Month: January 2013

By The Sizemore Letter

Yes, you read that correctly.  My favorite “tobacco stock” is Intel Corp (Nasdaq:$INTC).

Lest you think I’ve lost my mind, I am aware that Intel does not sell or market cigarettes or other tobacco products. Intel is the world’s premier designer and manufacturer of computer processors.

But while Intel is not a tobacco company, it most certainly is a tobacco stock, or at least it shares many of their characteristics.

This requires a little explaining.  If you’ve read some of my past posts, you are probably familiar with my reasons for liking tobacco stocks over the long haul, even if I recommend avoiding them at current prices (see “The Price of Sin” and “Time to Stop Bogarting Cigarette Stocks”).  Because of the social stigma associated with vice investments like tobacco, alcohol and firearms, many institutional investors shun them, either by choice or by socially-responsible investment mandate.  This causes sin stocks to be priced as perpetual value stocks, with the low valuations and fat dividends that this entails.

Well, I admit, in this particular respect Intel has nothing in common with tobacco stocks (even if it is priced like one at the moment).  It’s hard to find a scale by which Intel would be considered socially irresponsible. But let’s take a look at some of the other characteristics that make tobacco stocks—and Intel—interesting.

Tobacco companies have gargantuan barriers to new competition—what Warren Buffett might call an unassailable moat.   Given the legal and political risk and the size and scale needed to deal with both, it would be next to impossible to start a new tobacco company now.  You would need infinitely deep pockets and decades’ worth of political connections. As a result, Big Tobacco has become an entrenched oligopoly in which a handful of players—such as Altria (NYSE: $MO), Reynolds American (NYSE:$RAI) and Lorillard (NYSE:$LO)—completely dominate.

But even if you could start a new tobacco company, why would you?  It’s not exactly a business with a bright future.  In the developed world, tobacco is a business in steady but terminal decline.

This brings me back to Intel.  I’m actually in the minority among investors at the moment in that I see a bright future for Intel.  No, they haven’t figured out mobile yet, but they will.  As mobile devices become more and more sophisticated, they will need the power than only Intel can provide.  And there is also the server business, which accounts for roughly a quarter of Intel’s revenues.  Ironically, while Intel has yet to really break into mobile, its server business has benefitted handsomely as the mobile revolution has created greater demand for cloud services.

Yet this is not how the market views Intel right now.  No, Intel is a company resigned to gentle decline, as its core PC market inevitably shrinks.  From the way Intel bears talk, PC users are disappearing from polite company faster than smokers, forced to type on their physical keyboards in alleys behind buildings or in doorways.

For the sake of argument, let’s assume they’re right.  Intel would still be a buy at current prices.

As the Big Tobacco has proven for decades, companies in declining industries can make excellent investments under the right conditions.  If you have a dominant market position (think back to Warren Buffett’s “moats”), a conservative balance sheet, and have ample cash flow for share repurchases and dividends, you can do quite well by your investors even in a shrinking market. It’s worked for Big Tobacco investors, and it will work for Intel investors as well.

At just 9 times earnings, Intel is priced significantly cheaper than any major tobacco stock, and its dividend is competitive at 4.3%.  I might add that Intel’s dividend has risen by over 40% in the past two years and that its dividend still only accounts for 37% of (depressed) earnings.

Buy Intel and reinvest your dividends.  If I am right, Intel will regain its place among America’s most reputable growth stocks.  But even if I’m wrong, Intel is positioned to offer “tobacco like” returns for the foreseeable future.

Note: The “Intel is a tobacco stock” concept was conceived during a podcast interview with InvestorPlace Editor Jeff Reeves in which we each discussed our picks in the 10 Best Stocks of 2013 contest.  Jeff’s choice was Intel; mine was German luxury carmaker Daimler (OTC:DDAIF).

Disclosures: Sizemore Capital is long INTC and DDAIF

SUBSCRIBE to Sizemore Insights via e-mail today.

The post My Favorite Tobacco Stock is…Intel? appeared first on Sizemore Insights.

