Volatility Continues

Well, as Mandelbroit says, volatility begets volatility. The stock market was up a lot on Monday only to give it back again on Tuesday and gold stocks were no different. My actively trading/market timing friends are telling me that I should have sold back when certain trend lines were crossed, and I, if things keep going the way they do, I suppose they are right. Trend following works well when markets all move in one direction, as they are doing lately, but tends to generate lots of trades for small losses when the market drifts from one direction to the next and back again. Once, I used to be a trend follower, but I found I started underperforming the market at large. 

Then there are people like Warren Buffet They don’t really try to follow the market. They just feel that they are going to buy good stocks that will be “weighed” correctly in the long run. Or, as Bill Bonner puts it, “things that are out of whack have a tendency to get back in whack.” And that’s how I feel about gold stocks. Specifically the one gold stock I am invested in is Barrick gold (ticker symbol ABX). I hasn’t been doing to well lately and it’s down another 8% or so this morning, but I’ve found I’m not particularly bothered by its performance. Instead I’ve taken refuge in the slogans that I used to feel described bad investors- specifically that “it’s only a loss when you sell.” 

“What if it keeps going down,” some might ask. Well, in that case, I am prepared to buy more. I have a lot of money in bonds which is maturing in about three weeks, and I wouldn’t mind loading up on more Barrick gold. The company has been around since the 1980s, and is currently trading at the same price it was back in 1994. Since gold was bouncing around in the $200-$300 range around that time, and since its now bouncing around the $750-1000 range, I feel pretty confident that I’m making a good investment. In fact, I doubt I will be able to but it come mid-November for the price its trading at today, since they announce their earnings at the end of this month, but who knows. A recession may be on, but gold is still above where it was a year ago, even on that crazy COMEX market. So the company has been able to sell all the product it produces at prices higher than it did then, and it has expanding capacity coming up next year. So I’m not worried. Things will get “back in whack”.

It does beg the larger question about trading philosophy. In essence, would you rather invest like a Warren Buffet who picks good companies and sticks with them or like a George Soros who made his fortune by being on the right side of particular trades. There is no right answer to that question, its just a matter of personal preference. The advantage of being an investor with a longer time horizon is that you don’t have to monitor the market as much, but you do need to do your homework about the stocks you do like: study their markets, read their literature, listen to their conference calls. 

The one thing I would say though, is that if you are a Warren Buffet style investor, then you need to hang out with others of a similar mindset and vice versa. If a value based investor starts exchanging notes with an active trader, then they’re just going to mix each other up. It’s like a two dancers coming together and expecting each other to do radically different dances. And they tend to mess up each others timing. The value based investor will want to buy when stocks are down because, in comparison to their earnings, that’s when stocks are on sale. The trend following investor will never want to “catch a falling knife” and instead will admonish their friends never to buy a stock when it’s at or near it’s 52-week ago.  So when these two get together and talk one is saying that a stock is a buy based on Price-to-earnings and the other is saying its a sell based on technical analysis of the chart. The result of a collaboration between the two styles leads to the absolute worst kind of stock investing: buy high, sell low. 

I think what happens to the investing public at large is that they would like to be like Warren Buffet but don’t quite understand exactly what that means. They don’t read books like Buffett: The Making of an American Capitalist but instead just jump right in with the sense that they inherently know how this investing thing is supposed to work. So they go out and buy companies they like. When they go up, they feel good and talk about investing for the long term. When they go down, they get scared. “What if this company goes out of business?” they wonder. They talk to their friends about it. Eventually, they end up scared to death, so they sell out at what ends up being the bottom. 

John Maynard Keynes said that “the market can stay irrational longer than you can stay liquid.” I suppose that’s true, but if liquidity isn’t a problem, then you can afford to wait. That’s the way I look at it anyway. Or as Bill Bonner put it, he buys stocks because he “feels bad for them.” That they are so neglected and unloved. Well right now the market is neglecting gold stocks. They are unloved and abused. No one will return their phone calls… except me.

Strange Days in the Gold Market

The Dow and NASDAQ were both down some 7-8% respectively. Today, they’re up roughly 5%.

As I mentioned previously, volatility begets volatility.

One of the most curious developments lately has to be the market for gold and gold mining stocks. The demand for gold bullion’s gone through the roof in the past couple of months as the financial system has fallen apart — so much so, that bullion dealers are simply out of stock on most coins. German bullion dealers have stopped taking orders because they’re so swamped and have no product to offer. The US Mint itself has suspended production on the Gold Eagle and Buffalo coins; they simply can’t get the gold on the open market at a cheap enough price to profitably make the coins at the prices for which they’re currently offered.

