Sunday, 22 December 2013

Gold and Silver simply needed a rest.

Let me start by stating that i really like Gold and Silver they are the only true forms of money. paper money is simply convenient and portable currency, it is not money as it is not a store of value.

My disagreement with the Gold and Silver bugs is not because i disagree with the whole Gold and Silver story and the ongoing long term bullmarket. It is just that i feel they are misreading a very obvious reality.

Gold Started its bullmarket move in 2001 and it was trading at circa $250 per ounce, it then had a very strong and sustained move up to 2012 when the price averaged $1700. I am not interested in short term price spikes, i am far more interested in the average prices over a period of time.

Silver started its bullmarket in 2001 and it was trading at circa $4.50 per ounce, it then had a very strong and sustained move up to 2011 where it averaged £35 per ounce.

Now by my calculation Gold had an increase in price from 2001 to 2012 of 580% and Silver had an increase in price of 677%. These are massive price moves in such a short period of time, i repeat massive price moves. These moves are also UNSUSTAINABLE

Ben Bernanke and company the BoJ, ECB and BoE are serial money printers, but they have not printed a volume of paper currency or electronic equivalents that justify these the type of price moves. The actual prices of Gold and Silver had been frontrunning the money printing and to an excessive degree, this meant that the prices achieved for Gold and Silver were at the peak a long way ahead of monetary reality and actual production costs.

This clearly meant that the market was ripe for a fall, back to at least fair value and probably as most markets traditionally react below fair value. I believe that this is where we are today, slightly below fair value. We know this because we can cross reference the market achievable price today for physical delivery, against the mine cost of production. We are now very probably at a good buy point.

I have no doubts that both Gold and Silver will increase in price this is because the very forces that caused this whole bullmarket in the first place are alive and kicking and actually intensifying. Many Gold and Silver bugs cry foul, that the game is rigged. I am certain that there is plenty of market manipulation, BUT believing all these stories and letting them cloud your investing decision making, is a grave mistake. If the market is manipulated downwards with large quantities of paper shorting. It cannot last for very long, and the backlash will very probably not only push the market back up to fair value but very probably way beyond.

This is because the artificially engineered low price, means the product is effectively ON SALE!. This will rapidly increase physical demand, which is exactly what we have been seeing, until not enough physical supply is available at the artificially set low price. At that point the paper market either resets higher to tempt out more physical supply and reduce physical demand OR IT DEFAULTS. At some point the manipulators also have to cover there shorts, and the only way to cover a short is to buy, this also adds buying demand.

It is said that the Central Banks have been leasing out there Gold, It is a free market they are quite entitled to do this. In my opinion not a very clever move, as the huge question remains will they be able to actually get all of there leased metal back? however at some point there will have to be a lot of physical buying by the Bullion Banks to give this metal back to the Central Banks. As well as other Central Banks buying as they build up there gold reserves.

Leasing adds artificial supply and therefore decreases price, as the central banks are effectively "SHORT" there own Gold, This is the Gold Conspiracy viewpoint.

Therefore when they have to cover there "SHORT" by buying and when other Central Banks purchase to raise there own reserves, this is artificial demand that could unfairly rapidly increase price? Is this also a conspiracy?!

The Central Banks are simply another large player in the Gold marketplace. Whatever they decide to do with there Gold is up to them, if they want to sell or lease this Gold that is there decision it is not market manipulation. Likewise if they decide to buy to increase reserves or cover out there leases, that again is not market manipulation. It is simply a large player carrying out transactions for whatever reason at a moment in time, within the Gold market.

Manipulation of free Gold and Silver Markets is when the Governments step forward with Tariffs,( India) sale restrictions ( France) and outright confiscation ( America in the 30,s).

By 2011 and 2012 Gold and Silver had entered "bubble" territory which meant that a lot of people correctly sold out and a lot of people who wanted to short these markets because of "bubble" prices stepped forward to short in large volumes. Hence the large price declines. The Gold and Silver markets were begging to be shorted!

