Month: June 2012

By MoneyMorning.com.au

If you needed any further evidence of how trying to subvert natural forces is utterly destructive over the long run, look no further than Europe…and then perhaps China…and then…where do you stop?

For now, I’ll stick with Europe. The situation there is ruinous. EU elites are sacrificing the Greek and Spanish societies to maintain the façade of a workable monetary union and protect the banking system. The story is an old one, but it’s worth looking into again.

You can’t fight against nature and expect to win. Not in the long run. The European Monetary Union (EMU) is a flawed concept and the depressions in Spain and Greece are testament to that. Making matters worse, the Eurocrats demand fiscal austerity and deny exchange rate flexibility to ‘help’ these countries make the necessary economic adjustments to stay in the Eurozone.

This obviously matters for Australians. Every time Europe flashes red, global markets swoon. Our market and economy – perched on the edge of the world, open and exposed – seem to cop the brunt of the fallout. That won’t change anytime soon.

That might not be a soothing thought. But I want to show you why letting nature take its course in Europe would be a good thing, and why falling share prices would also be a good thing.

Why?
Because it would finally signal nature triumphing over the manipulators’ attempts to create wealth from nothing and ignore losses. Only then would the global economy be in a position to generate wealth – in a sustainable manner – again.

But the longer this game goes on, the more interference and bailouts inflicted on the market, the greater the final denouement will be. Let’s take the recent events in Spain as an example.

Spanish Influenza

The country’s banking system is imploding. Years of abundant credit (a product of the flawed EMU) created a historic housing bubble. Now the market has turned the credit tap off, exposing the overinvestment. Bad debts infect the Spanish banking system.

The Spanish Bank ‘Bankia’ is the poster child for this banking sickness. Formed in December 2010 from the consolidation of seven regional ‘cajas’, the Spanish government initially injected €4.5 billion into the bank.

That amount predictably evaporated and Bankia is now subject to a massive recapitalisation plan. The government has committed another €19 billion to the bank. Except the government doesn’t have the cash. It must borrow it. And the market is not too keen on giving Spain more cash to bail out the banks.

Spanish bond yields reflect this reluctance to lend. The 10-year yield is now over 6%.  This is a prohibitive interest rate. It makes it very hard for Spain to grow out of its debts. The interest rate plays a major part in ‘debt dynamics’. This is the trajectory of a country’s debt-to-GDP ratio.

All you need to know to work out a country’s debt dynamics:

• What is its economic growth rate?
• What is the interest rate it pays on its debt? And…
• What is the country’s primary budget balance (i.e. before interest payments) as a percentage of GDP?

To get the change in debt, subtract the growth rate from the interest rate. Then subtract the primary budget balance. To have any hope of reducing debt, you want that equation to produce a positive number.

Spain is in recession, meaning its economic growth rate is negative. It has a budget deficit. And its interest rate is very high. This points to a rapidly deteriorating debt-to-GDP ratio…Spain is on the slippery slope to a bailout.

And given that the problems at Bankia are just a reflection of the whole Spanish banking system it looks like the country will need assistance. I predict you’ll see Spain join Greece, Ireland and Portugal in the bailout lounge.

What does this actually mean? In practice it means the market has shut off Spain’s tab. The EU rescue fund will need to fund Spain at a much lower interest rate to help improve its debt dynamics.

But here’s where things get interesting. The Spanish government is itself not massively indebted (its debt-to-GDP ratio was around 70% at the end of 2011, forecast to rise to 80% in 2012). The problem in Spain is the household and banking sector, weighed down by debts from the property bust.

So if Spain does get a bailout, it will be a bailout of the banking sector.

Greg Canavan
Editor, Sound Money. Sound Investment.

From the Archives…

How Bad Monetary Policy Will End the Welfare State
2012-06-01 – Dan Denning

The Setting Sun of the Japanese Economy
2012-05-31 – Greg Canavan 

The US Dollar – The “Strongest of the Weak”
2012-05-30 – Kris Sayce 

Europe’s Energy Resource Puzzle
2012-05-29 – Kris Sayce 

The Market Has Crashed, But This Graphite Stock Has More Than Doubled
2012-05-28 – Dr. Alex Cowie

Why You Should Wish For a Falling Market

By MoneyMorning.com.au

May was quite simply a nightmare month for investors.

