Despite a pullback from its all-time high of about $1,920 an ounce set in September, gold is still trading in the $1,750 range. In fact, the glittering metal has gained 22% in the past 12 months. What's more is that I believe gold prices will eclipse $2,200 an ounce next year, and shoot beyond even $5,000 an ounce after that. So there's obviously still time to get in on this once-in-a-lifetime bull-run, if you haven't already. Of course, every investor should at least have shares of a gold-based exchange-traded fund, but if you really want to profit from the price surge, you ought to look at gold mining companies. Let me explain.
So much for engineered stock market "rallies" and global "bailouts" - per the latest ICI update, we can now confirm that no matter how or what the market does, retail investors have firmly decided that the ridiculous market volatility is simply too much for most, and have withdrawn another $3.7 billion from domestic equity funds, and have now taken out money for 14 straight weeks ($44 billion) since the US debt downgrade (but, but, the S&P barely lower), or 31 weeks ($130 billion) if one ignores the statistically irrelevant blip of a $715mm inflow on August 17. Perhaps instead of trying to fabricate a makeshift price for the SPX which nobody believes any more, the Fed should focus on moderating the insane volatility which is the primary reason preventing any normal investors from putting cash into stocks. And yes, $6.2 billion went into bonds, despite the record low yields. Said otherwise, retail investors have withdrawn $214 billion from domestic equity mutual funds since the beginning of 2010. Put a fork in stocks: America's infatuation with the stock market is officially over.
World markets got a nice tailwind yesterday (Wednesday) on news that the U.S. Federal Reserve is stepping into the fray along with other central banks to boost liquidity and support the global economy. Of course it's nice to see stocks get a hefty boost, but to be honest I'd rather see them rising on real news. Not that this isn't a good development in terms of stock values - but come on, guys. When things are so bad that the Fed has to step into global markets and bail out the other bankers in the world who can't wipe their own noses, we have serious problems. Think about it. The Fed is going to collaborate with the European Central Bank (ECB), the Bank of England (BOE), the Bank of Japan, the Swiss National Bank and the Bank of Canada (BOC) to lower interest rates on dollar liquidity swaps to make it cheaper for banks around the world to trade in dollars as a means of providing liquidity in their markets. Put another way, now our government is directly involved in saving somebody else's bacon at a time when, arguably, we don't have our own house in order. The Fed is cutting the amount that it charges for international access to dollars effectively in half from 100 basis points to 50 basis points over a basic rate. The central bank says the move is designed to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credits to households and businesses and so help foster economic activity." Who writes this stuff? Businesses are flush with more cash than they've had in years. The banks are, too. But the problem is still putting that cash in motion -- just as it has been since this crisis began.
With stocks plunging and gold and silver still consolidating, today King World News interviewed billionaire Eric Sprott, Chairman of the $10 billion strong Sprott Asset Management. KWN wanted to Sprott’s take on the ongoing financial crisis and where we are headed from here. When asked about the German bond auction, Sprott responded, “The results were that they (Germany) only sold about 65% of the issue on offer. Rates went up a little, but the fact that the Germans, who would have been regarded as the number one credit in Europe, couldn’t sell, I think it was a $5 billion euro issue, and they couldn’t sell it, I mean it’s truly shocking.”
And so the wave of beta chasers has once again be caught flat footed. Following the 11% jump in the S&P, hedge funds, which are now down 2% YTD (more on that shortly) and getting killed with redemption requests, it was only natural that in focusing solely on performance and not on fundamentals, that margin debt would increase. Sure enough, the NYSE has reported that in October, margin debt jumped by $21 billion, the most since June 2007's $25 billion... just in time for the market rout. And as funds levered up yet again, net worth, which nets out free credit cash accounts and cash balances in margin accounts, plunged by $46 billion, the most since the Lehman collapse which saw net worth implode by $184 billion. And just as the market ramped for no reason in October, it has now already retraced almost half the gains in the prior month. Oops.
One Canadian entrepreneur may well be forging an innovative path to changing the global banking landscape - for the better. And in the process he may build the world's safest bank. Eric Sprott, the billionaire resource investment guru, is buying 51% of Ontario currency trader Continental Currency Exchange Corp., with the aim of making it into a financial institution that, refreshingly, will not make loans. That's not a misprint. Sprott plans to structure his new Continental Bank to take deposits and generate income from currency trading and by selling precious metals. True private banks already operate on this model. They lend no money. They simply take deposits, provide brokerage, custodial, and management services, and charge a commensurate fee. But often their minimums are $1 million and up, leaving most depositors with only standard banking options. And right now, those options aren't very appealing.