Now we have a market that is actually close to or below the cost of production, so any further price reductions will be met with decreasing supply as mines shut in. We have a lot of shorts that need to cover and are now facing a trade with limited further profit potential, they are nervous. Many of these shorts may be asked for physical delivery and at a point where the physical market is extremely buoyant and very tight because these very same shorts have driven price to an unsustainable low level, actually below the cost of product production for many mines.

Something has to give and in my opinion it will be higher prices leading to increased supply and decreased demand. The shorts need to take Gold and Silver OFF SALE!  therefore market equilibrium for a point in time, until we very probably once again have "bubble" prices leading to decreased demand meeting increased supply. This is how the markets work, booms like 2011/2012 and busts like 2013.

Manipulation cannot work over the long term, and if i am wrong how did Gold move from $250 to $1700? it would seem to suggest that the manipulators were very unsuccessful. Real manipulation is when they erect barriers against free trade and free markets, that is what we must be careful about, they may well do this as the economic situation worsens.



         

Wednesday, 18 December 2013

Ukraine December 2013

I have just returned from a few days in the Ukraine, with my wife who was a Ukrainian Citizen, we travelled to see her family in the city of Nikolaev.

I have been to the Ukraine many times before, my wife actually owns property there. It is a very interesting country and certainly very different to Western Europe and also Eastern Europe, both of which i have travelled to extensively. The last time that i was in Ukraine was in 2004 during the Orange Revolution this was a period of great hope for the future. I was actually living in the country at the time.

This hope was wasted, the major political players behind the Orange Revolution preferred to line there own pockets rather than genuinely try and reform and move the whole country forward, it was a great opportunity that was squandered. One of the very major problems that i observed first hand during the election process that gave birth to the Orange revolution was the monstrous divide between the pro European west of the country and the eastern pro Russian part of the country. In the West Viktor Yuschenko the leader of the Orange revolution was polling 80% to 95% of the vote. However in the east of the country Viktor Yanokovich was also polling 80% to 95% of the vote. My immediate thought is that with such political polarisation this was going to be a very difficult country to manage.

During my time living in the Ukraine in 2004 the other things that struck me was the appalling state of nearly all the infrastructure. The centres of the large cities are ok, but travel a few metres away from the centres and it rapidly falls apart. It was obvious that the Ukraine had a desperate struggle against time to turn its economy around so that it could fix its ailing infrastructure.

Natural gas in the west has always been seen as a valuable resource, our infrastructure and homes are built around this obvious fact. A legacy of the old Soviet Union is that Gas was regarded as a virtually free resource, this was true of all energy in general. So homes were not designed to be in any way energy efficient, add this to a failing communist economy and it means a terrible standard of home construction, in particular apartments where the vast majority of the population actually reside.

These homes are very energy inefficient, the country has a cold winter climate and therefore a voracious appetite for gas. The problem is that with the collapse of the Soviet Union gas is no longer free it is very expensive. The European free market wholesale rate today is $1096 per Thousand Cubic Metres. The Ukraine has been paying a "Special" rate of $410 per Thousand Cubic Metres. The state owned gas company Naftogas then charges the Ukrainian people a rate of just over $120 per Thousand Cubic Metres used. The massive losses are simply added to the Naftogas balance sheet, it currently has a $21 billion debt and growing rapidly on a daily basis. This is inevitable when you only charge the end user 29% of the actual wholesale price that Naftogas is being charged, and only 11% of the true free market price.

This problem was compounded for many years, by weak collection of gas bills due, and an acceptance and understanding by the population that Gas and energy were still basically free. This has somewhat changed as collection policies are far more aggressive and the population because of the cost pressures economise.

However they are trying to do this against a legacy of poorly designed, poorly built, ageing, and fuel inefficient homes. This means that the Gas price is a major political problem for any politician, which is why the ongoing gas problems of the Ukraine refuse to go away.