The ASX200 lost 7.3% in a month – its worst result in 2 years. Half the market is still shell shocked. So this Queen’s birthday long weekend gives us a welcome breather.

With the good ship China creaking and groaning as it decelerates, resource stocks were some of the worst effected. The ASX300 Metals and Mining index (XMM) lost 12%.

Most hedge funds lost money. Despite clever trading strategies, the average hedge fund lost 1.6% in May according to analysts Hedge Fund Research Inc.

So with this backdrop, it was a very unlikely time for my latest Diggers & Drillers tip to gain 154% during the month…

Those readers who bought this stock saw the share price more than double in just 2 days, on the back of incredible drilling results. And this happened just as the market was going through its worst few days of the month.

Frankly there are very few places to make money in this market right now.

So it’s very satisfying to help readers more than double their money – particularly when the rest of the market is going down in flames. Putting opportunities like this in front of my readers is what gets me out of bed every morning.

This sector, which is still making investors money now, is graphite.

After May, the ASX200 is now right back to where it started the year.

That’s a big fat ZERO percent gain for the Aussie market.

In stark contrast, graphite stocks have had an incredible 2012 so far:

The ranks are growing too. In just the last month, we’ve seen stocks like Kibaran appear on the radar.

This is what happened on the Canadian resource market. There is so much money to be made in graphite that the number of graphite stocks tripled in the space of a year. Some huge gains are being made by jumping on the stories at the very start.

But why is the graphite sector booming at a time like this?

In short – the opportunity has been quietly building for a few years. But the market only spotted it this year.

The graphite price has been rising strongly for a while. In fact, between 2008 and 2012, high quality graphite tripled in price. The price is still rising now as demand increases faster than supply.

Graphite Price Quietly Tripled

But the whole time the price was rising, no one seemed to be watching.

Then word got out a few months ago, and travelled quickly around the market. The price of graphite stocks are now making up for lost time.

It’s not simply a supply and demand story though.

Graphite is a ‘strategic mineral’, which means the supply is unreliable and prone to disruptions…

Graphite – Nearly All of it Comes From China

People are being very quick to brush graphite off as a bubble. The quick assumption is that it is ‘the new rare earths’. Some similarities are there: both are obscure strategic minerals, both are controlled by China, and both sectors went off like a rocket.

There is one very important difference.

There are different types of graphite, and the type of graphite investors are after is ‘flake graphite’. This makes up about a third of the market, and has the highest demand growth.

And when it comes to flake graphite – China has very little of it. China is in fact an IMPORTER of the stuff.

Rare earths prices have soared and then crashed as China kept changing its rare earths export policies.

But flake graphite’s current price rally has nothing to do with Chinese policies.

This is important because it means China hasn’t got the power to bring the price back down again, as it did with rare earths.

China’s power over rare earths prices was the key reason I side-stepped the whole rare earths frenzy a few years ago, and never tipped any rare earths stocks in Diggers and Drillers.

In direct comparison, the flake graphite price rise is not at the mercy of Chinese policy, and so is far more sustainable.

So I think those dismissing graphite as the latest hot commodity will be very surprised at just how long this graphite stock rally will run for.

And also just how much money savvy investors will make from investing in the right graphite stocks.

Dr. Alex Cowie
Editor, Diggers & Drillers

Related Articles

Market Pullback Exposes Five Stocks to Buy

This ‘Strategic’ Minerals Stock Has Just Doubled: What to Do Next

Europe’s Energy Resource Puzzle

Why Graphite is One of the Few Places For Savvy Investors to Make Money

By Taro Hideyoshi

As you may have read, I wrote an article to give you the idea what the strategy traders are. I also wrote another one to let you know a few benefits of strategy trading over other methods of trading.

And here, in this article, we are still talking about strategy traders. Actually, it is the complete strategy traders.

So, who are the complete strategy traders and what are the differences between the regular strategy traders and the complete strategy traders?

The complete strategy traders are traders who have learned to use advanced cash management principles, trade in multiple markets, and may also trade multiple strategies in each market.

The successful traders realize that the most important keys to make money in long run is how they manage their money, not what method or indicator are used.