Interview by James Stafford, Editor Oilprice.com – the No.1 source for oil prices

We are in the midst of an amazing energy boom, but by sweeping the idea of peak oil under the rug we are ignoring a significant fact: the relationship between hydrocarbon reserves and flow rates are not the same as they used to be—reserves have increased but flow rates are not as high or sustainable.

Perhaps the most important thing we need to pay attention to is net energy returns, on which we run society. Massive new discoveries are only netting a fraction of the returns compared to earlier decades.

While we must proceed into the energy future with caution—and the knowledge that analysts may be overselling the shale boom—there are also, as always, major opportunities in this story and they can be found in the wider trends related to improving energy efficiency.

Looking at our energy future in more detail we were fortunate to speak with the well known economist and author of the Crash Course Chris Martenson. You can find out more about Chris and the Crash course at his website Peak Prosperity.

In part 1 of our exclusive 2 part interview Chris discusses:

• Why we shouldn’t talk about energy independence
• What the media is failing to report about the “massive” Shale discoveries
• How oil analysts are getting the economics wrong
• Why we could see $200 a barrel Oil in the Near Future
• The relationship between energy and the economy
• Why peak oil is not a defunct theory
• Why electric vehicles are the future
• Why natural gas should be a bridge to a new energy future
• Why Washington just doesn’t get it

Interview by James Stafford of Oilprice.com

James Stafford: You’re well-known for talking about the dangers of peak oil. But are you more optimistic about the future now that we find ourselves in the middle of an energy boom—thanks to improved extraction methods like fracking and other technologies, which have opened up massive oil and gas plays once thought to be unreachable or too expensive to get to market?

Chris Martenson: Good question. The relationship between energy and the economy is the most important thing that anyone can, and should, work to understand. In the past, we’ve always had whatever amounts of oil we wanted to support the sort of economy we operate, and that happens to be an economy that grows exponentially. The rate of growth that seems to work best at about 3% real and 6% nominal growth.

Now, between the 1960s and the 1980s, the world saw roughly a 6% per year growth in oil output. From 1980 to 2000, roughly 1.5%. And since then, almost flat, maybe a .1% growth in oil output.

So shale oil discoveries may be massive in terms of the total number of barrels of oil–but what they lack are high and sustained flow rates. And there’s a lot of confusion out there in the press right now, with several analysts that should know better, waving their hands at increasing reserves and then making the utterly wrong conclusion that peak oil is a defunct theory.

Now, to illustrate this, imagine we just found a trillion barrels 40,000 feet down. Yeah, that would awesome, right? No more peak oil, at least for a long time, right? Well, what if due to technological considerations, we could only get a few wells installed, and the max flow rate we could get from that reservoir was 100,000 barrels per day. Oh, that’s it? Well, that’s nice, but it doesn’t really help the overall situation, where we’re experiencing roughly 4,000,000 barrels per day,per year declines in existing conventional crude oil fields. That is, reservoir size and flow rates were well-correlated several decades ago, because the stuff just flowed out of the ground so easily, but now that we have to drill tens of thousands of feet to achieve a single well flow rate on the order of 100 barrels per day/per well in the shale plays, or we even have to scoop up tarry sand in giant machines and then power wash the bitumen off of it, oil just don’t quite flow quite like it used to.

There’s a new relationship between reserves and flow rates, and it’s a fraction of the old rate. And it’s an entirely new world, and this has been missed by the less insightful analysts and commentators out there. I am optimistic about the new reserves and flows but not because I happen to think they allow us to forget about the challenges and snap back to ‘how things used to be.’ We’re in a new regime of higher oil prices and that alone sets today well apart from the past.

James Stafford: In your crash course, you make an interesting point that America imports 10 million barrels of oil per day, which represents the same power equivalent as 750 nuclear plants. With the new oil fields opening up in the US, is it realistic to think that America could become energy independent?

Chris Martenson: Energy independence is another confusing term that’s recently, and I think regrettably, been introduced in the conversation. The various forms of energy are simply not interchangeable at this time. We have to consider them separately.