The other major problem in my opinion is that the majority of eastern European countries were desperate to throw off the yoke of the Soviets and Communism. They genuinely wanted there own independent and European future, which is why they so quickly embraced NATO and the EU.

Russia did not see itself and with a lot of justification as another economically small European country, they see themselves as being DIFFERENT and a counterweight to the EU, and China and the USA. To add gravitas to this belief they are trying to form a new kind of Soviet Union, which will include amongst others the Ukraine. However at this point we run straight back into the problem of the Russian east of the Ukraine being for this, and the Nationalist west of the country being very much against this.

The problem with Russia being DIFFERENT is that this difference does not really translate into a viable economic reality. Outside of the two major cities Moscow and St Petersburg where the wealth of the country has been concentrated, the infrastructure problems are acute and similar to the Ukraine. The other major problem is that the wealth that is so concentrated in Moscow and St Petersburg is largely from resource extraction, this valuable natural gift is being squandered with very few benefits for the majority of the ordinary Russians.

I am very doubtful that with the current Russian/Ukrainian way of managing economic and business affairs, both countries will be incapable of solving there acute infrastructure problems, and also moving the general standard of living for there people forward, and not just a small minority who live in Moscow, St Petersburg or Kiev. I just do not see this happening, for the average person i see at best stagnation and in reality a worsening of an already dire situation.

This situation is compounded as the people in positions of power. Politics, Economics, Education, Business are of an age and a generation that grew up under communism.They think and act like the old communist bosses. It really is a situation for the future of the Ukraine, of the blind leading the blind. So much of the culture is also still ideologically aligned against capitalist success and the modern interconnected world that the Ukraine now lives in. You feel that they really want to do it all there way, but there way cannot and never could actually work. To paraphrase Obama it really is time for change, different thought patterns, and an understanding and acceptance of reality, and new younger blood not tainted with a communist past.

It also seems that the USA has lost interest in the Ukraine as has the EU and the IMF. This is largely because of so many broken promises, and a general failure to meaningfully move forward. Because the Ukraine's economic, infrastructure and political problems are so large, it looks to me as if they are now taking the viewpoint over to you Vladimir Putin?

Today it looks as if Yanokovich and Ukraine have signed a "deal" with Putin and Russia. The reality is that he had no choice, time had run out for the Ukraine. Gas bills and Debt payments need to be paid, and the country is desperately short of foreign currency to actually pay these bills, so the time was now.What will be very interesting to watch will be the reaction of western Ukraine to this "deal" if the protests fizzle out over the coming months, then Ukraine will be integrated further into Russia.  

Do i feel that Ukraine would have been better served with an EU solution?. For the average Ukrainian YES. The EU is an organisation that has plenty of its own problems, but at least it has the basis for a more just, honest and prosperous society for the Ukraine, IT PROVIDES THE BASIC TEMPLATE.

I simply feel that the natural Russian and Ukrainian way of doing business and understanding of economics is very limited, somewhat crude and simply does not work very well, so much of the culture is still based in the communist past. This is why considering both countries large size and large and diversified natural resource bases, they always seem to languish in the international business and economic league tables. They are serial under performers, in particular the Ukraine.

Looking at the GNI or Gross National Income per Capita on a purchasing parity basis, we see

USA            $50,610
EU Average $34,519
Russia          $22,720
Poland         $22,162
Ukraine        $7,300

Or actual size of economy's by GDP ( GDP is not a good statistic, please see my previous blog, but in this instance it is a relative statistic)

USA         $15,684  Billion
EU            $16,690  Billion
Russia       $2,022    Billion
Poland       $489      Billion
Ukraine     $176      Billion

I use Poland as an example because it has many similarities with the Ukraine geography,climate,culture and recent communist history. Its size is 304,000 Square Kilometres and it has a population of 38 Million People. Ukraine is 603,700 Square Kilometres and has a population of 45 million.