While most traders are trying to predict the market and looking for the Holy Grail method or indicator, the successful traders are not. They understand that strategy trading is not unlike most other businesses and, as a result, have turned their trading into a sophisticated business based on sound business principles.

In order to be a successful in trader, you have to treat your trading like doing a business. From my experiences, I have realized that many successful business do not possess the best products but they are still leader in their business. It is because they manage their business effectively.

For example in the restaurant business, it is not only the food that makes a successful restaurant. It needs more than good chef and good food such as costs and services. However, the key is to master in restaurant management. You can see it clearly in fast food business where selling bad food but still in business.

It is the same in trading. Traders have to understand trading management to be able to become successful. Trading management is nothing to do with indicators. Of course, you have to use solid indicators in order to enable you to make money. However, the trading management is another thing, it is how you manage your money, your cash flow, your risk also your trades. And you have to manage them effectively.

Successful traders are traders who understand that more than simply a great indicators or trading system is needed to be successful.

So, if you want to be one of a successful traders who trades strategy, you need to be a complete strategy trader.

About the Author

Taro has strong will to share his experiences to others who are living in hard economic times like these days and trying to survive in financial markets. So, he has written and published articles on subjects such as personal finance, investment and money management.

His articles could be found at the websites – eFinanceZine.com & MetaStockTradingSystem.com.

By Amy Calistri , globaldividends.com

$7,200 in Dividends From a $10,000 Investment

It’s the most lucrative investing strategy I’ve ever found. It won’t happen overnight, but I’m convinced anyone can earn a significant amount of money with this strategy.

Let me explain…

Over the past few weeks, I’ve shared the details of my “Daily Paycheck” strategy (you can read those issues here, here, and here).

Consider your typical income portfolio. It holds a position in a few dividend payers and maybe a fund or two. You get paid occasional dividends, that’s for sure. But because you only hold a few positions that pay quarterly dividends, the income you receive is inconsistent.

That’s where my “Daily Paycheck” strategy is different. The goal is to build a high and steady stream of income. And as I’ve told you before, I want to build a portfolio that pays a dividend for every day of the year.

So right now, I’m earning more than 30 dividend checks a month from my portfolio. At the same time, I’m generating an average yield of 7.2%… and that’s when interest rates — which fuel the yields on most “normal” income investments — are their lowest in history.

There’s a major caveat, though. And it’s one that will cause most investors to never take the first step to start their own “Daily Paycheck” portfolio. Most investors don’t have the most important characteristic that allows you earn the greatest wealth via this strategy — patience.

Take a $10,000 investment. In a portfolio like mine that earns an average yield of 7.2%, that amount would earn $720 in dividend income during the year. I wouldn’t sneeze at $720, but it’s just a fraction of what you could earn if you simply let your portfolio pay you year after year.

The table below shows exactly what I mean. It shows how much you’d earn… if you have patience. As you can see, even modest amounts can generate substantial dividends.

Your $10,000 investment would earn a staggering $7,200 in dividends in a decade. And that amount is before any capital gains and ignores any dividend increases.

I want to make something clear… this isn’t a “get-rich-quick” scheme. You aren’t going to invest a few thousand dollars and be buying expensive sports cars or going on exotic vacations.

But I think that’s part of what makes this style of investing so powerful…

See, if you want to become wealthy in the stock market, it’s probably not going to happen overnight. (Just ask early investors in Facebook (Nasdaq: FB)) … they’re already down 26% on their original investment — and the stock has only been trading for a week.)

The key is finding stocks that will pay you consistent dividends… and having the patience to let them grow your wealth over the long-term.

Truth be told, there’s a lot more to share about my “Daily Paycheck” strategy. I’ve been building my own portfolio for more than two years, earning more than $28,000 in total dividends so far. To learn more about how you can do the same — without having to watch a video — you can read my presentation here.

Always searching for your next paycheck,

Amy Calistri
Chief Investment Strategist — The Daily Paycheck

P.S. — Don’t miss a single issue! Add our address, [email protected], to your Address Book or Safe List. For instructions, go here.

Disclosure:  Amy Calistri does not own shares of the securities mentioned in this article. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.

