Has gold ended its bull run?

The price of gold has soared in the last decade. Can it continue?

Two views make a market, as the saying goes. in "Gold's Run is Over -- I'd Much Rather Own This Stock", Tim Begany writes:

"Gold is the worst investment around. Anyone buying it now is doing so at their own risk, near the end of a bull run that's apt to end badly.

A major clue gold's time is up: institutions and hedge funds are starting to get out.

In October, for example, these big players reduced their long gold futures by -9%. Meanwhile, small investors added +5% to their long gold positions. It's a familiar pattern in which large investors exit the market of an overheated asset in a timely fashion, leaving the little guy to drive the final run-up to the big pop.

I give gold up to another year, maybe two, before it peaks. From there, it's all downhill."

Tim prefers shares in an ex-bankrupt company - Owens-Corning (NYSE: OC) - that makes insulation for buildings.

Bargain-hunting among distressed firms can be rewarding. The financial journalist George Goodman (aka "Adam Smith") once interviewed a fund manager who'd bought stock in the Santa Fe railroad, then bankrupt. The manager explained that the land, buildings and rolling stock had substantial value that was not yet reflected in the share price. This was decades before Warren Buffett and George Soros (an ex-railway porter) discovered their recent interest in choo-choos - maybe for similar reasons. (But it's worth noting that Soros recently sold his holdings in Canadian Pacific - cold feet?)

And it's true that the ratio of the Dow to gold has dropped below the long-term average since the closure of the "gold window" in 1971:

- though the ratio hasn't fallen to its 1980 low. It's also true that gold has outpaced inflation in a way not seen since the end of the 1970s:

So why do the gold bugs still have a voice?

I'd say it's because, as in 1980, these are not "normal" times. JK Galbraith said "The only function of economic forecasting is to make astrology look respectable" and all their cyclical predictions are junk when an asteroid is spotted coming in our direction. That asteroid is a combination of the vast debts of Western nations, the dependence of much of their populations on wealth transfers within those economies, and globalized trade.

Can we deflect it with rockets of bailout and default? The bailouts appear to be devaluing our currencies and may end with high inflation in necessary commodities; sovereign debt defaults would affect not only international relations but the mutual and pension funds on which many of us hope to live in retirement. If the biggest banks are allowed to fail and their shares go to zero, what will that do to Everyman's portfolio?

Gold is a speculation unlike most others: it's a vote of no confidence. As such, it's a systemic indicator, not an ordinary item of trade. At this level of the debate, graphs are meaningless. Among the bears, opinion is divided between people like Peter Schiff who think we can make something out of this crisis, and those like Michael Panzner who believe that when a civilization falls, even the richest citizen can lose all. For example, the biggest-ever hoard of Anglo-Saxon gold was discovered last year, not far from where I live. It's thought to be from the Kingdom of Mercia in the 7th or 8th century. The people who put it there never came back.

We should turn our minds from playing with money to repairing the framework of our nations, and preserving our liberty and democracy.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

If you think I'm a bear, read THIS...

By his own account, "Savelife" is a mental health professional who is "a professional investor for a charitable trust" which pays richly for investment analysis by outside experts. Their assessment exceeds the worst I've dared suggest - and it's coming very soon.

"Their call: Markets will crash within two to six months (can happen at any time). First drop, in seven days, 3,000 points on the DOW. Then over six months, DOW will tank to about 1,000 points. Then a unionizing recovery will occur to the upside. Allow a decade or better for total recovery."

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Reasons to be fearful: a warning about the stock market

Previously published on Seeking Alpha - the business site with 3m readers monthly:
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This is the time that tests bearish investors.

Interest rates on deposits are lower than inflation, if you look at food and energy costs. Since the 1990s, I have been more cautious than most of my investors and have been careful to suggest that they might like to keep their powder dry. Some listened and switched to cash in 1998 and 1999, and so avoided the fall out of the 2000-2003 decline.

