Saturday, August 13, 2011

Rare Earth Elements Update

As discussed ad nauseum on this site, China controls 35% of the world's know rare earth element deposits and 97% of current production.  They have restricted exports in the face of rising demand.  The rest of the planet decided to indulge in excessive, credit-fueled blind consumption for three decades while never asking where the parts used in these convenient products come from?

Now, as we have predicted, China's intentions are becoming clear.  Even the mainstream press is reporting what we have been labeled conspiracy theorists for saying.
One moment that remains unforgettable in our mind is the grandstanding that Senator Charles Schumer indulged in over the outsourcing of windmill production by the T. Boone Pickens wind project.  The Senator was quickly informed by a staffer that there was no possible way windmills could be manufactured in the US.  More than 600lbs of neodymium is required for each one!

The Reuters article above makes some statements regarding the future of rare earth deposits outside of China being no longer economic.  Insinuations that this movement to produce good inside China solves the free world's supply problems should be disregarded immediately.

We have discussed the essential components of modern military equipment that require rare earth elements.  Could you imagine placing a large order of smart bombs with a Chinese manufacturer in order to use them in a war with China?

The price of rare earth elements themselves have soared far higher than the stock of the companies attempting to mine them.  Over the next few months as the world continues to wake up to this reality the right stocks in this sector should drastically outperform the overall market.

Friday, August 12, 2011

The Trick To Making Money In Markets

The real trick to making money in markets lies in the ability to spot a trend and place capital in its path.  Most investors never accomplish this because they fail to work up the courage to believe the small voice within that says, "Wait a minute, something doesn't look right here."  There are good reasons for squelching this voice.  If 20 years of formal education designed to teach you to follow orders wasn't enough, working for a major corporation will finish the job.  We are taught that coloring outside of the lines is dangerous.  To us, the danger lies in the enslavement found within the lines.

Next time you are in a social setting where group-think is rewarded, suggest alternative energy as a topic.  After a few monologues on solar power and windmills (which can't be built without rare earth elements) suggest that nuclear seems like the logical solution.  Brace yourself for the ensuing reaction.  This is truly a hated power source.  If you seek permanent dislocation from the group suggest that 30,000 people died in the tsunami and 0 have died from the nuclear incident.  When something is this hated it immediately commands our attention.

Fossil fuels, specifically oil, have remained our choice energy source due to their low cost of extraction and simple structure.  Most people are not aware that we are running out of oil.  To be more specific, oil is becoming marginally more difficult to produce.

As you can see in these two charts, the known supply of oil has been eclipsed by demand.  This is more than significant if you drive a car, eat, consume power at your home, wear clothing or use toothpaste.  That is correct, one of the main ingredients in toothpaste is the petroleum used to make the packaging.

When we say there is difficulty on the margin we are speaking to the demand associated with the last barrel purchased or produced.  To further explain the effects of this, there are now several users fighting for that last barrel and someone will go home empty handed.  Currently there are around 4mil bpd (barrels per day) that we can assume are fought over.

This will take a while to permeate the economy.  It will take even longer for people to understand what the problem is.  It will take yet another period of time while US citizens demand a law be passed to give them there fair share of oil.  One day though these options will have been exhausted and there will be fierce competition for fossil fuels.

Once we understand this concept interest develpops in alternative fuel sources.  There is only room in our portfolio for low cost sources.  Solar, wind, hydro and geothermal are all great sources but will never represent 10% of fuel needs.  Consider this statement found on the Department of Energy's website:
Uranium is the most dense naturally occurring fuel on planet earth that we are aware of.  Also, when considering all factors, it is arguably the most green.  Three accidents occurring in plants using 1960s technology dominate public opinion on the subject.

What are the facts?  Why is Saudi Arabia building 16 reactors for power generation?  Why are China and India rushing to expand their nuclear power base?  Why do we only hear about Germany closing a dozen reactors 8 years from now?