By Carla Pasternak, globaldividends.com

My Best Income Advice for This Market

Your portfolio isn’t the only one that’s taking a beating right now…

U.S. equities across the board have sold-off in the past month. The S&P 500 fell 9% in May alone. That kind of volatility makes it hard for income investors to navigate the market.

But before you give up and empty your portfolio, remember that it’s times like this that present us income investors with the opportunity to pick up high-yield stocks at bargain prices…

But before I get into that, let’s take a look at what’s going on.

After starting the year off strong, the market has taken a turn for the worse. Europe’s debt wars, slowing growth in China and high unemployment in the U.S. have incited fears of another a global recession.

While it’s clear that there is no quick fix to these issues… fears of another financial crisis like the Great Recession of 2008 may be overblown.

Investor confidence is at the lowest level in 20 months and the S&P 500 is now valued at a forward price-to-earnings P/E ratio of 12 — substantially below a long-term average of 16. These metrics could be signaling we’re nearing the bottom of a cycle.

Still, what really matters to investors is how the crisis of confidence is affecting our portfolio positions.

In the past month, investors have dumped speculative growth stocks in favor of the perceived safety of U.S. debt. Ten-year Treasury yields, which move inversely to price, hit an all-time low of 1.44% on June 1. Meanwhile, risk-aversion and a strengthening dollar saw commodities trading at their lowest levels in more than a year. It’s no accident, then, that commodity-related shares are being pummeled as well.

So what’s an income investor to do?

You could sell your holdings. The months of May through October for the last 60 years do have a track record of poor stock returns. But do you really want to lose six months of income?

Sit Tight and Keep Collecting Your Dividends

During a sell-off like this, select dividend stocks may offer some of the best places to park your money.

I have seen a similar pattern numerous times. After the market bottoms, dividend stocks with high-yields supported by steady cash flow rebound with a vengeance.

I am waiting for confirmation of a bottom in the overall market before I commit too much capital… but meanwhile, I’m prepared to sit tight with my existing investments until I see clear evidence that fundamentals have changed or the dividend is endangered.

Good Investing!

Carla Pasternak’s Dividend Opportunities

Disclosure: In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.

By MoneyMorning.com.au

Last weekend, on a sunny afternoon in the Victorian suburb of Bayswater, two men on a dirt bike smashed the glass window of a jewellery store. In 90 seconds they stole about $90,000 of gold jewellery. And then rode off.

The shop was open for business and a staff member and the owner were out the back. They weren’t sure what the ‘banging’ sound was.

But these dirt bike bandits aren’t the only ones pinching gold.

On five separate occasions a Perth man walked into a store to try on a gold necklace. Once wearing the necklace, he’d bolt out the door. Police reckon his stealing binge netted him $70,000 of gold jewellery. The cops only caught him this week.

Before you get a little cynical and cry ‘insurance job’, hear this. The Victorian jeweller didn’t insure his gold. The owner claimed that at the current price, insuring his gold was an expense he couldn’t afford in this economy.

This is an odd risk to take. In New South Wales alone, jewellery store thefts are the fastest rising store robberies. Up 35% since 2008. Even pinching booze has only increased 25%.

How times have changed. Rather than rob a store and demand cash from the till, thieves prefer a real asset. Something with real value.

And why wouldn’t they? With all those ‘gold buyer’ stores in shopping centres, it’s pretty easy to turn the stolen loot into cash. Sure they won’t get the spot price of gold…but hey, they stole it, remember?

Right now, the Perth bandit is yet to face the judge and see how much trouble he’s in. But if the dirt bike bandits are reading this, we recommend they hold onto their ill-gotten gold a little longer.

Because the price of gold is going up…

Central Banks Still Driving Gold Demand

Click to enlarge

The shiny metal is yet to return to its mid-2011 highs, but there’s a suggestion that it has found a floor price.

As reported on a self-confessed goldbugs website, 24hourgold.com, ‘…there are rumors circulating the market of Asian central bank purchases on any drop into the $1500 to $1550 range — a gold call of sorts that puts a floor under the price.’

This tells you central banks are trying to buy up when gold reaches a ‘cheap’ level. And they view $1500–$ 1550 as a cheap level!

Dr Alex Cowie, editor of Diggers & Drillers, has been encouraging his readers to watch central bank gold buying for over twelve months.

