Currency

If it works for the ECB it can work for the Fed. Be happy!

Posted by Jack Crooks

on Wednesday, 4 April 2012 22:55

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“The only thing that saves us from bureaucracy is its inefficiency.”

– Eugene McCarthy

We foolishly find ourselves asking: when will Federal Reserve quantitative easing reach its limit?

Considering the consequent boost to risk appetite that flows from QE, enriching those who hold financial assets while doing little for those holding welding torches and spatulas, we are happy to tell you that the Fed has plenty of room to maneuver the printing presses still.

And if you’re wondering just how much credit they can pump into banks or how much government debt they can buy up in order to keep the Keynesian desperados operating, it’s at least 26% more of total government debt – that would take them to even with the ECB efforts that have to this point “succeeded” in suppressing severe risks:

To read full article CLICK HERE

 

Michael Campbell – “David is one of the best known Silver Analysts in North America, and he has been very very accurate on what he thought the metals were going to do in this last period, and it is unusual to find that. When the markets were excited last September with Gold at $1900 and Silver at $49, David Morgan called for just the type of consolidation we are experiencing now”.

David thinks we are in the “scare you out or wear you out” long consolidation. The “scare you out” being the sudden drop that occurred in silver in 1 1/2  weeks when it plunged from 43-33. The” wear you out” being the month after month of consolidation that is so tough for long term investors, some who might have bought silver at 38 and are now enduring months with it at 32. That said, David underscores this is typical bull market psychology.

David thinks this consolidation is going to continue, possibly until September, before Gold ultimately breaks out above 1900 and Silver breaks out above 40. He also firmly believes metals are going “far higher”.

Regarding the disconnect between the relatively high precious metal prices and the precious metal stocks that are trading at multiple year lows, he thinks precious metals stocks are so undervalued that it wouldn’t make sense to sell them now if you bought them at higher prices. Indeed he thinks that you should buy more if you have the ability to do so. Markets do not like these divergences and the stocks will ultimately rally and  become overvalued compared to the metals before this bull market is over.

In the interview David describes how the bottom will occur  in the precious metals stocks, what will send them soaring, and the precious metal equities he would buy, and is buying now.

Listen to the full interview. The full interview begins at the 26.25 mark on the Money Talks March 31st player located in the centre of the masthead at the top of any Moneytalks.net page.

ETF’s: Time to take profits in the industrial sector

Posted by Don Vialoux - Timing the Market

on Wednesday, 4 April 2012 15:22

This column recommended accumulation of Exchange Traded Funds in the Industrial sector on October 11th for a seasonal trade lasting until Spring. Since then, the S&P Industrial Index has gained 23.9 per cent. What should holders of Exchange Traded Funds and related equities in the sector do now?

The industrial sector includes a wide variety of subsectors including industrial conglomerates, aerospace & defense, machinery, air freight & airlines, road & rail, electrical equipment, construction and engineering and building products. Investors can choose between 24 ETFs that track the sector or its subsectors. Largest holdings in the S&P Industrial Index are General Electric, United Parcel Services, United Technologies, Caterpillar, MMM, Boeing, Union Pacific, Honeywell, Cummins and Emerson Electric.

The industrials sector has a period of seasonal strength from October 9th to May 31st. Average return per period during the past 20 periods was 15.0 per cent. The current period has recorded significantly higher than average returns through actively traded Exchange Traded Funds. Excluding dividend distributions, the Industrial Select Sector SPDR Fund (XLI $37.42) has gained 21.0 per cent, the Vanguard Industrial Index Fund (VIS $69.54) has advanced 20.0 per cent, iShares on the Dow Jones Transportation Average (IYT $93.69) gained 15.5 per cent, the Dow Jones US Aerospace & Defense Fund (ITA $67.13) gained 17.4 per cent and Market Vectors Environmental Services ETF added 14.7 per cent.

On the charts, the S&P Industrials Index has a positive, but deteriorating technical profile. Intermediate trend is up. The Index trades above its 50 and 200 day moving averages. However, strength relative to the S&P 500 turned negative at the end of January and short term momentum indicators started to roll over from overbought levels last week. The Index at 323.52 currently has resistance at 329.29. In addition, several key stocks in the sector including United Technologies, Caterpillar and Boeing broke below technical support levels last week.

The sector is vulnerable to news from first quarter earnings report when they begin to appear next week. General Electric, United Parcel Services, United Technologies and Caterpillar are scheduled to report modest earnings gains on a year-over-year basis while MMM, Boeing and Honeywell are expected to report modest declines. Of greater concern, second quarter earnings guidance released with first quarter reports could be revised lower by several key companies in the sector. Most companies in the sector realize more than half to their earnings from operations outside of the United States. Currency translation into U.S. Dollars at a time when the U.S. Dollar Index is high relative to the same period last year will significantly dampen earnings expectations in the second quarter.

Preferred strategy is to take seasonal profits on Industrial sector Exchange Traded Funds and related equities at current or higher prices.

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 Don Vialoux is the author of free daily reports on equity markets, sectors, 
commodities and Exchange Traded Funds. . Daily reports are 
available at http://www.timingthemarket.ca/. He is also a research analyst for 
Horizons Investment Management Inc. All of the views expressed herein are his 
personal views although they may be reflected in positions or transactions 
in the various client portfolios managed by Horizons Investment Management.