Just when I was beginning to feel that things were getting sensibly priced, interest rates were pushed down and the already-existing house price bubble superinflated from 2003 on, along with much else. And then...

But now there is talk of investors being "forced" into the market by negative real returns on cash - and fears that inflation may rise significantly. I recently displayed a graph from the Now and Futures site, showing how German shareholders survived the Weimar hyperinflation of 1923, after a severe interim drop. "Financial Armageddon" author Michael Panzner justly pointed out that there was a danger that investors in a similar situation might lose their nerve, sell out and miss the market recovery.

It is also very hard to stay out of the market when it has risen dramatically. I was batting away queries from clients in the latter stages of the tech stock boom with warnings of what I strongly suspected was a bubble ready to burst. But there is pressure to get in, not merely because of greed but in the case of fund managers, fear: the fear that your boss will use peer benchmarks to judge you negatively and appoint someone else to take over the portfolio. So you need nerve at more than one level in the organization.

Invesco Perpetual's Neil Woodford has that kind of nerve. During the dot com craze, he stayed out and stuck to his guns despite the stellar tech-invested performances of others' funds - and fortunately the management backed him.

Woodford was very bullish - selectively - in January this year, according to the Daily Telegraph. So how does he feel now? Well, bearish about China this week, according to Investment Week. This, at a time when others are coming late to the emerging-markets party, looking for something to get exciting returns. Surely, we tell ourselves, someone's making money somewhere, and we want a piece. This, I think, is the dangerous time.

It's caught out geniuses before now. During the South Sea Bubble of 1720, Sir Isaac Newton bought in, sold out and made £7000 profit - about £1 million in today's money. Then, seeing the market soaring further, he bought in again. And the scam crashed, costing him £20,000 - the equivalent of nearly £3 million.

Some say the market now has been climbing a "wall of worry", so that really we're not in a mania and reasonable concern has already been factored into valuations. Personally, I fear that this is like a lunatic certifying his own sanity and discharging himself from the hospital - "I'm all right now."

I'm not alone in this fear. In a Financial Sense article by Tim Wood yesterday, he says:

"I continue to believe, based on the evidence at hand, that the rally out the March 2009 low is a large scale bear market rally that should ultimately prove to separate Phase I from Phase II of the much larger and ongoing secular bear market. But, just as I told my subscribers before that low was even made, the longer this rally holds up, the more dangerous it becomes. Reason being, it becomes more and more convincing."

We have interest rates lower than ever, debts higher than ever and a financial sector borrowing cash at giveaway rates and playing games in the market. We now have an interdependent world economy, which is like lashing all the lifeboats together - extra security in a small storm and complete disaster in a big one.

Granted that the situation is such that there is no completely valid basis of comparison - and remembering that the Dow now lists companies that garner much more from foreign earnings than they used to - let's take a look at the Dow adjusted for CPI inflation since the peak before last - the one in January of 1966:

Remember, too, that everyone agrees that we've just had a recession, and many say we're not out of it. Where would you pin the tail on this donkey? Mr Market appears to have stuck it on the back of his neck.

If we are climbing the Wall of Worry, we're starting from very high up. Don't look down.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

The God of small things

Eyelashes growing out of human skin - one of many wonderful electron microscope pictures here.

Should rich people be asking us to think that money isn't everything?

It's a debate here at the moment. I'm only asking.

http://news.bbc.co.uk/1/hi/uk_politics/5003314.stm
http://www.guardian.co.uk/business/2009/sep/20/economics-wealth-gdp-happiness

Protect your cash savings (UK customers)

The following is an extract from a just-published article by Nadeem Walayat on securing your bank deposits in the UK:

UK Savers Emergency Plan:

a. Ensure that you have at least 2 current accounts across banking groups.

b. That you have procedures in place to ensure that you can act fast to initiate transfer of funds from instant access savings accounts, especially if your total funds with a particular banking group exceeds £50k / £83k (1st Jan 2011).The best strategy is to limit exposure per banking group to the limit.

c. Do not have ANY savings are fixed deposit exposure to banks that do not fall under the UK Financials Services Compensation Scheme.

d. Limit exposure to PIIGS banks, that is Greece, Ireland, Spain, Portugal and Italy as these are at the most risk of going bust thus triggering a lengthy process of Savers having to wait for compensation.