On Monday, he told readers about another round of purchases. He said ‘…as a group they [central banks] are huge buyers. Last month central banks from 12 countries, including Russia, Mexico and Turkey, bought 57 tonnes of gold. In reality, China’s central bank should be on that list too — they just don’t declare how much they buy.’

How huge is huge? Less than ten years ago, central banks sold 545 tonnes of gold. And last year, they bought about 440 tonnes. That’s nearly a 1000 tonne swing in a decade.

Even though investment and jewellery make up the largest demand group, central banks now account for 7% of all gold demand.

Gold Demand

Click to enlarge

It might not sound like much, but it actually reflects a very important shift in attitude towards the metal.

You see, the biggest central bank buyers of gold aren’t from Western economies like America, or the UK. It’s the smaller, emerging and developing economies like Mexico, China and Russia.

As the crisis continues to play out, central banks are stocking up on gold for the same reasons we do.

In spite of the volatile prices, gold is one of the few assets that goes up in value when things go wrong. Another is US Treasuries, but we know which we’d rather own.

But there’s a bigger reason why central banks are moving into gold. They’re preparing for the bigger role gold will play in reserve assets. Rather than hold cash, US Treasury bonds or foreign currencies, central banks could choose to load up their balance sheets with something of real value.

So, consider this the time to stock up, or take the big leap of buying in for the first time.

As Alex said recently ‘The one thing I’d say about gold is that it’s not a get-rich-quick scheme. It’s a long-term alternative to holding cash in a portfolio. The trick to making it work hardest for you is buying at the right time.’

And when is that right time?

Now. The gold price is still around $1600 which is a great entry point. Take advantage of buying when the gold price dips down.

If you’re keen to get started in buying some bullion, check out Alex’s tips on how to buy gold.

Shae Smith
Editor, Money Weekend

The Most Important Story This Week…

In 1989 it was perceived wisdom that Japan would overtake the United States as the largest economy in the world. Tokyo was famous at the time as the most expensive city in the world. The Japanese share market was at a huge high. However, that was the peak for Japan. It has suffered a long bear market ever since. The share market has been falling for twenty years.

Investors have often thought the Japanese market couldn’t fall any further along the way. It did. Everyone kept waiting for a recovery that has never come. Most investors think a stock market falls but will rally higher at some point in the not too distant future. The Japanese experience says this is wrong. Australians have been waiting five years already for the share market to head higher than it was in 2007. The question is, will the ASX go up? Or will Australia suffer the same fate as Japan? Kris Sayce give his opinion in How This Bear Market Could Last Another 18 Years… Just Like Japan’s

Other Recent Highlights…

Nick Hubble on Best Investment Strategies For the Times Ahead: “If you think that investing in times like these is difficult, you’re right. Recognising that these events happen regularly is a helpful step to sorting out your investment strategy. Do you simply wait for a lost decade to pass by before jumping into the stock market again?”

John Stepek on Why the Chinese Economy is On the Slide: “Growth in China’s manufacturing sector is slowing rapidly, according to official data. In May, the purchasing managers’ index hit a five-month low, worse than analysts had expected. A separate survey sponsored by HSBC…suggests it is already shrinking.”

Dr. Alex Cowie on The Banking Plan That Could Be A Game-Changer for Gold: “The Basel Committee of Bank supervision, who dream up the rules that govern banks, are looking at turning gold into a ‘Tier One’ asset. This means the banks can carry gold as capital at 100% of its market value – instead of the current 50%. This gives gold a huge increase in status, and effectively turns it back into money at the top level…That’s a pretty incredible thought.”

Martin Hutchinson on Inside JPMorgan’s Magical Fun Palace: “The financial system wasn’t fixed after 2008, and it won’t be fixed anytime soon. The unexpected $2 billion – or is it $5 billion? – loss incurred by JPMorgan Chase “whale” trader Bruno Iksil shows only too clearly the flaws in Dodd-Frank and other regulatory activity. Big banks are still taking risks they simply don’t understand. Worse, there’s no reason to believe the regulators understand them, either.”

When Dirt Bike Bandits and Central Banks Demand Gold

By MoneyMorning.com.au

The gold market is an incredibly complex beast, so I’m going to try and simplify things as much as possible.