This is they type of market that we see offering large capital gains.  Well run mining firms are selling at prices reflecting nothing short of pure hatred.  Many fail to consider that physical uranium is trading at a spot price 30% higher than a year ago.  As the price continues to rise on the back of fundamental demand, look for shares in mining companies that have low per-pound operating costs.  Finally, competent and experienced management along with a reasonable share structure must back up good operating fundamentals.

When a sector is this hated all of the risk has been sold out of it.  Now is the time to acquire dirt cheap shares in well run firms.  It may take a while for the world to wake up and realize that there is no other solution for its energy needs.

Thursday, August 11, 2011

Gold Margin Raised

Last night the CME Group raised the maintenance margin requirements on gold futures contracts.  For readers who are not familiar with futures here is how it currently works:  Gold contracts trade in paper form and represent a contract to purchase the metal at a specific future date.  The contracts can be settled in cash and while many novices assume they represent actual physical gold, they do not.  These are strictly paper instruments.  

Only a fraction of the total contract value is required to place a futures trade making the instrument highly leveraged.  The CME Group, in this case, controls the amount of leverage available on each commodity.  Once the trade is placed an amount of cash per contract must be held in the account. This is called the Maintenance Margin Requirement.  If the value of the contract decreases, more cash must be posted in order to keep up with this requirement.  Also, the CME can raise the amount required at any time.  So, when margin requirements are raised it makes trading more expensive and when lowered, less expensive.  This can be used as a tool to persuade price.

As of last week $4,500 in cash was required on each gold contract.  This is effectively 32:1 leverage.  Gold rose over $150/oz and they raised the cash maintenance requirement by 22% to $5,500.  The leverage ratio remains virtually unchanged at 32:1.

This move has not really changed much in the gold market.  Selling today can likely be attributed to traders adjusting to the new margin requirement.  Some contracts must be sold to get back into agreement with the exchange.

This is a good time to mention that US Treasuries can still be leveraged 40:1 on the exchange!

Wednesday, August 10, 2011

Market Update

Posting an opinion of where markets are headed before a Fed announcement is always a risky move.  We predicted that there were only two outcomes possible in advance of yesterdays planned news release.  There would be another bond buying program announced which would spark a rally, or the failure to announce one would result in continued fierce selling.  Some readers were seduced by the 400 point rally manufactured at the end of trading yesterday.  We were not.

The indexes will continue to fall.  Many readers are asking how low they will go.  Does it matter?  They will fall until another bond buying program is announced.  The next likely opportunity for that will be the Jackson Hole Fed meeting.  Until then, expect markets to fall and continue falling.

The banks are insolvent.  Small bankers are still unaware that the banking system is a cartel and if you are not in it operating is very difficult.  This statement is still labeled as a conspiracy theory.  What many well educated members of society label as heretic behavior is merely our choice to remain solvent.  The loss of capital means we would no longer be capitalists.

Clearly, Possible Outcome 2 was the correct choice yesterday.  Hopefully you took our advice and used the 400 point shadow rally as an opportunity to get out of mainstream equity positions.  You probably did not though so here is our next bit of advice to surely be discarded.

Something very important happened today, many mining stocks decoupled from the indexes.  Shares on average rose in the face of 500 more points to the downside for the Dow 30.  This tells us clearly that there is relative strength in the mining shares.  The selling has pushed them to the point that the value of their metal in the ground is severely undervalued.
This chart shows that the gold miners are beginning to rise in the face of major market weakness.  When shares show relative strength they are signalling that they will lead the next general market advance.

The next few weeks is an excellent time to build a position in quality mining names.  If your broker is not capable of making any statement that does not involve something negative about gold please contact us for more information on available research products.

Tuesday, August 9, 2011

Market Update

Last Thursday at 11:00AM we posted a page from the playbook being used to run this market.
This was posted before the DOW began plunging to previously unexpected levels.  The playbook is simple.  If objectivity is sought the big picture becomes completely clear.

As previously discussed, the bond buying programs put in place by the privately owned Federal Reserve benefit the shareholders of that institution.  The shareholders are the primary dealers.  The primary dealers are required to bid in treasury auctions creating stability for the government's bond issuance.  What has been happening for the past 2 years is slightly different in that the primary dealers buy the bonds, mark them up a few clicks and sell them back to the Federal Reserve.  The Fed uses newly created cash to buy these and the spread on sale results in billions of dollars of profit for the member banks.  Some of this free money is used to purchase equity index futures in order to manage public opinion and distract the people from this outright theft.  If you still think this is a conspiracy theory consider the chart below.  Recognize that it begins with Bernanke's Jackson Hole speech last August and ends in June of this year when the bond buying program expired.  This happened while the average American was struggling to get by, unemployment was 20%, credit was completely unavailable and commerce had ground to a halt everywhere but Washington.

Why did the primary dealers meet at the New York Fed two weeks ago?  The last bond buying program ended in June of this year.  An arbitrary date of August 2nd was chosen as a rally point for public concern.  The debt ceiling was officially lifted at the end of July.  The press said that the dealers met to discuss options if the debt ceiling was not raised.  This is not the case.  The purpose of the meeting was to agree on how to manage public opinion into agreeing that another bond purchase program was needed.  Since that meeting the market has been allowed to plunge.  It is unsupported by the futures purchases of the primary dealers.  The DOW has fallen 1,400 points in 10 days.

So, what happens now?  There are only two possible outcomes we will explain the one we feel is most likely first.  Few sites go on record with these predictions.  It is also worth mentioning that in March of this year we predicted that gold would pass $2,000/oz in the 3rd quarter but close the year in the $1,800/oz area.
Possible Outcome 1:
The Fed begins meeting today.  For readers that still might be utilizing the Wall Street Journal as their primary source for information we must inform you that the Fed does not meet the way you think.  The meeting is the huddle where they figure out how to spin what they have been told to do.  You do not have to believe us but we know what we are talking about.  The meeting is designed to make sure the spin they need to apply to the decision is ready for market scrutiny.  The primary dealers have succeeded in scaring the public.  You must ask yourself what has changed in the economy in the past month, quarter or year?  Nothing has changed, conditions are the same but the perception of the people has been manipulated.  This article appeared in the FT last night:
What?  They are forced to consider it?  Why?  Nothing has changed but now they are forced to consider it. There are stories about a double dip recession, trouble in the economy and unemployment.  We have been writing about these conditions in the face of criticism for being negative, pessimistic and hoping for failure.

So here is the prediction.  The new bond buying program is announced to save the economy.  The market begins to rally as there will be another $500-700 billion in fresh cash pumped into the system.  This is in addition to principal and interest reinvestment of the $2.6 trillion in Fed holdings.  So really, closer to $800billion is the correct number.  Gold has effectively reached our short term target of $1,800 as $1,782.50 was achieved overnight.  Once the rally begins gold will take a hard hit of $100-150/oz.  This will also include at least one margin hike on the yellow metal.  Currently it is 4 times easier to trade gold futures than silver futures.  That will change.

With this move the remainder of the year will include more of the same to include surging commodities, weakening dollars and a perceived rise in the stock market.  Future posts will provide more detail as conditions change.  It is a good time to point out that the Dow is flat over 11 years and the price of gold is up over 600%.  Here is a 5 year chart.
Possible Outcome 2:
This is not likely considering the oversight of the Fed is tantamount to a dog on a self-feeding system.  There is tremendous moral hazard at work when they can initiate a policy that gift-wraps profits.  We still must at least say that there is a small chance no program will be announced.

If this happens we suggest you move to the strongest part of your home and close your eyes.  The Dow will reach a level that you are not ready for.  We don't want to frighten you this early in the morning but the long predicted 1:1 Dow:Gold ratio will be more believable.

Monday, August 8, 2011

Quick Reminder......

In a world of instant gratification people seem to only remember what just happened.  What are you doing for me now now now?  This was posted August 4th at 11:11 AM EST and if you will consider that the Dow was down only 200 clicks at that time then focus on what has happened since maybe you will see the bigger picture.

Again, the post is telling you what the plan is.  So, your choice is to try and trade the plan or sit tight.  We recommend sitting tight as the odds of you successfully navigating this are slim.