The following list represents Britians' largest deposit taking banking groups and the banks that fall under each.

Note whilst banking groups may have multiple licences as a consequence of mergers and takeovers, however they also may be in the process of merging licences so for ultimate safety one should remain focused on banking groups.

LLOYDS BANKING GROUP
Lloyds TSB Bank
AA Savings
Bank of Scotland / HBOS
Birmingham Midshires
Capital Bank
Cheltenham & Gloucester Savings
Halifax
Intelligent Finance
Saga

SANTANDER GROUP
Santander bank
Abbey National
Asda Savings
Alliance and Leicester
Bradford and Bingley
Cahoot
Moneyback
Honycomb
Nationwide Building Society
Nationwide Building Society
Cheshire Building Society
Derbyshire Building Society
Dunfermline Building Society

BARCLAYS GROUP
Barclays Bank
Standardlife Bank

HSBC GROUP
HSBC Bank
First Direct
Marks and Spencer Financial

ALLIED IRISH GROUP
Allied Irish Bank
First Trust

CITI GROUP
Citibank
Egg

CO-OPERATIVE GROUP
Co-operative Bank
Britannia
Smile
Unity Trust Bank
RBS Group
Royal Bank of Scotland
Nat West Bank
Direct Line Savings
Lombard
The One Account
Drummonds
Ulster Bank

Additional comments

Foreign Banks under UK FSCS Scheme - ICICI (India), First Save (Nigeria)

Small business are covered by the FSCS on the basis of 2 of following 3 conditions - upto a turnover of 6.5 million, less than 50 employees, balance sheet total not more than £3.26 million

Banks not under the UK FSCS.

Post Office - Currently Guaranteed by the Irish Government, pending coming under the UK FSCS.
ING Direct, Tridos - Dutch
Anglo Irish, Bank of Ireland - Ireland

Don't delay! Act today to form a quick personal savings protection contingency plan, otherwise you may wake up one day to find yourselves locked out of your funds Iceland style!

For more on how to protect your wealth from debt default bankruptcy see the Inflation Mega-trend Ebook (FREE DOWNLOAD)

Comments and Source: http://www.marketoracle.co.uk/Article24572.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

EU: superb dressing-down by Nigel Farage

Using our brains

It is common wisdom that the Soviet Union and associated states collapsed because of the failures of centralized planning. Then why do we allow and encourage the same kinds of structures in large corporations and government in the West?

The ostensible reason given is easy to defend: large entities can be much more efficient. As a secondary reason (not usually stated), large entities also mean a concentration of power and wealth.

The problem with efficiency is that it comes at a price. This is not only the loss of jobs and transfer of wealth, but more disturbingly the catastrophic nature of any breakdown. We saw it in 2003 with the power grid in the US, in 2008 with the collapse of the banking system, and in new cars, which are much more reliable and efficient than those from the 1970’s, but harder and more expensive to repair.

The key to preventing or mitigating future disasters in finance, oil, energy and water appears to be the opposite of our past practices. Rather than make everything bigger, we should take a hint from the designers of the World Wide Web, and decentralize as much as possible. This will take planning and cooperation, and a thought process unlike anything since World War II. Just consider: how many large purchases for homes, business or government consider the long-term costs of maintenance?

Doing the same idiot thing ...

What makes the scientific community different from most groups of humans is the willingness of the group (but not necessarily individual scientists) to let go of emotionally-satisfying hypotheses when they are not supported by the data.

By contrast, consider education and government.