To get you in the right frame of mind, consider that the history of gold and humanity has a span of 6,000 years. Think about that. It is a long time. The history of the US paper dollar — and the global financial system that it underpins — spans just 41 years.

Right now, I want you to consider this. ‘But, this game of gold, it is not only hard, but will cost anyone dearly if they try it without all the facts!’

That quote was believed to be written by a banking insider who went by the pseudonym of ‘Another’. The background to Another’s ‘thoughts’ is a long one…it’s a fascinating story that I’ll endeavour to write to you about at some other time.

Think about what that quote means. This person had a profound understanding of gold’s monetary function.

Investing in gold without knowledge of the facts will indeed cost you dearly.

The thing to understand about gold is that it is absolutely crucial to the functioning of the global financial system. In times of market stress and liquidity crises, gold is one of the few assets that can be used as collateral (security) for US dollar loans.

For example, if a bank needs US dollars in a hurry, putting up gold as security is the cheapest and easiest way to obtain the loan. That’s because physical gold has no counterparty risk. And it’s why in times of a liquidity crisis (2008 for example) gold falls in price…because gold is sold short term to obtain dollars to meet short term liquidity commitments.

Paper Gold, Real Gold

But here’s the crucial thing. The London gold market (where most of the world’s ‘physical’ gold trading takes place) doesn’t always deal in physical gold. Unallocated gold — also known as paper gold — features heavily in this market.

Unallocated gold is gold that you think you have ownership of, but really don’t. It’s your asset but the bank’s liability. Unlike physical bullion, there is counterparty risk with unallocated gold. That is, the risk that a party won’t be able to make good on their promise and get your gold when you need it most.

No one really knows for sure, but informed opinion estimates that most gold trading that takes place in London is unallocated, or paper gold trading. As I mentioned, during a liquidity squeeze or crisis the market sells gold to obtain US dollars. As you can see from the USD index below, since the start of March the USD has been in strong demand.

USD — Rising as Liquidity Tightens

Click to enlarge

The swapping of gold for USD is more prevalent post the 2008 credit crisis because of the dwindling pool of decent collateral in the world. As more governments succumb to credit downgrades because they have too much debt, there is less collateral that can be used as security for short term dollar loans.

Although the price action doesn’t show it, the US dollar and gold  will be the last two currencies standing by the time this rolling crisis finally plays out.

In a cruel twist, gold falls in US dollars precisely because of its strength as bullet proof collateral. Other players who don’t know the ‘game’ see this gold price ‘weakness’ as a sign of some sort of inherent weakness and begin selling too. As a result more gold, both paper and physical, comes onto the market causing a PRICE rout.

The irony is that a great deal of gold collateral is simply unallocated (paper) gold. Physical gold exists to satisfy those who want to convert to allocated, but certainly not enough to satisfy everyone. A rush to convert to allocated would send gold soaring.

The important point to note here is that the gold price you see quoted is essentially a paper gold price. Sure, you can buy physical gold at that price too, but it is the high volume of paper gold that gives the impression of greater supply than there actually is.

When liquidity crises cause selling of paper and physical gold, the gold price gets too low and sophisticated players who know the rules of the game come in and buy. When physical gold starts to leave the banking system, the gold price MUST RISE to entice some of the gold back.
You see, the western financial system relies on the circulation of physical gold to function. It doesn’t matter what Warren Buffett or Ben Bernanke think. The ‘system’ needs gold.

The Gold Market is Massive

But I can show you that the size of the gold market is much bigger than you think. For such a ‘fringe’ investment, it’s certainly massive. If it wasn’t so important, it wouldn’t be so huge. According to the World Gold Council (WGC), the size of the gold market is third only to the US and Japanese debt markets. Not bad for a ‘small’ market.

The WGC says all the gold ever mined in history amounts to 170,000 tonnes. In US dollar terms, that’s around US$9.6 trillion (at US$1,600 an ounce).

Of that amount the WGC reckons around 60,400 tonnes is private investment and official sector holdings. That’s the equivalent of US$3.4 trillion. With official sector holdings of around 31,000 tonnes, that leaves just under 30,000 tonnes in private sector hands – about 1 billion ounces, or US$1.6 trillion.