I’ve never thought that the US has an energy shortfall. We have a lot of coal, for example, but we do have a liquid fuel predicament. Right now, we move almost nothing from point A to point B using anything other than liquid fuels derived from petroleum. Together, electricity and natural gas account for perhaps 1% of everything that moves. I believe that we could and we should work very hard towards using electricity to move things, but to do so will require many trillions of dollars in investment in infrastructure, vehicles, storage technology.

I also believe we should use our remaining natural gas as a bridge fuel to get us to a new energy future that’s durable and provides us with a high quality of life. If we were on a path towards using electricity and natural gas to move things around, then I would be willing to entertain the idea of energy independence as a useful concept, because then the various fuels would be swappable. However, we’re not on any such path at all at this point in time, at least not meaningfully so.

We will not ever become energy-independent with respect to liquid fuels in the US unless demand absolutely craters due to an economic calamity of some sort.

James Stafford: Obviously making a change would take serious political will. Do you think that will exists at this point in time, or is it something that’s going to happen when people get a nasty shock?

Chris Martenson: I think we’re going to have to go with the nasty shock at this point. The political will just isn’t there. Recent events have really confirmed for me that Washington, D.C. just doesn’t get it. They really want to believe in the story that the US is a new energy powerhouse; just don’t want to look at the complexities that are actually involved in the story at this point in time.

So will we change through pain or insight? Those are the two main avenues of change, either at the individual or cultural level. I truly believe that pain is probably the most likely way we’re going to change in this story. Maybe not – hope springs eternal – but from a betting standpoint change will follow pain.

James Stafford: What do you see happening with the oil market in the coming, say, three to five years?

Chris Martenson: Despite all of the hoopla about tight oil, which I think has been oversold by the way, I remain focused on the fact that for whatever reasons, world oil production has been effectively flat for six years running despite a tripling in the price of oil. Brent crude remains solidly over 100 a barrel, and 2012 will be the highest yearly oil price on record for global oil.

So my ideas here are that oil’s an utterly non-negotiable necessity of modern life. Demand for it is going to grow further on the world stage. New oil discoveries all have a marginal cost of production that ranges from 60 bucks on the low end per barrel to 100 dollars per barrel on the high end. What this means is that my new floor, for the price of oil, is somewhere in the vicinity of $70 to $80 a barrel. That’s my low end target.

On the upper end, so much depends on whether the world economy finally recovers, which is looking increasingly unlikely, or whether there are further geopolitical difficulties in the few remaining productive oil basins, notably West Africa and the Middle East. Should either or both of those regions see their oil production shut in for any length of time, I can easily see the price of oil doubling from here to $200 a barrel, with very dire effects on the struggling world financial system.

James Stafford: What are your thoughts on the situation we are seeing with declining net energy returns?

Chris Martenson: This is really the important part of this conversation. I think it’s a subtle idea, but it’s actually the most important one here, and that is that net energy returns are what we run our society on. And the net energy returns we’re getting from these new finds are a fraction of those that we enjoyed in prior decades. So that surplus energy left over after exploring and extracting energy, that’s the stuff on which our complex, just-in-time economy runs.

With less surplus or net energy, there’s just less left over to do other things with, such as growing our debts–at nearly double the rate of underlying economic growth, which is what we’ve done for the past four decades. Or shipping billions of economic items tens of thousands of miles from low cost labor markets to high profit consumer markets. Those activities require net energy, and that’s the part of this story that’s really missing, that even if we have these large finds, the tight oil shale plays, the heavy oils, the ultra-deep water finds, the net energy we’re getting back from those is just a fraction of what we used to get.

Continued in part 2.