For at least two decades, we have been warned by business and government leaders that we need more graduates in the technical fields, just to sustain our infrastructure. Even in these tough economic times, the graduates in Engineering, Mathematics and Geology are finding good jobs. These disciplines require a great deal of Mathematics training to succeed, and our Education College experts hold to the philosophy that the key to that teaching is pedagogy. To that end, they have tried to make it easier to learn, to reduce the speed at which the students learn the material, or to dispense with material altogether. These huge experiments have not made a significant difference in the graduation rates in these subjects.

To my experimental mind, this suggests that the difference is one of innate ability, which is anathema to the John Dewey philosophy of education as a social equalizer. Instead, we just try to pump even more money into failing ideas.

In the case of government, we can look at tax policies. Since the 1950’s, the tax burden has shifted from corporations to individual taxpayers. Within that latter group, the past 30 years have seen a shift, where the lowest 50% or so pay very little in taxes, and the marginal tax rates for the wealthy have gone steadily down. All of these changes were supposed to make our economy strong, and have utterly failed. Yet, what is the current mantra? Cut taxes for business and keep the tax cuts for the wealthy (including preferential rates on capital gains and no estate tax).

While I can readily understand that the rich and powerful would have this view, what is it that makes middle-income and poor Americans support this idea?

Rough justice, Aussie-style

http://the-public-house.blogspot.com/2010/11/tiger-in-cage.html

A snapshot of the Irish disaster

In their third-quarter survey of credit default swaps (insurance against debt default), CMA Datavision rate Venezuela the riskiest country by far (see first graph); but currently (Tuesday, 23 November 2010 16:30 BST) the sub-investment grade of Allied irish Banks (AIB) is much, much worse (second graph).

Some might say that supporters of the Euro currency system are throwing good money after bad. It is not a good thing to let the markets sense an emotional attachment to a position, and the bond traders may find a way to exploit this weakness, just as George Soros did when the UK attempted to preserve its link to the Exchange Rate Mechanism. The crisis of "Black Monday" (16 September 1992) merely made Soros a billion dollars and cost the UK Treasury £3 billion sterling.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Inequality, housing costs and resetting the economy

Previously published on the Broad Oak Blog:
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Charles High Smith posts (as many times before) on the widening inequality of income and asset ownership in the USA. This time he uses it to explain the apparent recovery from recession: "The top 5% of Americans by income are responsible for 37% of all consumer spending-- about the same as the entire bottom 80% by income (39.5%)."

Among the useful links at the bottom of his post is one to an earlier article of his entitled "Why We Keep Getting Poorer: High-Cost Housing." Back in April, I took a graph (below, with some style additions by me) from Calculated Risk to illustrate that point.

(adapted graph from Calculated Risk) - click on image to enlarge

It seems to me that if the USA (and the UK, and Europe generally) wants to get competitive with the Far East, our wages will have to drop. But they can't until our debts are reduced.

Debt default, or debt forgiveness, may be the only way out.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Inequality, housing costs and resetting the economy

Charles High Smith posts (as many times before) on the widening inequality of income and asset ownership in the USA. This time he uses it to explain the apparent recovery from recession: "The top 5% of Americans by income are responsible for 37% of all consumer spending-- about the same as the entire bottom 80% by income (39.5%)."

Among the useful links at the bottom of his post is one to an earlier article of his entitled "Why We Keep Getting Poorer: High-Cost Housing." Back in April, I took a graph (below, with some style additions by me) from Calculated Risk to illustrate that point.

(adapted graph from Calculated Risk) - click on image to enlarge

It seems to me that if the USA (and the UK, and Europe generally) wants to get competitive with the Far East, our wages will have to drop. But they can't until our debts are reduced.

Debt default, or debt forgiveness, may be the only way out.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Will fusion power save us?

