closed lower just under the 9 day MA and on a penetration of the 20 day MA; in September at 143.25 an interim top would be called. Until then stand aside. Lean hogs are approaching 70 cents trading near 20 month lows. A 61.8% Fibonacci retracement on the weekly chart puts prices near 68 cents. As I've said a trade in the 60's has 2013 swing trades on my radar.
Grains: December corn closed out the week under $8/bushel but we've yet to see the flush I've been expecting. Patience is a virtue as I still like sitting on bearish trade thinking $7/bushel will become a reality before we see a return to the highs. That being said you can have tight stops just above the MAs in my opinion. Great risk to reward. Soybeans have closed lower the last 5 sessions finishing the week under its 9 day MA for the first time in 3 weeks. Next week should be the week we see prices back under $17/bushel. Wheat bounced off its 50 day MA lifting prices back over $9/bushel. Continue to fade rallies as $8.30 remains my target.
Currencies: The dollar got pummeled today breaking 81.00 for the first time in 4 months. More downside is expected but I'm more interested in trading the commodities that could be effected by this move then the dollar itself. All crosses benefited on the dollar depreciation with the biggest winners the Kiwi and Euro. The commodity currencies should catch a bid in the short run. Depending on stop placement the Yen shorts should have been stopped at a loss today or will next week on any further advance.
Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
Stock Indices: Very little follow through based on yesterday break out action in the stock market. But that is attributed to the unfavorable jobs number this morning. Well I think a bad number could mean QE so who knows in this market? What I do know is I'm on the sidelines and have advised clients with big stock positions to lighten up the whole way up as I do not think it is sustainable.
Metals: Egg on my face ... I'll be the first to admit I thought metals had reached an interim top and I'm wrong. Gold gained 2% today and nearly 5% in the last 5 days. This lifts prices to 6 month highs. I missed this most recent leg and would not be a fresh buyer until prices retraced. For now $1700 is eyed as support with $1670 under that level. Silver gained over 3% today with prices approaching $34/ounce also at 6 month highs. Support is seen just under $33 with next upside target of $35. I have no client exposure as I told traders to get off this train too early. High to low in 2012 copper completed a 50% Fibonacci retracement gaining over 20 cents this week. A strong correlation exists to the stock market currently so I don't think we will get much more.
Softs: Cocoa may be running out of gas. I say this because even in the face of a falling dollar today cocoa could not get out of its own way. I'm still searching for a sign to get short. Sugar advanced 2.7% today on decent volumes. After getting stopped on fresh lows I'm not ready to advise longs just yet but maybe next week with more evidence. I'm still expecting a break in cotton but first let's see a trade under the 50 day MA for confirmation. Coffee gained 3% today but just on dollar weakness as I see nothing positive in coffee. After a bounce I may have some bearish suggestions ... stay tuned.
Treasuries: 30-year bonds failed to hold onto early gains trading below but closing just above its 20 day MA. Expect more selling into next week. 10-year notes are exhibiting the same action but at a smaller degree. This environment in my opinion is perfect for establishing a NOB spread (short 30-year long 10-year 1:1).
Livestock: After 3 negative weeks live cattle finished higher this week. I expected prices to roll over here but with stock investor upbeat maybe they are eating more beef. No seriously - when equities turn south cattle should follow ... I was early on both I guess. As long as the 20 day MA supports prices could grind higher without my clients. Feeder cattle closed lower just under the 9 day MA and on a penetration of the 20 day MA; in September at 143.25 an interim top would be called. Until then stand aside. Lean hogs are approaching 70 cents trading near 20 month lows. A 61.8% Fibonacci retracement on the weekly chart puts prices near 68 cents. As I've said a trade in the 60's has 2013 swing trades on my radar.
Grains: December corn closed out the week under $8/bushel but we've yet to see the flush I've been expecting. Patience is a virtue as I still like sitting on bearish trade thinking $7/bushel will become a reality before we see a return to the highs. That being said you can have tight stops just above the MAs in my opinion. Great risk to reward. Soybeans have closed lower the last 5 sessions finishing the week under its 9 day MA for the first time in 3 weeks. Next week should be the week we see prices back under $17/bushel. Wheat bounced off its 50 day MA lifting prices back over $9/bushel. Continue to fade rallies as $8.30 remains my target.
Currencies: The dollar got pummeled today breaking 81.00 for the first time in 4 months. More downside is expected but I'm more interested in trading the commodities that could be effected by this move then the dollar itself. All crosses benefited on the dollar depreciation with the biggest winners the Kiwi and Euro. The commodity currencies should catch a bid in the short run. Depending on stop placement the Yen shorts should have been stopped at a loss today or will next week on any further advance.
Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
Could This Be a Huge Growth Business for Google?
What is that phrase about the mother of invention? Google (GOOG) knows.
Google ran into trouble in China when it decided to stop self-censoring content. But an underdog there in search ads, Google has pioneered the market for mobile ads, according to the latest Bloomberg Businessweek.
Mobile ads include search-related ones but also ads sent to people playing games, watching videos and using apps. Google's position stems from an acquisition that’s now looking pretty smart -- in 2010 it paid $750 million for AdMob, which gave it a technological leg up. AdMob had technology for mobile apps that must have been still newish at the time Google announced its purchase, considering that Bloomberg had to explain apps in its story. It called them “mini-programs have become enormously popular on the iPhone, which has more than 100,000 apps.” Apple’s (AAPL) app store now has more than half a million apps.
With the world going mobile, this seems like a nice new avenue for growth. The mobile-app ad segment alone is reportedly estimated to reach $283 million in sales this year -- and that's just in China.
GOOG Revenue TTM data by YCharts
But of course Google will face competition. In China that'll come from Baidu and China’s biggest internet company, Tencent Holdings.
GOOG data by YCharts
From the editors of YCharts.YCharts Pro Investor Service includes professional stock charts, stock ratings and portfolio strategies.
Apple Inc. is rated Neutral. Google Inc. is rated Neutral.
Subscribe to:
Posts (Atom)