In Part 2 Chris talks about:

• How tight oil is being oversold
• An idea for solving the storage and Battery problem
• How price, not technology, has unlocked boom reserves
• Why it’s about conservation now, not new technology
• Why we should be concerned about another financial meltdown
• Future opportunities for investors
• Why exporting natural gas is a terrible idea

· Why Governments should help renewable Energy innovation

• Why net energy returns are the MOST important thing

Source: http://oilprice.com/Interviews/Dont-Fall-for-the-Shale-Boom-Hype-Chris-Martenson-Interview.html

Interview by. James Stafford, Editor Oilprice.com – the No.1 source for oil prices

EURUSD
At the beginning of the trading week, the EUR/USD fond itself under pressure and fell to 1.3020 level. Here the pair found support and began restoring, through which could rise to the level of resistance around 1.3140. So, we got quite logical downward correction to the 30th figure, followed by reduction to an important resistance. Now, further dynamics of euro/dollar depends on the ability to get up and consolidate above resistance area 1.3140-1.3170. If this happens, then a pair of oxen may be able to count on growth to 1.3260 at least. Otherwise, bears will return the rate to 1.3020-1.3000. Loosing of the 30th figure aggravate the situation of the single currency and lead to fall to 1.2900-1.2880.

GBPUSD
In GBP/USD pair is seen a picture similar to the picture in euro/dollar. As part of a downward correction British pound fell to 1.6008, where it found a good support that allowed the pair to recover to now resistance at 1.6129. Theoretically bears may try again to test 60th figure, passing of it will decrease the British perspective. But if we are seeing the resumption of upward trend, the resistance has been passed and the pound will rush towards 1.6180-1.6200. Therefore, the behavior of market participants on the current levels will determine future pair dynamics.

USDCHF
Upward correction in dollar/franc pair has helped the U.S. Currency to recover to 93rd figure above which the dollar could not to rise. Yesterday the pair tested the 0.9286 mark and began to decline towards 0.9200 level, where it found support. If the dollar can consolidate above support, it will be able to continue upward momentum and get back to 0.9300 level, passing of which significantly improve the outlook. Otherwise, falling of the U.S. Currency will continue, and it would mean the completion of upward correction.

USDJPY
Despite the continuing negative against the Japanese currency, bulls on the USD/JPY pair did not find strength to rise above resistance at 88.40 mark, which has led to some profit taking. Thus, the pair is now trying to develop a downward correction and it dropped to 87.23 so far, on which the pair faced an attempt to resume growth. But at 87.80 sellers again made an actions, and the pair is slowly returning to the current support. The scale of pair growth give reason to expect that bears will not be limited by falling to 87.23, it means that dollar’s decline may be more impressive. The nearest goal of the bears is 86.76-86.63 support, next – 86th figure. In the absence of fresh incentives rise above the current maximum seem to be unlikely.

Provided by IAFT

By www.CentralBankNews.info

London Gold Market Report
from Ben Traynor
BullionVault
Tuesday 8 January 2013, 12:30 EST

WHOLESALE gold bullion prices ended Tuesday morning in London at $1655 per ounce, regaining ground lost yesterday to climb back to where it started the week, with dealers reporting signs of strong demand from India and China, the world’s two biggest gold buying nations.

Silver climbed to $30.40 an ounce, slightly up on the week so far, while stocks and commodities also edged higher and US Treasuries fell.

The Shanghai Gold Exchange Monday reported record trading volumes equivalent to 19.5 tonnes for its Au9999 contract, which represents gold bullion of 99.99% purity. Tuesday’s Au9999 volume fell to just under 9.3 tonnes, still significantly above the last year’s daily average.

“Physical [gold] demand is very strong,” one Beijing trader told newswire Reuters this morning.

“It’s a combination of the attraction of lower prices as well as pre-holiday demand.”
China celebrates Lunar New Year on 10 February this year.

Official customs data from Hong Kong meantime shows China imported 90.7 tonnes of gold from Hong Kong in November, a 91% increase from the previous month. The volume of gold flowing the other way rose 23% to 27.7 tonnes. Hong Kong is widely regarded as the major conduit for Chinese precious metals imports.

Premiums on gold bullion shipments to India hit a two-month high Tuesday, with dealers blaming a rush to buy gold before an expected import duty hike.

Gold shipped to India traded between $2 and $3 an ounce above London prices, dealers reported.

By comparison, premiums in Singapore this morning were around $1-$1.20 an ounce.