Forwarded to me by Paddington, an article that gives us hope for future energy production and the continuance of the civilisation we're used to:

A new approach to nuclear fusion means that in a few years time nuclear fusion will break even. Bearing in mind that our ‘preferred’ power choices of solar power, windmills etc. have to be heavily subsidised before people will even look at them and our electrickery bills will soon reflect our politician’s latest stealth tax.

Now it seems that we have had breakthroughs in nuclear fusion every few years without a reactor becoming available. However, I feel that we are finally getting there. The project is difficult but worthwhile to the whole human race. As it is so important to the human race I wonder why the money we are wasting on windmills and making coal stations more environmentally friendly is not being spent on making this become true.
Look at the benefits.

Electrickery at a cost that makes metering it unfeasible. Certainly not the case for anything we have now.Virtually pollution free. No waste and little environmental impact. Certainly less than coal, gas, windmills and hydropower.Safe power production. Negligible accidental risk and can be protected from nutters.

Of course from a politician’s perspective this is far from the Holy Grail. They won’t be able to tax us to death on the pretence of climate change, something they still push for tax reasons which have been debunked by all but a few climate nutters, plus they won’t be able to use climate change as a stick to beat us back to the Stone Age with. So even when a fusion reactor is available don’t expect our politicians to approve one being built any time soon.

Prince William, Kate Middleton and Bishop Broadbent

The death of deference cuts both ways...

Above, the man who put the "pric" in "bishopric" - Rt Rev "Pete" Broadbent (fashionably tieless - and somewhat unbuttoned - in the Sun's pic), Bishop of Willesden, who has now apologised for prognosticating the failure of a royal marriage that hasn't yet taken place. His wonderwall is on Facebook here - he seems to have time for such things. He has also put the "twit" in Twitter.

What else does he do? Does he curse infants at christenings, like the wicked fairy at Sleeping Beauty's? Or is his malevolence reserved only for his superiors? Did it occur to him that "Big Ears"'s mother is the Head of the Church of England, and William may one day be so?

Does he quite understand the difference between the C of E and the Labour Party? Perhaps not: "Formerly an Islington Councillor and Chair of its Development and Planning Committee, Peter Broadbent is a member of the Labour Party." ("Cranmer" had a bit of a go at this bien-pensant prelate last year.)

As a "good republican", perhaps he should consider his position, since Anglican bishops also "cost us an arm and a leg" - see "Bishops' office and working costs" and The Times' recent article on same. After all, those who have decamped to the Catholic Church are prepared to "make sacrifices, giving up salaries, additions to their pensions and accommodation." Would he be willing to turn his footsteps that way, like a previous incumbent (Graham Leonard)? Less likely, I suppose, since he seems to be an "evangelical", than the other direction; but in that case, perhaps, following Leonard's example, prudently after retirement and receiving his pension, so costing us an arm and a leg all the way.

As long ago as 2004 the Daily Telegraph revealed that "Newly appointed bishops are currently paid £33,930 a year in addition to which they receive a number of perks and allowances." "Pete" won 30Days' "Golden Mitre Suffragans Award" for his expenses in 2005, claiming £45,207. I don't know if he gets anything extra from his other position as the acting Bishop of Stepney - he has been riding both horses since July this year. King Athelstan must regret having given the parish ten manses.

Still, it's only the same sort of screw as a pole dancer. And, it would seem, for a similar degree of exhibitionism, if manifested in a slightly different way. Perhaps Willesden is his day job and he moonlights as Stepney.

UPDATE: He's been suspended "indefinitely". What price the "early retirement" solution ("Pete" is 58)? Of course, like the publicity-seeking, fast-gabbling controversialist David Jenkins, he may merely leave his episcopal post but continue with his priestly duties. At least Bishop Broadbent hasn't (so far as I know) sworn in sermons or had his church struck by lightning.

Airport X-ray bodyscanning machines may increase cancer rates

Read this.

Is there a science of flavour combining?

You're probably familiar with versions of the colour wheel, first attempted by Sir Isaac Newton in 1666 (left) and since reworked in different ways (example, above).