In today's politically charged atmosphere, it's nice to occasionally find a situation in which everybody wins. And that's exactly what we have with the collapse of MF Global. Politically, this failure unites both liberals and conservatives. Liberals can rejoice, rightly, that Wall Street's pushback against the "Volcker Rule" - the provision in the Dodd-Frank act that said banks should not engage in proprietary trading - has been exposed as completely spurious. And conservatives can rejoice in the come-uppance of a man who represented the worst of modern Wall Street's obsession with trading and flirtation with left-of-center politics. Indeed, Jon Corzine turned Goldman Sachs Group Inc. (NYSE: GS) from a respectable corporate finance house into a dodgy trading-dominated casino. And, as if that weren't bad enough, he pushed New Jersey to the edge of bankruptcy. What a career! Of course, apart from enjoyable schadenfreude on both sides, there are lessons to be learned. But before we get to exactly what those lessons are, we must first perform an autopsy on MF Global to see exactly what went wrong.
After European leaders announced a plan to stem Eurozone and global panic over Greece's potential default and shore up capital at beleaguered banks, positive contagion is lifting stock markets from one end of the planet to the other. What's not to love? Well, the plan itself, for one thing. It's so full of holes that unless it's tightened-up, detailed, actually agreed to, financed and executed, it's nothing but an outline in the sand. Don't get me wrong, it's a start. But, the question investors have to ask themselves is, if the plan isn't written in stone and if they've missed this rally, is now the time to jump back into equities? The answer is yes and no. Understanding where the risks are and how to position yourself to profit on the heels of this new global positivity requires looking at the European bailout plan as proposed, and measuring it against the realities constantly unfolding in the future. Let's start with the plan and measure it against what you should be watching in the days, weeks, and months ahead.
Editor's note - It may surprise more than a few gold devotees to learn they have an ideological friend in none other than Federal Reserve Board chairman Alan Greenspan. Starting in the 1950s, in fact, Greenspan was a stalwart member of Ayn Rand's intellectual inner circle. A self-designated "objectivist", Rand preached a strongly libertarian view, applying it to politics and economics, as well as to religion and popular culture. Under her influence, Greenspan wrote for the first issue of what was to become the widely-circulated Objectivist Newsletter. When Gerald Ford appointed him to the Council of Economic Advisors, Greenspan invited Rand to his swearing-in ceremony. He even attended her funeral in 1982. In 1967, Rand published her non-fiction book, Capitalism, the Unknown Ideal. In it, she included Gold and Economic Freedom, the essay by Alan Greenspan which appears below. Drawing heavily from Murray Rothbard's much longer The Mystery of Banking, Greenspan argues persuasively in favor of a gold standard and against the concept of a central bank. Can this be the same Alan Greenspan who today chairs the most important central bank of them all? Again, you might be surprised. R.W. Bradford writes in Liberty magazine that, as Fed chairman, "Greenspan (once) recommended to a Senate committee that all economic regulations should have fixed lifespans. Senator Paul Sarbanes (D-Md.) accused him of 'playing with fire, or indeed throwing gasoline on the fire,' and asked him whether he favored a similar provision in the Fed's authorization. Greenspan coolly answered that he did. Do you actually mean, demanded the senator, that the Fed 'should cease to function unless affirmatively continued?' 'That is correct, sir,' Greenspan responded." Bradford continues, "The Senator could scarcely believe his ears. 'Now my next question is, is it your intention that the report of this hearing should be that Greenspan recommends a return to the gold standard? Greenspan responded, 'I've been recommending that for years, there's nothing new about that. It would probably mean there is only one vote in the Federal Open Market Committee for that, but it is mine.'"
Even while gold, silver, and platinum steal most of the headlines, there are stealth bull markets advancing in other precious metals. Take palladium for instance. Indeed, while platinum may have the prestige, palladium has the profits. Palladium has seriously outperformed its sister metal over the past year: Its price has soared 57%, compared to a mere 23% increase in platinum prices. Platinum is still trading 24% below its 10-year high, which was set at $2,273 an ounce in early 2008. But palladium just this past February established its own 10-year peak at $858 an ounce - and at about $743 per ounce now, it's just 15% shy of that mark. And that's despite the massive sell-off we've seen in precious metals over the past few days. Furthermore, the outlook for palladium - from both fundamental and technical aspects - is decidedly positive. All that's left is for palladium to take out the $858 an ounce target it set earlier this year. Once that happens we could be looking at a blue-sky breakout for the unsung metal. So let's take a closer look.