“Our physical desk has already noted significant interest from Indian clients looking for gold, which could push up imports until the tax in announced,” says a note from Nick Trevethan, senior commodity strategist at ANZ.

“Nothing is available readily,” adds one dealer at a bullion importing bank in Mumbai, adding that some shipments are taking up to a week to arrive.

Western investors  meantime continued to add to their gold positions in December, according to data from BullionVault.

The Gold Investor Index, which tracks buying and selling on the world’s largest online precious metals exchange, rose to a 12-month high in December.

Over in Japan, investment by pension funds in gold exchange traded funds could more than double over the next two years, according to Itsuo Toshima, pension fund advisor  and former regional director Japan/Korea at the World Gold Council.

“Bullion’s role as an inflation hedge, long ignored by Japanese fund operators, has come under the spotlight thanks to [Japan’s prime minister Shinzo] Abe’s economic policy,” said Toshima Tuesday.

Following his election victory last month, Abe said the Bank of Japan should adopt a 2% inflation target, double the current targeted level, having previously called for unlimited quantitative easing during the election campaign.

“Gold may be a standard asset-class in the portfolio of Japanese pension funds as Abe’s target is realized,” said Toshima.

Over in Europe, the Eurozone unemployment rate rose to a record 11.8% last month, figures published Tuesday show. Spain had the highest unemployment rate of any Euro member at 26.6%, while Austria’s rate was the lowest at 4.5%.

“The Eurozone needs easier monetary policy,” says Standard Bank currency analyst Steve Barrow.

“This can happen through lower policy rates…[as well as] the activation of the [European Central Bank’s] Outright Monetary Transactions program, although the ECB would claim that this is not equivalent to monetary easing.”

The OMT program, announced last September, would see the ECB commit to buy sovereign bonds in whatever quantity needed to prevent borrowing costs rising too far above those of other Euro members. A condition of the OMT is that a beneficiary government has accepted a bailout program and its attached conditions.

“A move to negative deposit rates [also] seems very possible in our view,” adds Barrow, “and we would not even rule out the possibility that the ECB will have to undertake quantitative easing of its own.”

The ECB announces its latest policy decisions this Thursday.

Deutsche Bank meantime cut its average gold price forecasts for 2013 and 2014 Tuesday.

Deutsche’s 2013 forecast is down 12.1% to $1856 an ounce, while next year’s forecast is down 5% to $1900 an ounce.

“The whole debt situation remains a major challenge, and accommodative monetary policy is very much seen as a way to minimize the negative repercussions of that,” says Daniel Brebner, the bank’s head of metals research.

“So I don’t believe the gold story is over, but certainly, the market is likely to continue to pause.”

Shares in London-listed African Barrick Gold meantime fell 20%this morning after the state-owned China National Gold ended talks to buy the 74% stake in African Barrick owned by parent Barrick Gold.

Ben Traynor
BullionVault

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben writes and presents BullionVault’s weekly gold market summary on YouTube and can be found on Google+

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The Euro is deemed to continue outclassing its British counterpart today after European Commission President Jose Manual Barroso declared yesterday that the threat to the Euro has been overcome, providing a positive outlook for the region this year. Meanwhile, elevated fears that the UK economy is headed for a triple-dip recession this year are presumed to continue weighing on the Sterling.

At a diplomatic conference in Portugal, Jose Manuel Barroso asserted that the Euro has been saved and that the Euro crisis is a thing of the past. “I think we can say that the existential threat against the Euro has essentially been overcome. In 2013, the question won’t be if the Euro will, or will not, implode,” he said. Barroso believes that the turning point was last September’s pledge by the European Central Bank to buy unlimited amounts of Euro Zone states’ debts. Further, he said investors now understood that EU leaders had committed themselves to the currency’s survival. Echoing his remarks, a report yesterday revealed that investor confidence in the bloc is on the mend. The Sentix Investor Confidence index rose from -16.8 points to -7.0 points in January, exceeding forecasts of a modest improvement to -13.7. The January figure is the highest since February 2011, suggesting vastly improved investor moods toward the Euro Zone.