But can the same be done for food and drink? One thinks of chef Heston Blumenthal's bizarre combinations - snail porridge, bacon and egg ice cream, etc - and wonders whether there is some underlying set of principles.

This seems to be far more difficult, because individual foods are a complex of flavour elements and besides, texture and appearance are important additional factors. Also, all these aspects can change as a result of how they are prepared and cooked. And there are hundreds of ingredients, subdivided into many varieties, so there is a dauntingly large number of potential combinations.

A recent book byNiki Segnit, "The Flavour Thesaurus", attempts a schema of selected foods - see page 8.

But you may find this website useful in your experiments - it allows you to input an ingredient and find a choice of partners for it.

Blowing a stolen trumpet

As others have noted, blogging appears to be undergoing a recession (rage is so tiring); so I am thankful for any scraps of recognition or praise. Perhaps we should look for quality of readership, rather than quantity.

I am ego-boosted by my ranking as 6th/49 in Online MBA's list of "Top 49 Economic Blogs with Visual Aids", and the inclusion of Bearwatch on Alltop's live post-listing of "Top Economics News". We humbly rub shoulders there with some of the real big hitters, and are grateful that nobody's noticed our scuffed shoes.

When I finally suspect I'm an authority, I shall let you know. Until then, I shall continue to stand on the shoulders of giants, and pick their pockets.

Inflation vs deflation revisited

I am flattered to receive attention from the Economic Policy Journal re my recent post on the Weimar hyperinflation of 1923. (I should have made it clearer that the graph is not mine - it comes from the site I linked to in that post, i.e. Now and Futures. Apologies for any misunderstanding, which I didn't intend.)

Some may think that I'm scaremongering, talking about such a scale of inflation; and we must hope that it doesn't come to pass. After all, history cannot be repeated exactly because the later time has the memory of the earlier, a point made elegantly by Jorge Luis Borges' short story "Pierre Menard, Author of the Quixote". But we may simply get to the same destination more slowly - after all, the dollar and pound have lost something like 98% of their value since the beginning of the 20th century.

So I responded to the comments as follows:

You're right, we're in a deflation at the moment, but the undermining of the currency is already showing up as inflation in energy and food prices. Recently (http://www.youtube.com/watch?v=J2-BZEyOnhE) Mike Shedlock and Dr Marc Faber appeared together on an interview and they agreed that inflation was the end stage, the only real difference of opinion between them was over timing.

Deflation would greatly benefit holders of cash (and gold, which seems to be a great each way bet if you buy in at the right price), but pretty much cripple and bust everyone else, so you're right again. Which is why our governments are so very motivated to find a way to restimulate inflation.

This time, the most indebted countries seem to be competing to see who inflates most (so they end up debauching their currencies in parallel), and the creditors who depend on exporting to them are trying to follow suit. The global economy has never been so interconnected before so we're in new teritory.

Faber reckons we are heading for a global bust; in which case I suppose global trade will break down, the focus will be on national and individual self-sufficiency and those who have spare assets will hold commodities of one sort or another until a new, sound currency arises.

Scaremongering? My mother's family lived through the Weimar inflation, but got through OK because they were farmers; until the busted German middle class turned to a new leader. The farm is now in Russian-held territory and we haven't seen it since 1945.

I have hope for the USA because it has natural resources (including land) that could satisfy the reasonable needs of the population; and because you have a Constitution that could be your storm cellar, if you don't let your corrupted elite persuade you to fill it in and build over it.

The State of the Union, in credit terms

First published on The Broad Oak Blog (Nov. 15, 2010):
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CMA DataVision's third-quarter report gives the latest assessments of sovereign debt default risk, as measured by the price of credit default insurance. This edition also includes ratings for selected individual States of the USA. I have combined the latter with the former in a ranking below, so that you can see the ratings of States in some sort of context. Please click on the picture to enlarge.



DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.