However using the EU template as opposed to the Russian template it has dramatically outperformed the Ukraine, and despite not having Russia's vast size and resource's has a standard of living for the average Polish person, nearly identical to the average Russian. I would also suggest that in Poland the wealth is also far better spread across the greater population, rather than some billionaire oligarchs, and concentrated wealth in Moscow and St Petersburg and near poverty elsewhere.

To conclude, i am not very hopeful for the future of the Ukraine to many opportunities over the last 20 years have been squandered. The West has largely given up on the Ukraine, which only leaves Russia, but i just do not see Russia providing a viable solution and workable template that will move the Ukraine forward.  





Saturday, 7 December 2013

Property and the exponential function

Imagine mortgage rates like they were in 1980 at 20% and imagine them in 2010 at 4% the same as today, we have a 30 year period of declining interest rates. Interest rates simply price the cost of borrowed money, it was the movement downwards of these interest rates over the last 30 years that caused the huge property bubble in most western countries and the implosion of the financial system when it inevitably collapsed.

Western Governments were going ever more into debt throughout this whole period, they therefore needed a lower interest rate, or a lower cost of money. I contend that it was this lowering of interest rates to facilitate the western governments growing indebtedness, that spawned the runaway and out of control housing bubble.

The problem is actually very simple when interest rates were at 20% and you reduce those rates by 1% to lower the debt carry cost for the Government, you also reduce the cost of money in the real economy, so you have the beginnings of the start of the boom. If you can afford a $100,000 mortgage at 20% then at 19% you can afford a $105,263 mortgage, or just over 5% more. However this applies to everyone, so you have a mass of people now willing to go into more mortgage debt as the debt service costs actually remain the same. This increase in mortgage borrowing meets a more fixed and inelastic supply of housing = Property rises.

The Government is happy as its own interest cost is not increasing, people are happy there major asset increases in value, and business is happy as its interest costs decrease and potentially there are some new "consumers"  who are extracting equity from there higher valued properties.

By Reducing interest rates from 20% to 19% you have effectively cut the cost of money by 5%.

The Government keep borrowing so they need to drop rates again, this means mortgage rates lower once again, which means a lower cost of money and therefore bigger mortgages and house price rises again.

Keep this process going and eventually you hit 10% which is a full 50% lower than 20%. So if you could afford $100,000 debt at 20%, you can afford $200,000 at 10% the same function applies to the Governments debt which keeps growing.

So time to lower rates again from 10% to 9% however this time lowering rates by the same 1% as when they were lowered originally from 20% to 19% means a 10% drop in the cost of money and not 5% as before.

This process continues as the Government always needs to sell more debt, until we reach 5%. Now at this point if you could afford $100,000 at 20% and $200,000 at 10% you can afford $400,000 at 5%. We now have a huge property boom in full swing, and a huge rise in Government debt which can all be funded at the new low rates, Politicians love this "new normal" as they get to promise lots of money they do not have, to win votes at election time.

The Government still need more money as they have promised a lot of people a lot of "entitlements" to get votes, so we eventually end up at 0% for short term Government debt costs, and 3% for longer term debt and 4% for Mortgages. This is because, why would you lend to an American family for less than the cost of lending to the American Government whose security is the American Taxpayers?

So if you can afford $400,000 at 5% a fall to 4% means you can afford $500,000 a full 25% bigger mortgage. Now lets just stop there for a moment, when we dropped rates from 20% to 19% the same 1% fall meant that instead of a $100,000 mortgage you could afford $105,263 or a 5.26% bigger mortgage.

This exponential function is what drove property to insanity in 2008, and led to the implosion of the whole banking sector which was leveraged into this exponential madness. The situation now, is that there is no driver in the property market to drive prices any higher thank god! sanity returns. However we have millions of people now stuck in vastly overpriced houses that they cannot afford, they are very susceptible to rising rates that the dreaded fed tapering may entail. They have therefore hunkered down and are not spending in the real economy which still remains in deep trouble. They are simply surviving.