Today, the single currency is deemed to receive support from an encouraging Retail Sales report for November. In a positive indication that Euro Zone states ramped up their spending leading to the holiday season, Eurostat is seen to report that sales inclined by 0.3 percent in November, rebounding from the 1.2 percent dip in October. Although the region remains mired in recession, the report is deemed to provide optimism that improving consumer confidence could carry the region on track for a recovery. On the contrary, the German Bundesbank is awaited to report that factory orders in Germany declined in November. Purchase orders placed with German manufacturers are projected to have tumbled by 1.4 percent, a stark contrast from the 3.9 percent jump in October. Nonetheless, there is reason to hope as the strong German Retail Sales report released last Friday could result to a better figure.

Meanwhile, anxiety that the UK is headed for a triple-dip recession have ignited after a closely-watched gauge of the services sector showed output shrank for the first time in two years in December. The contraction in services, which account for three-quarters of Britain’s economic output, signifies that the UK economy shrank in Q4. Markit estimates that overall, the economy contracted by 0.2 percent in the December quarter. If output declines again this quarter, the UK will then fall into its third recession in five-years. On a grim outlook for the economy, the Sterling is apt to decline, warranting a long position for the EUR/GBP trades today.

For more news, analysis, technical charts and candlestick analysis, visit AlgosysFx Forex Trading Solutions

By MoneyMorning.com.au

It’s been 18 months since Standard & Poor’s lowered the U.S. credit rating, and now Moody’s Corp. (NYSE: MCO) and Fitch Ratings look ready to do the same.

That’s because even after the fiscal cliff deal, the country’s biggest financial problems still remain: the debt ceiling debate, the uncertainty over the delayed sequester cuts and the failure to address the escalating long-term national debt.

And there’s little confidence in Congress to reach an effective long-term deficit-reduction agreement by the February deadline.

“It’s a fait accompli, actually,” Money Morning Chief Investment Strategist Keith Fitz-Gerald said of a credit rating downgrade. “We are the most indebted nation on the face of the planet, spending has ground to a halt, lending is not happening.”

Standard & Poor’s became the first of the “Big Three” ratings agencies to downgrade the U.S. credit rating when it did so on Aug. 5, 2011. Now Moody’s and Fitch could downgrade the ratings one notch from AAA to Aa1 and AA, respectively.

One of the biggest reasons to expect a downgrade is that the government has continuously failed to cut money from the bloated budget. The fiscal cliff deal did nothing to resolve our spending problem.

“The recent package mitigates part of the fiscal drag on the economy associated with the fiscal cliff but does not eliminate it,” Moody’s said. “It does not … provide a basis for meaningful improvement in the government’s debt ratios over the medium term. The debt trajectory resulting from this [ongoing] process is likely to determine whether the AAA rating is returned to a stable outlook or downgraded.”

And Fitch said in a report last month, “If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the U.S. sovereign rating could be subject to review, potentially leading to a negative rating action.”

This fiasco is exactly what S&P predicted when it downgraded the U.S. credit rating.

In 2011, Congress bickered and squabbled over raising the debt ceiling until the last minute, almost forcing the U.S. to default on its debt.

S&P said at the time “political brinksmanship” in the debt ceiling debate had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.”

When the ceiling was ultimately raised and a deficit-reduction plan was passed, S&P said the bipartisan deal that was reached fell short of what was necessary to tame the nation’s debt over time, and presciently stated that leaders would not be likely to achieve more savings in the future.

A U.S. credit rating downgrade would likely lead to an increase in all interest rates, raising the cost of borrowing for the government and everyone else.

That, in turn, would make it more difficult and expensive for consumers to acquire mortgages and credit cards and for companies to acquire business loans.

Higher interest rates could also cause homeowners to default on mortgage payments, weakening the housing recovery just as the industry is showing signs of a rebound.

States and municipalities that have their economies tied to the federal government and could also see their credit ratings in jeopardy, as well as could face higher borrowing costs for schools, roads, hospitals and other projects.

