All-Time Highs, All-Time Lows

Addison Wiggin – August 18, 2011

  • Panic sets in again…stocks dumped, Treasury yields at all-time lows and gold at all-time highs… your 3-Part strategy for avoiding the mayhem… and even making a little sumthin’ from it…
  • “A very interesting set of circumstances for gold stocks,” says Byron King, looking for immediate gains…
  • Your government at work: Justice Dept. opens a case on S&P long after the crisis… Moody’s and Fitch are left untouched… hmmmn…
  • Thank God someone thought of it: The Wall Street Journal seeks out Snooki’s view of the economy…
  • Readers rant: Rick Perry, Ron Paul, Greece, the presidential motorcade… and more!

   In the first five minutes of trading this morning, the Dow fell 300 points. It fell a further 40 in the ensuing 25 minutes. Then shed another 150 the moment the Philadelphia Fed announced grim news for manufacturing at 10:00 a.m.

As you might expect, the “safety trade” is back on.

At the opening, it sure looks like today will be the day gold breaks $1,800… and sticks. At last check, the Midas metal is up to $1,822.

   This morning’s initial shock in New York began in Europe. Major indexes in London, Frankfurt and Paris all shed 3-4% during their sessions.

No specific event set things off…. except perhaps “the realization is that [officials] don’t really have a clue” one waggish analyst explained it to MarketWatch.

Banks across the board are taking the biggest hit. Good thing officials banned short-selling financial stocks in France, Italy, Spain and Belgium last week, isn’t it?

   With the Dow’s 450-point plunge, all the gains since a week ago today are gone. Ditto the S&P and the Nasdaq.

As we mentioned, The “Philly Fed” — a Federal Reserve measure of manufacturing in the mid-Atlantic region — plunged deep into negative territory, to a grim level last seen in March 2009…

A hit list of additional domestic economic numbers in the U.S. isn’t helping much:

  • The consumer price index (CPI&#41 is up 0.5% from June to July. Gasoline drove about half of that increase, with food and clothing accounting for much of the rest. The year-over-year increase is 3.6%…
  • First-time unemployment claims rose 408,000 last week. After a one-week respite, we’re back above 400,000, the critical number under which wonks like to think the economy healthy…
  • The National Association of Realtors (NAR&#41 reports existing home sales fell 3.5% between June and July…

Add all these data points up you get a giant sigh of disgust from economic pundits across the nation. Every one of these numbers was worse than the “consensus estimate” of economists polled by outfits like Bloomberg and MarketWatch.

   Likewise, the “safety trade” is driving money into Treasuries… forcing yields down. The yield on a 10-year Treasury note set a record low this morning.

At last check, Uncle Sam will give you a whopping 1.98% return on money you lend him for the next decade — even less than during the panic low on Dec. 19, 2008.

Perspective: On that same date, gold went for $840 an ounce. Treasuries have a newfound companion when it comes to the safety trade.

“I think we’ve reached a stage,” says First Eagle Funds’ Jean-Marie Eveillard, “where [gold is] not just a hedge against inflation, it’s a substitute currency.”

“Investors look at issues in Europe and in the U.S., in Europe the problem with the single currency and in the U.S. there is the problem of the ballooning government debt because of gigantic budget deficits.”

“We have had a pure paper money system for 40 years when Nixon closed the gold window in ’71. That system, or what passes for a system, is fraying at the edges and gold becomes a hedge and some kind of insurance policy.”

   Even our favorite Latin American caudillo has figured that out. Venezuelan president Hugo Chavez nationalized the country’s gold mines yesterday.

Well, the ones that weren’t nationalized already anyway. Not that Venezuela is much of a gold producer to begin with.

Lost in the noise surrounding this announcement is something we find a lot more significant: Chavez is repatriating much of Venezuela’s gold held overseas — about $11 billion worth.

The Bank of England, J.P. Morgan Chase, Barclays, Standard Chartered, the Bank of Nova Scotia… all of them recently got a request from Chavez asking that the gold he has stored with them be shipped home.

“We’ve held 99 tons of gold at the Bank of England since 1980,” declared Chavez. “It’s a healthy decision” to bring it back.

   So where does gold go from here? In the options market, traders are making some extreme bets.

There’s a high amount of open interest — 14,532 contracts, says the Financial Times — in December 2011 gold calls with a strike price of $3,000. That’s a lot of people counting on nearly a double in four months.

There are 189 contracts for December 2012 calls at $5,000. December 2012? That’s the Apocalypse trade.

   The stock market is dragging down gold stocks today, but not much. The GDX ETF of major gold miners is down about 2/3 of a percent.