The Government as usual still needs more debt, but can no longer afford the interest rate that a free Bond market would dictate, so they have resorted via the Federal Reserve to counterfeit the currency that they need to continue to operate, it has come to this, and it is called Quantitative Easing or easing the quantity of currency. I refuse to call it money, it is simply bits of paper so it is only currency, it has no real value.

Because the real economy is very subdued, and because of the Governments counterfeiting to try and keep the party going for a big longer. We now have real inflation that is a long way ahead of income increases for the average person, this is leading to major living standard squeezes. If you are already struggling with your huge mortgage brought about by the exponential function, explained above. This is simply making matters much worse. God forbid if interest rates on the mortgage begin to actually rise.

We have had 30 years of falling interest rates, mandated by Governments refusal to live within its means that set off a massive property bubble and bust. They still refuse to live within there means and they have now resorted to counterfeiting money to survive, we also have the not insignificant problem of the baby boomers retirement directly ahead.

Alexander Fraser Tytler:

"A Democracy is always temporary in nature, it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship". 








     

Thursday, 5 December 2013

GDP? its a pointless statistic

If one statistic lies above all others it has got to be GDP and very closely followed by the "Official Inflation Figures"

GDP is simply a guess as to Turnover or Revenue of the whole economy, but there are so many approximations, so many guesses, so many substitutions, so many assumptions, and frankly so many lies contained within the methodology it is a pointless statistic.

The raw figures are always overstated so that Politicians can say " Our Debt is not so bad in relation to our GDP" i have one big question? are we going to pay back our debt with GDP?

A far better statistic is to compare the size of the Governments debt against its actual income ITS TOTAL TAX REVENUE. That would be quite an eye opener and proves beyond any reasonable doubt what a real financial mess all western governments are actually in.

The other farce regarding the GDP numbers is that to allow for inflation a GDP "Deflater" is used.The problem is that the deflater bears little resemblance with actual true inflation reality. One bent statistic now collides with another bent statistic.

This is because official inflation figures are used as the deflater, the problem is that these same official inflation figures do not actually measure TRUE INFLATION they radically understate true inflation,which means that GDP is therefore always radically overstated.

Compound this overstatement over many years and the GDP figure becomes ridiculous. If a true and honest rate of inflation was used as the deflater then there has been no growth, i repeat NO GROWTH in the western economies since millennium night, in reality we have quite dramatic negative growth over this same period.

Bent and meaningless GDP figure - Artificially low rate of inflation as the deflater = pointless statistic

All debt accrued by the Government will be paid if at all! out of tax revenues. Therefore simply compare the Governments debt against the same Governments total tax revenue, that is the only ratio that matters.  It is also an extremely easy and accurate number to calculate, and wholly relevant. The GDP number is a farce to hide the real mess that Governments have now got themselves into. Debt will be paid from Tax income, so all you need to do, is quantify the debt and quantify total tax income. That will show how many years it will take to pay off all the Government debt, it is a frightening figure for all Western Governments.

Tuesday, 3 December 2013

S&P 500 Non Predictions

We have had a tremendous year at Trendinvestor Capital Management trading the S&P 500 in 2013, it has truly been a vintage year.

What will happen in 2014? Honest answer, i really have not got a clue.

One side of me says BIG BUBBLE FORMED and time to get out, but i felt that at the end of 2012 as well and look at what has happened since.

The other side of me says, that i do not think that the FED can taper in any meaningful way, without spiking interest rates as the bond market falls. Remember the FED are very rapidly becoming THE BOND MARKET !!!

Therefore $85 Billion a month and all the other money printing going on around the world provides lots of firepower to keep the market chugging higher. We have also had a breakout this year from the 2000 and 2007 peaks, that is a bullish sign without doubt.

So no real prediction for 2014 ! SORRY !!. It all comes down to trading correctly what you are given.

Market goes up, i am a BULL, market goes down i am a BEAR. My opinion simply does not count, it is just one of millions

I learned a long time ago " Lose your opinion, or lose your money"    

Monday, 2 December 2013

Gold and Silver

I do not like to give too many opinions as regards the markets as they can have a habit of proving you wrong!. i prefer to trade what we are given.