Markets will likely tumble after a downgrade. In 2011, from Aug. 5 to Aug. 19, the S&P 500 fell about 6.3% and the Dow Jones Industrial Average slipped 5.5%.

Even speculation of a ratings change could cause a sharp sell-off in equities. The S&P 500 fell 10.8% in the two weeks prior to Standard & Poor’s announcing its change to the U.S. credit rating. The Dow fell 9.7% in the same period.

And the market hit could be more severe this time if not just one but two or all three of the big ratings agencies deliver a downgrade.

“In the absence of a grand bargain in the next two months, it is likely that the U.S. is downgraded,” analysts led by Tom Porcelli, RBC’s chief U.S. economist, wrote in a note Jan. 3.

BEN GERSTEN
Contributing Writer, Money Morning US

Publisher’s Note: This article originally appeared in Money Morning (USA)

From the Archives…

The Talisman of Fear: Why Gold Remains the Foundation of Wealth
4-1-2013 – Kris Sayce

We Got it Wrong With Dividend Stocks…And Investors Still Made Money
3-1-2013 – Kris Sayce

A Contrarian Investment Prediction for 2013
2-1-2013 – Greg Canavan

The Rockers and Shockers of 2012
31-12-2012 – Kris Sayce

Will 2013 Show Us Up?
29-12-2012 – Callum Newman

By MoneyMorning.com.au

If the mainstream perceives gold investors as cranks, they see silver investors as the real nutters out there.

Yet this scorn is misplaced. In the space of just one decade, silver has quietly gained 233% – and that’s even factoring in the rising Aussie dollar.

This 233% gain means that if an Aussie investor had bought A$15,000 of silver in 2003, it would be worth A$50,000 today.

The gains have come in fits and starts – as is the way with silver. However the average gain for Aussie dollar silver has been 16.3% per annum, which puts it well ahead of Aussie dollar gold at 11.6% per annum.

The trick is to maximise your gain by timing your entry.

And the good news is that after two slow years for silver, it now looks more than ready for its next big rally.

In 2012, silver notched up just 5.4% (I’ll refer to all gains in Aussie dollar terms). This was a pretty disappointing year for silver, particularly as it was sitting above 20% as recently as late November.

And back in 2011 (a nightmare year for silver investors) it finished the year with a loss of 10.8%.

So silver has had a couple of years in the wilderness now.

And this could pave the way for a big 2013. Take a look at this chart I’ve put together for you below to show how wildly silver’s performance has varied in the last ten years.

The pattern with silver is very much one of a few slow years followed by a few big years. For example, after a dismal 2007-2008, silver went on to gain 15.8% in 2009, then an epic 58% in 2010.

So after enduring a very weak 2011-2012, the chances are now much higher that we see some real action from silver in 2013. Another year like 2010, in which we see silver gain 58% is entirely possible from here.

Looking at annual performance statistics is a bit misleading of course. Using the 1^st of January and 31^st of December as start and end-dates respectively is totally arbitrary.

A slightly different picture may emerge if we used May the 7^th as our start date, for example. The silver price is dancing to a beat that has little to do with when we celebrate the New Year, after all. An ever increasing amount of silver is bought by China, which observes a totally different New Year.

So looking at annual performance is just a starting point. Taking a step back and looking at a ten-year, weekly silver chart gives a more comprehensive view, as well as a good idea of where we are in the rally.

Over this time, the 200-week moving average (red line) has been remarkably steady. This strong trend is still very much intact, and has driven Aussie dollar silver to a 233% gain over the last decade.

Even in the chaos of 2008, 2009 and 2010, the price rarely broke below this 200-week level. It has given excellent support. And buying at, or close to, this level has proven to be good timing, and a great opportunity.

And it’s one I think we are looking at again right now.

After slipping in December, the silver price is A$28.70 today, just a few bucks from the current 200-week level of A$26.50.

Last time silver got this close to the 200-week was back in July last year. Without first reaching the level, the silver price took off like a stung cat and soared 28% in a few months.

So I think silver looks like a great entry level around these prices.