In a recent report, QB Asset Management tells us that all the gold and silver ETF’s (exchange traded funds) combined hold just 90 million ounces (around 2550 tonnes) – or around US$145 billion (at US$1,600). That’s tiny in the scheme of things.

The question is, just where does all this gold reside? How much privately owned gold actually resides inside the banking system? My guess is it’s not much. My hunch is that much of the world’s privately held gold is tightly held…outside the Western banking system. I’m not talking just about individuals owning physical outside the system…I’m talking about sovereign nations (like oil producers, China etc) who have accumulated gold slowly but surely — and held it regardless of PRICE.

Less gold held outside the banking system means less gold that the bankers can sell and turn into ‘paper’ gold. If physical gold exited the market entirely, the game would be over.

To keep the game going, the London Gold market needs physical metal. For many years central banks have supplied the metal via outright sales and leasing operations (this is the practice where central banks leased gold to bullion banks). It is unclear whether these leasing operations are still in effect.

I would guess that the gold bull market itself reflects lower central bank sales and leasing. As such, the role of PRICE has come to the fore. By this I mean the London gold market needs constantly high prices to entice a steady stream of physical gold into the market. If this is the case, lower prices have the opposite effect.

At some point, lower gold prices will lead to a drain of physical metal from the market as sophisticated players take advantage of the weakness. Higher gold prices are the only thing that will keep the game going.

I know this analysis will sound like a house of mirrors to some of you, and to be honest it is. The gold market is as complex as they come. Very few people in the world understand it. I don’t pretend to be one of them.

But I do know this:

‘The game’ is not over. Do not leave the arena. When it is, you’ll know. ‘Another’ knew the endgame 15 years ago…

‘For ones of simple thought, such as I ‘gold will be repriced once in life, and that will be much more than enough’.’

Greg Canavan
Editor, Sound Money. Sound Investments.br>

From the Archives…

How Bad Monetary Policy Will End the Welfare State
2012-06-01 – Dan Denning

The Setting Sun of the Japanese Economy
2012-05-31 – Greg Canavan

The US Dollar – The “Strongest of the Weak”
2012-05-30 – Kris Sayce

Europe’s Energy Resource Puzzle
2012-05-29 – Kris Sayce

The Market Has Crashed, But This Graphite Stock Has More Than Doubled
2012-05-28 – Dr. Alex Cowie

Why Lower Gold Prices Won’t Last

By Central Bank News
Here’s today’s Central Bank News link list, click through if you missed the previous central bank news link list.  Remember, if you want to submit links for inclusion in the daily link list, just email them through to us or post them in the comments section below.

Canadian pipeline company Enbridge is in the hot seat for an oil spill from a ruptured line in southern Michigan. Crews in Marshall, Mich., are still working to clean up contaminated areas nearly two years after Line 6B burst open, dumping about 20,000 barrels of so-called tar sands oil into the Kalamazoo River and surrounding waters. A report from the NTSB suggests operators in Canada interpreted the pressure drop associated with the spill incorrectly and continued pumping oil through the line after it broke open. Last month, Enbridge said it was spending billions of dollars to upgrade its pipeline networks in the region. Some of that effort won’t require new pipe at all, however, opening the door to questions about its operational safeguards.

Line 6B of the Lakehead oil pipeline system burst open in the early evening of July 26, 2010. Enbridge didn’t recognize the leak until 17 hours had passed. The pipeline was set for a 6pm shutoff and a 6.5 foot tear appeared in Marshall two minutes prior to the closure. Alarms that began to sound, according to the National Transportation Safety Board, were indicative of zero pressure at the section of Line 6B in Marshall and, minutes later, a leak. Operators, however, interpreted the alarms as a response to column separation, a depressurization that normally occurs when a pipeline is getting drained, as was the case with Line 6B. Operators decided to continue pumping oil, however, to get oil through to the next station. More or less the same thing happened when the next shift came in because, according to the NTSB account, operators were “never told of the alarms.”

A few shifts later, it appears operators were still debating what happened with Line 6B. A manager had suggested that “something else” was going on, possibly with the “computer or the instrumentation.” If it was a rupture, the manager said, “someone is going to notice that and smell it.”  At 11am on the morning of July 27, a utility company employee reported Talmadge Creek “was black” and got a call in to Enbridge. Residents in Marshall, however, had called the police to report odors at 9 pm on July 26, but nobody bothered to call Enbridge.