However i have a real interest in THE REAL MONEY markets which are Gold and Silver not the idiotic PAPER CURRENCY markets. I watch people trying to trade the FX markets, you are wasting your time. That is because there is simply no driver in those markets, you are simply trying to pick out the least ugly if you want a LONG position. Or most ugly if you want a SHORT position, they are still all ugly paper currencies, and they are all being debased at a furious pace against the only true REAL MONEY which is Gold and Silver.

When they say that the price of Gold is going up, how can it? it is the same 1oz of Gold !!! what is happening is that the measuring unit of that 1oz of Gold the Dollar or any other paper currency is going down in value

Price inflation of gold = Deflation in the purchasing power of the paper currency measuring unit. It does not matter whether that is the Dollar or Euro or Pound or Yen or any other paper currency.

Have a look at a monthly chart of Gold and Silver and you can clearly see a long term trend line going back to the very start of this bull market in 2002/2003. you can also see the IN FORCE down trend line from April 2011. This is the trend line that is in force and dictating price action at the moment IT NEEDS TO BE RESPECTED. The Gold bugs can say whatever they like, but at the moment the price is trapped in a bear market and has been since 2011 that is a simple and undeniable fact

My thoughts are that, the down-trend line is about to collide with the long term up-trend line, The up-trend line defines the primary trend and is the most dominant. I believe that this line will hold, price will then be forced up through the down-trend line, which will be negated and the bull market resumes.

To conclude since April 2011 we have been in a bear market that i believe is contained within an ongoing bull market. I expect some time in 2014 a resumption of the Gold and Silver Bull Market.

At this time pessimism as regards the Gold and Silver markets will be at an extreme, there will be a lot of very afraid people.

" When everbody is afraid, be BRAVE"

That will be a very good BUY point 
We opened up a demonstration account with CMC markets to try out some new ideas related to our system that trades the S&P 500. The account started with £10,000. This account was open on 13/08/2010, we traded up until 12/04/2013 so 33 months in total.

We then took a holiday for 6 months and did not trade this account again until 7/11/2013, so it has now been trading for one more month. For a total of 34 trading months.

The account as of 2 minutes ago stands at £60,244 for a gain of 502.44% in a total of 34 trading months.

I can provide to any interested party for verification and audit purposes, our CMC Markets account details and records, and also CMC Markets themselves will verify this performance. 
I just cannot see how the Federal Reserve can in any way taper in a meaningful way. They provide $85 billion a month in artificial demand to the Bond market that is a lot of fire-power. They are keeping yields which are the reverse of the bond price artificially low. If they take away this artificial demand away then bond prices fall and yields head higher.

If you look at the Treasurys bond issuance requirements there is no real austerity, the need to sell more new debt via the bond market will only rise with time as more of the Baby Boomers retire. They are already retiring at the rate of 10,000 per day.

If they taper at all which somehow i doubt, it will be very small and basically symbolic. When the bond market inevitably falls in response,and yields spike higher, QE will be back with a vengeance.

Sunday, 1 December 2013

For November 2013 the live account was up by 8.03%. This account although very small, uses real money and is really an experiment to showcase our system, its validity and its authenticity, but also to prove that even with a small account and a long term, patient attitude it is possible to grow this into a large account.  
I have opened up this new blog for my company Trendinvestor Capital Management our website is at www.trendinvestor.info and you can follow us on twitter @TrendCapMan.

We have had a lot of success over the last 19 years trading ONLY the S&P 500 via the various derivative products Futures Contracts, Mini Size Futures Contracts, Spreadbets and CFD You can see all of our results at our website.

As an experiment on 1st November 2013 we have opened a small live trading account with £5833 we have margined this account at our usual 3 to 1 and you can follow the evolution of this account over the coming months and years, so that you can see all of our reported profits and all our losses.

This account will also show that it is possible to build a considerable sum of money from a small initial account, the key is patience, it takes time!

However the wonders of compound interest should help!