Silver has really got close to the 200-week moving average in the last ten years, so it’s hard to see it falling much further. However, if it does fall a few more dollars further to reach A$26.50 (the current 200-week level) then that would be the clearest buying signal for three years.

Projecting the trend to continue like this of course assumes that the macro forces that have pushed silver up in the last ten years are still active.

This is absolutely the case.

Investor demand is still raging, and record sales from major mints keep hitting the headlines. Institutional demand for silver is just as active, with institutions now owning around 50-60 million ounces of silver in the silver ETF, ‘SLV’.

Some big silver bets went on when Obama was voted in for a second term, as silver was the best performing commodity during his first term. Investors are betting that his second term will see just as much money printing and debt accumulation as his first.

With QE3 underway, and QE4 to commence presently, they made the right bet. And with Japan now pumping out the Yen too, there will be no shortage of paper, while the global silver inventory is relatively steady – and small too at just A$50 billion in value.

A real game changer the market hasn’t caught onto yet is Chinese silver demand. Although China has a huge silver mining industry, it can no longer meet rapidly growing domestic demand. And in the last few years, it has gone from a serious exporter to a significant importer of silver. This changes the dynamics of the market completely.

You can see the red bars below under the axis (which show China exporting silver) gradually decrease, and then swing above the grey bars (which shows China net importing silver).

 
It’s a familiar story. We saw China become a huge importer of gold in recent years as its demand overtook its domestic production. Now China is steadily buying gold on all the price dips, and the same is also now true of silver.

The black line in the chart shows the amount of silver potentially held in China. The rocket-like trend shows no sign of slowing! So, assuming no big jump in domestic production, I’d expect Chinese silver imports to explode very soon.

After a few tough years for silver, including getting beaten up twice in 2011, and a few false starts in 2012, we are now looking at a very cheap entry – and this year looks good for silver to shine brightly again.

Dr Alex Cowie
Editor, Diggers & Drillers

USDJPY may be forming a cycle top at 88.40 on 4-hour chart. Pullback to the lower line of the price channel would likely be seen. As long as the channel support holds, the fall is treated as consolidation of the uptrend from 82.11, and another rise towards 89.00 is still possible. On the downside, a clear break below the channel support will indicate that lengthier consolidation of the longer term uptrend from 77.14 (Sep 13, 2012 low) is underway, then deeper decline to 86.00 area could be seen.

Forex Signals

By The Sizemore Letter

The following was a memo to Sizemore Capital clients:

Given the historically low yields present across the yield curve and Sizemore Capital’s view that bonds are risky investments at current prices (see “Grantham is Dumping Bonds“), Sizemore Capital has opted to substitute the actively-managed Pimco Total Return ETF (NYSE:$BOND) for our traditional bond index exposure via the iShares Core Total US Bond Market ETF (NYSE:$AGG) in the Sizemore Capital  Strategic Growth Allocation.

Additionally, we will reduce our current allocation to the iShares Barclays TIPS Bond ETF (NYSE:$TIP) by 2.5%, with the remainder being allocated to BOND.  The total portfolio allocation to bonds will remain 15%, but will consist of a 10% allocation to BOND and a 5% alloction to TIP.

Our rationale is easy enough to understand.  At current prices and yields, a “buy and hold” bond portfolio offers no realistic opportunity for returns, particularly after inflation.  Rather than a “risk-free return,” we are now offered a “return-free risk.” 

But at the same time, bonds do offer value as a “shock absorber” and can play a valuable role in a dynamic rebalancing strategy.

We chose BOND as an alternative because its manager–the legendary “Bond King” Bill Gross–takes a tactical approach to bond investing.  Gross is also willing and able to short sectors of the bond market he considers at risk.

Gross is not infallible, and he has trailed his peers in recent years.  And in a broad sell-off of bonds, his fund would take losses along with its peers.  But in choosing BOND, we hope to get the benefits of a bond allocation–its low correlation to the equities markets–with the additional possibility of at least modest capital gains via Gross’ active management.

Disclosures: Sizemore Capital is long BOND and TIP.

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