Enbridge later defended its procedures to local media, saying the operators “were trying to do the right thing.” And it appears that they were. The NTSB said column separation is “typically corrected” by increasing the pipeline pressure and that’s what the operators did – more than once.

The company announced plans to upgrade Lakehead and replace several hundred miles of Line 6B, which was built in the 1960s. Some of the upgrades, however, mean more horsepower to pump more crude oil through these pipeline systems, which likely won’t sit well with residents along the lines. The NTSB investigation is ongoing. At the onset, it appears that operators, at the very least, weren’t willfully ignoring the issue. But if these pipelines are the economic life-lines that backers say they are, pipeline companies like Enbridge, TransCanada and Enterprise Product Partners need to ensure not just the public, but safety regulators as well, that all systems are in check because, at 20,000 barrels a pop, there’s a lot at stake.

Source: http://oilprice.com/The-Environment/Oil-Spills/Michigan-Oil-Spill-Highlights-Need-for-Safety-Overhaul.html

By. Daniel Graeber of Oilprice.com

Article by Investment U

It’s hard to know who is disliked more, Tiger Woods or Goldman Sachs (NYSE: GS) and Facebook (Nasdaq: FB).

As you may have heard, golfer Tiger Woods won his second tournament in three months, after having not won an event since before his personal life went over a cliff in 2009.

We’ll have to see if the old Tiger is back, but regardless, it’s a strong comeback for an athlete and a man who seemed completely lost just a short time ago.

Stocks can act the same way.  Sometimes a stock is enormously popular, only to crash and burn.  And if you can find the ones that will rise from the ashes, there is a lot of money to be made.

Let’s look at a few stocks that have had a rough go of it over the past few years, but seem poised to rebound.

Goldman Sachs (NYSE: GS)  – Goldman’s stock is a disaster, trading at about 1/3 of its all-time high of $250, back in 2007.  Main Street despises Wall Street right now and that will likely only increase as we head into a particularly nasty election where the Obama campaign will attempt to position Mitt Romney as everything negative about the industry.

And although Goldman’s reputation doesn’t shine as brightly as it once did, it is still one of, if not the 800 pound gorillas in the business.  With J.P. Morgan Chase’s (NYSE: JPM) CEO Jamie Dimon seeing his formerly beloved status evaporate due to uncontrolled trading losses, Goldman is still arguably the king of Wall Street.

It’s stock isn’t trading like that though. Near its lowest level in three years, the stock is trading at just 7.6 times this year’s expected earnings.  In 2013, earnings per share are projected to grow 11%, increasing to 12% over the next five years.  On a trailing basis, Goldman is surprisingly trading well below its peers at 13.3 times earnings versus the industry average of 18.5

There are all kinds of regulatory reforms aimed at Wall Street firms, which make them out of favor with investors.  But nobody has done it better than Goldman for years and when the group comes back into favor, Goldman Sachs will likely lead the way.

Facebook (Nasdaq: FB) – Facebook hasn’t had a long history as a publicly traded company, but could anything be more out of favor?  On Monday, an analyst was on CNBC saying Facebook wasn’t going to be around in five years.

I’m going to bet he’s wrong.  Facebook might not have lived up to the hype that was generated in order to get the masses to pump up the stock price, but that doesn’t mean there isn’t a real business here that can grow by leaps and bounds.

Facebook has more of its users’ personal information than any company on the planet.  As it begins to figure out how to monetize that information, revenue and earnings will grow significantly.

Keep in mind that internet users spend three times as much time on Facebook than on any other website.

And don’t underestimate Mark Zuckerberg.  Just because he’s soft spoken and a little awkward, don’t mistake him for being complacent.  He is one of the most driven CEOs around.  He wants to be the next Bill Gates. He has the intelligence and the product to get him there.

It’s still in the early stages with Facebook, but I think long-term investors will be just fine with this stock.

It’s hard to know who is disliked more, Tiger Woods or Goldman Sachs and Facebook.  But Tiger appears to be back and I expect Goldman and Facebook to help investors be at the top of their game in the near future too.

Article by Investment U