Which just begs the question: why doesn’t the US Mint just raise the price on the coins?

I’ve discovered that this is a rabbit hole question — the more you study it, the more questions you come up with. When you finally do manage to piece together an answer that makes sense, you’ve arrived at the conclusion you’re looking at the result of some kind of conspiracy.

Now, I realize that conspiracy theories regarding gold are the stock of Libertarians everywhere — not to mention, the kind of thing that makes traditional people regard us as freaks. But — I’ve come to believe that that is exactly what’s going on.

Here are the facts that are difficult to explain without invoking some form of conspiracy:

  • WHY … has the US MInt suspended the sale of gold coins rather than just raise the prices on the coins they offer?
  • WHY … had the electronic market of gold futures come about with a “spot” price of gold (that’s fallen quite a bit lately — 5.1% today) at a time when gold bullion dealers haven’t been able to keep the stuff in stock?
  • WHY … is Barrick Gold (ticker symbol: ABX), one of the world’s largest gold miners with a solid balance sheet, a good pipeline of new mining projects, and more production coming online next year, trading at a Price-to-Earnings ratio of 11.5 today — down over 10% today alone?

What on Earth is going on here?

Well, the COMEX (Commodity Exchange) is the marketplace where futures contracts for gold and silver, and what is traded are paper claims to the metal. Very little actual metal is delivered in all of this paper trading of gold and silver on the COMEX exchange.

In days of old, a large portion of the paper claims to gold and silver were ultimately backed by “forward selling” based upon mining operations. In other words, there were paper claims floating around to gold and silver that were backed by nothing more than the promise of a mining operation to deliver it at some point in the future. That makes some sense, but given that some mining operations were selling up to 10 years in the future, it’s not hard to see how this could be used to create the illusion of an abundance of gold when the actual precious metals themselves are quite rare.

Consider the recently settled lawsuit brought against Morgan Stanley.

Morgan Stanley was charging clients a service to store physical silver in their vault for them. The problem was, there was no actual silver ever stored. Eventually, the clients caught on and sued them for fraud.

Their defense? That it was merely carrying out “industry standard” practice.

Since the paper claims to gold and silver are for precious metals that are supposed to be stored in bank vaults, Morgan Stanley has since let us know that it’s the banking industry’s “standard practice” to claim they have gold and silver that they actually don’t. Is it such a far fetched idea that the COMEX paper market has attempted to “create” gold out of paper by inflating more physical claims to paper than actually exist? If the COMEX spot prices for gold and silver are truly representative of the actual demands for the physical metal, then why can’t the US Mint buy the gold it needs to fill its orders? Instead, since bullion dealers have stopped taking orders, Ebay has become the main exchange for gold and silver coins — which are trading at far higher prices the COMEX says it should.

This situation represents a vast fraud perpetrated against global investors seeking to protect their wealth against inflation. The Morgan Stanley lawsuit in particular shows how callously “industry standard” practice treats its clients. The fiat money game is all about how the banking industry can pervert the free market system and siphon off wealth to themselves. Apparently, out and out fraud is not against their interpretation of the rules, and that just goes to show you, as far as they’re concerned, this is war — a war they certainly fight aggressively.

Dr. James Conrad wrote regarding this issue:

“At any rate, you initially issue a lot of claims to fake metal, and so many futures contracts are written, in a very short time period, that they flood the market on exchanges like COMEX and the London Metals Exchange, where almost all the transactions are on paper, and real metal rarely changes hands.  Meanwhile, if you are the big bullion bank, you know what you are doing.  You issue just enough subsidized precious metal paper to automatically trigger stop-loss orders.  The price starts going down as the sell orders are filled.  That triggers yet more stop-loss orders, and the process becomes one of dominos, falling one after another, until the price collapses.  If the operation is successful, and the collapse is big enough, market confidence is destroyed, on a wide scale.”

I believe that we are clearly witnessing yet another attempt to destroy confidence in gold and silver as a hedge against inflation.

Further evidence for this: as discussed in the video of the Gold Antitrust’s Gold Rush 21: A Historic Gold Conference Exposing the Manipulation of the Gold Market, the gold market has declined at many times of high political tension, such as when Iraq invaded Kuwait.

Why would the price of gold decline when you would expect people to increasingly demand it except that the banks of the world flood the market with false paper claims in order to drive the price down to discourage people from looking at precious metals as a safe haven at all? The financial market is falling apart and the price of gold fell 5% today. Yet, there’s not enough physical gold to go around?

Beware, dear reader. Something is very rotten in the state of Denmark.