The Wikileaks/Financial Times revelations on significant gold buying interest in the Middle East —
notably Iran’s central bank, Jordan’s central bank and Qatar’s sovereign wealth fund — brought to mind the story of King Ibn Saud and his sale of oil concessions to the major oil companies. In payment he received 35,000 British sovereigns — a coin
many of you hold in your own sovereign wealth funds. The good king understoodthe difference between the value of gold and the value of a paper promise. 

At the time (1933), the British sovereign’s
value stood at $8.24 each, or $288,365 for the lot. The price of oil was about
85¢ a barrel, and a British sovereign could buy about ten barrels.

Today those same sovereigns would bring a little less
than $12 million at melt value ($338.00 each) and a barrel of oil is selling
for about $115. Thus, a British sovereign can buy a little under three barrels
of oil — a statistic which gives you an inkling of gold’s current
undervaluation. 

For gold to buy the same amount of oil now that it
did in 1933, the price would have to go to nearly $5000 per ounce — an
interesting calculation for those who think gold is overvalued and in a
bubble. 

In the gold market where there’s smoke,
there’s fire. If members within one class of investors — e.g.,
central banks, sovereign wealth funds or hedge funds — you can be
assured that other members of that same group are similarly involved. Recent
activity within the hedge fund industry with respect to gold is exemplary. It
follows then that if Iran, Qatar and Jordan — themselves threatened by
the popular Pan-Arabic uprisings — are acting on their interest in gold,
can Saudi Arabia, the United Arab Emirates and Kuwait be far behind?

If so, they will join several nation states and a
bevy of hedge and sovereign wealth funds in the pursuit. The problem they will
encounter is an old one. There simply is not enough physical gold available at
any given point in time to satisfy the needs of any one of these major
players, let alone all of them. All of this, of course, will resolve itself in
the price for which the metal sells. 

I note with interest that Barclays Bank — one
of the five members of the London Gold Fix and an institution well-situated to
experience first-hand the interest in physical metal — has predicted a
top price for 2011 of $1620 per ounce. Predictions by other Fix members are
equally bullish. Scotia-Mocatta predicts a high
range of $1500 to $1600 with a possibility of a spike higher. Deutsche Bank is
predicting $1511 per ounce for 2011 and $2000 per ounce for 2012. Both Societe General and HSBC, the two remaining members, are
calling for a top-end price of $1550 per ounce. These bullion banks are in a
better position than most to ascertain the sources of physical demand, and
they know better than anyone the extent of global interest among key players.
By the way Goldman Sachs, though not a member of the Fix, is still widely
monitored for its opinion on gold. It has set a price objective of $1690 per
ounce for 2011.

 

Michael J. Kosares

USAGold – Centennial
Precious Metals, Inc. 

www.USAGold.com

 

Article originally
published  on USA
Gold 


Fed – Actions Speak Louder Than Words

Posted by Axel Merk, Portfolio Manager, Merk Funds

on Wednesday, 4 April 2012 13:20

Investors may be taken for a ride by today’s Minutes of the Federal Open Market Committee (FOMC), which expand on the FOMC’s March 13, 2012 statement; in the interim, we believe the Federal Reserve (Fed) Chairman Bernanke has gone out of his way to assure the markets that monetary policy will remain “highly accommodative,” at least through late 2014.

The Fed does indeed have a credibility problem: having assured investors that rates will remain low for an extended period, it may only take one or two FOMC members to turn more optimistic about the economic outlook to cause the markets to more aggressively price-in tighter monetary policy. Conversely, Bernanke has made it clear that he is most concerned about a recovery in the housing market and that low interest rates – throughout the yield curve – are desirable. Operation Twist is specifically aimed to achieve that, lowering long-term rates and flattening the yield curve. However, should investors become increasingly optimistic about economic improvement, odds increase that investors sell bonds, putting upward pressure on long-term rates.

To understand the Fed’s “communication strategy”, one needs to be aware of who is calling the shots. We are not just talking about Fed Chairman Bernanke, but also the composition of voting FOMC members. Without a doubt, the “hawks” (hawks are FOMC members considered to favor tighter monetary policy compared to “doves”) on the FOMC are getting more vocal. At the same time, the only voting “hawk” on the FOMC this year is Richmond Fed President Jeff Lacker:

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The scale may tilt a tad towards the centrist/hawkish side should Congress fill the two vacant seats with the candidates under consideration. Still, when all is said and done, it is the voting members who ultimately determine imminent monetary policy decisions, rather than the noise created by non-voting members. And those actions remain, in our interpretation, decisively on the dovish side:

 

  • “almost all members again agreed to…maintain a highly accommodative stance…”
  • “a number of members perceived a non-negligible risk that improvements in employment could diminish as the year progressed”

 

Obviously, should economic data continue to surprise to the upside, the Fed will have an ever-more difficult time defending its dovish position. The credibility of the Fed will be seriously tested as the Fed has committed to keeping rates low until late 2014. However, should we enter a weak patch, we believe the odds are rather high that the FOMC will “take out insurance” against another slowdown. In a world where everyone hopes for the best, but plans for the worst, central banks around the world – including the Fed – may keep the world awash in money.

After all, a world laden with debt may need inflation if deflation is to be avoided. Bernanke has argued many times that tightening monetary policy too early was one of the biggest mistakes the Fed made during the Great Depression. We don’t think Bernanke will repeat this. Indeed, we consider he will err firmly on the side of inflation. As such, when the dust settles, look at actions, not words. We see doves, not hawks, managing the monetary aviary.

Please register for our Webinar on Thursday, April 19, or sign up for our newsletterto be informed as we discuss global dynamics and their impact on currencies.

Axel Merk
President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds