Friday, September 2, 2011

How To Invest In Gold

Current market conditions are characterized by persistent and maddening asset deflation with simultaneous monetary inflation.  For new readers we will break this down into a more simple statement.

Everything you own is going down in value while everything you buy is going up in price.

This is a challenging set of circumstances for small investors.  The reason that the challenge is greater than normal is that these conditions are the product of economic manipulation.  The laws of markets have been bent in order to benefit a select few.  Before labeling this a conspiracy consider that the money center banks profited handsomely from issuing, packaging and selling mortgages that were not worth the paper they were printed on.  Then, when the house of cards collapsed the public was told that if these companies fail everyone would be doomed so we must keep them solvent.

What you must understand about 0% interest rate policy is that money center banks are allowed to borrow funds at 0% and purchase US Treasury notes at 2-3%.  The newly purchased notes are used as collateral for the loan so there is no cost to the bank.  They are then allowed to use the interest payments to repair their balance sheet.  Meanwhile, they are providing funding for an out of control and delusional congress who insists on spending $1,400,000,000,000 more than it receives in annual income.  Do you see the problem?  Do you see why the founding fathers warned of the dangers that come with a central bank?

This is not a political site.  In fact, we remain devotedly agnostic with respect to politics.  It just does not matter anymore who gets elected.  Most people write us off as negative after hearing that statement but maybe you should consider this.  The conditions present today have nothing to do with politics.  Economics is all that matters.  The only way to survive and protect capital is to understand markets, economics and human psychology.  Grasping these three concepts simultaneously then using them as indicators is the key to survival in a system that reeks of fascism.

Your stock broker still has not received the slap in the face that is coming from the gold market.  Please understand something very very clearly.  Gold is not a commodity.
Gold is Money
When you purchase gold your are engaging in a currency swap.  This means you are trading dollars that are printed in unlimited quantity for money that has a fixed supply and can not be duplicated.  Consider the following chart which compares the performance of gold vs the dollar over 5yrs:

That is probably not good enough for your stock broker as he will wait until there is a 60 Minutes broadcast telling him that the dollar is no longer useful.  Maybe we should try to persuade him with a chart comparing this "Useless commodity" with the S&P Index Spider ETF that he calls "Aggressive" market exposure based on the formulaic marching orders handed down from his superiors.

Well, you can draw your own conclusions from these facts.  Remember, the critical tool for survival is the ability to objectively think for yourself.  You were told that thinking for yourself was dangerous and not politically correct.  Get this ability back as soon as possible because when you don't think for yourself someone else thinks for you.  A quick study of human history will show that exchanging this autonomy for perceived security this will not end well.

When investing in precious metals we suggest an allocation of bullion, mining stocks and cash.  If your broker can not help you with this please contact us to receive information about other options.

See our three part series on gold at

Wednesday, August 31, 2011

Banking Sector

It is just a bad time to be in the banking business.  If you are a commercial bank with voting interest in the Federal Reserve then you might take exception to this statement.  For new readers, the fed is not a public institution.  Before labeling us conspiracy theorists please spend at least 5 minutes researching the topic.

The banking business is simple.  $100 in tier I capital creates $1,000 in loans.  If you are a large commercial bank with stock in the fed you can lever up to nearly 30 times your initial capital.  The problem with this business is that the $1,000 in loans can at times incur losses.  In the case of many regional banks the actual value of loans would be closer to $700 on the initial $1,000 in origination.  Remember, $100 in capital created that loan book so you have effectively wiped out your equity and created a $200 loss for the bond holders.

There were roughly 8,000 banks or thrifts in the US before this recent crisis.  We have frequently suggested that 6,500 will survive and so far that looks to be a good target.  7,988 of those initial 8,000 institutions have no financial influence or ownership in the fed but are subject to the effects of its policy.  Amazingly, the remaining banks have no understanding that they work in an industry controlled by a cartel and they are not in it.  The compliance costs associated with a free checking account have risen to nearly $400.  This is just one of fee increases the FDIC has implemented in an effort to pay for the cost of failed banks.  The failed institutions that are valuable get taken over by connected bankers with influence.  They take the assets and deposits but push the losses to the FDIC.  The FDIC pushes the costs of those loses to the rest of the remaining banks through fees.  The treasury also absorbs some costs and most Americans have long forgotten that they are the treasury.

What we are literally shouting at investors is that these stocks are not cheap.  If an industry is experiencing growth of 20% during a period of expansion you want to own equity as profits are rising and value is increasing.  In this case, the industry is contracting by an estimated 20% and the burdens of doing business are increasing exponentially.  Combine that with a balance sheet that looks like a toxic waste dump and we are asking again, "Why would you want to own the equity of a company in this condition?"

Many novice investors think that a $5 stock is cheap.  It is a good time to mention that sometimes a $150 stock is cheap and a $5 stock is expensive.  If you are buying a $5 stock in a bank that has a market capitalization of $5bil and is carrying losses of 3 times their capital you are drastically overpaying for equity in this concern.  Let's have a look at several expensive stocks.
This bank is basically a giant asset gatherer.  They are not a primary dealer and at some point we speculate they will be absorbed by JP Morgan or a large money center bank.  Warren Buffett's infusion of capital likely represents a gesture of goodwill in return for something.  Again, resist the urge to call us conspiracy theorists as we have seen behind the curtain and know how government behaves.  Don't be surprised if there is some federal move that benefits Wells Fargo which is Buffett's main bank holding.

Notice on the chart (Courtesy of that there is a major downtrend in place and this current rise is not likely to break out of that.  It should test the downtrend and continue floundering.  $4.00 represents firm support for the stock and only a failure of the business should break this.  We expect more sideways momentum as it is forming a perfect bearish pennant.  BAC should represent high Blood Alcohol Content as that is what you need to think this is a good buy.
Here is another awful looking chart.  Bearish pennant again in place.  $3.30 is the possible low and at this time  $5.80 would need to be breached to even consider a purchase.  There is just no way this will happen without a drastic change in circumstances.  The elephant in the room is the balance sheet.  Since no one wants to discuss it why should we?  RF should stand for RUN FAST! and that is what we would do if we owned these shares.
At this point we are boring readers so there is not much to explain here.  This issue needs to breach $23.50 as of now with confidence to warrant consideration.  These downtrends always stay in place until something changes.  Do you see anything changing?  We do not either and investors should give up trying to argue with the market.

As for charting it is an art not a science.  This commentary is not intended to encourage any investment activity.  We are only trying to illustrate that if you apply the same chart analysis to a gold mining stock the exact opposite becomes apparent.  Investing with the trend is a much easier and more pleasant way to make money in markets.  It also makes you much more fun to be around!