Over the last 10 trading days, gold stocks have performed a lot more like gold than stocks:

“Here we are right now with a very interesting set of circumstances,” said Byron King during our teleconference this week, released to Reserve members last night. “The price of what they sell has gone up a lot, and a big part of the cost of what they do, which is energy, has gone down quite a bit.”

“So you’ve got higher income from your gold sales and you’ve got lower cost from cheaper oil and cheaper energy. That ought to go to the bottom line, and from a pure valuation standpoint, that ought to be good for the gold mining stocks.”

   The breakout of gold stocks in recent days marks the reversal of a stunning trend as shown on this chart, courtesy of our friend Bill Baker and the crew at Gaineswood Investment Management and the Marlmont Fund:

This shows the correlation between gold and gold stocks as represented by the Philadelphia Gold and Silver Index, commonly known as the XAU.

“During the second quarter of this year,” says a new report from Marlmont, “shares of precious metals companies behaved strangely, actually going down in value when gold appreciated.”

“This negative correlation has never existed in the data that extend as far back as we could access, to 1992. There have been very short bouts when the movement of miners and the metal did not move well in unison, but never this.”

Their conclusion: “We frankly could not conjure up a more convincing case for owning companies that search for and produce precious metals — especially now that in recent decades these have underperformed gold bullion as dramatically as only seen in the meltdown of 2008.”

   This is a pivotal moment. With gold where it is today, the stars are now aligned for a handful of junior gold miners to make big moves… the kind that can leave you set for life.

That’s the second part 3-Part “Market Volatility” Strategy. We lay out a handful of plays among our editors that are the ideal buys… right now.

More broadly speaking, stocks are tanking… again. Treasury yields are at record lows, and gold is at record highs. The information recorded in our teleconference this week is more urgent than ever. That was the first part of our strategy. You can access, right here.

And with new crises looming in Europe, a new showdown over the federal budget in Washington and a cost of living that keeps rising despite panics worldwide… you can’t afford to overlook the third part of our strategy.

It’s an “Emergency Summit” of our editors and a select group of readers. The dates are set: Oct. 13-14, here in Baltimore.

And we’re going out of our way to make it worth your while: We’ll cover your hotel, we’ll cover $500 of your airfare… and admission to the event itself is free. But space is limited. We can accept only 300 people. Please review your invitation here.

   Less than two weeks after Standard & Poor’s downgrade of the United States comes word the Justice Department is investigating S&P’s AAA ratings of rotten mortgage-backed securities back in the day.

Only S&P. Not Moody’s and Fitch, which also gave their AAA blessing to similar securities.

Note… it’s the Justice Department doing the investigation… not the Securities and Exchange Commission (SEC&#41.

Turns out the SEC has had a peculiar policy for years now: If it finds no wrongdoing in an investigation, it destroys all the records.

“Imagine a world,” begins Matt Taibbi’s Rolling Stone expose, “in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case.”

“No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file — ‘Hey, chief, didja know this guy had two wives die falling down the stairs?’ No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements.”

“This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.”

   Apparently because The Wall Street Journal has nothing better to cover at this moment in history, the paper recently sent a reporter to interview two stars of the reality series Jersey Shore.

Thankfully, the reporter saved face and got Snooki’s take on the economy.

Snooki: “famous for being famous” dingbat pulls down $30,000 an episode

“The economy is really scary,” Snooki wowed with her brilliance, “because 2012 is coming. I feel like the first thing that’s going to happen… is a blackout and then everyone freaks out and the world goes crazy.”

OK, maybe we’re being too hard on her. We’re heading into the heart of the 11-year sunspot cycle and respectable scientists talk about the possibility of a solar flare so strong it could take out the power grid.

“So hopefully,” she went on, “Obama will take care [of the economy] before 2012.”

No, we take it back.

   “So now you are defending Rick Perry,” writes a reader. “But of course, you right-wingers would like to see a cowboy in the White House.”

The 5: Ahh, so you’re the one who flunked the reading comprehension test in Mrs. Rice’s fifth-grade class. Try again.

   “What would be really interesting,” a reader muses, “is if Ron Paul would position himself for a really useful job where he could actually accomplish something.”

“I wish he would give up the presidential bid and get the nomination for either the secretary of the Treasury and head the IRS and negotiate the finances or be appointed to the Fed chairman. That is a position from which he could be heard. And that is a position in which he could effect real change.”

The 5: Um, who would appoint him to such a position? And how would he have to prostitute himself to secure that appointment?

   “What ever happened to Greece?” another reader inquires. “Four months ago, Greece was asking for its next tranche of bailout loans, but Merkel of Germany wanted bondholders to share some pain and arrange a soft default, where banks would voluntarily write some bonds, or value, off.”

“There was a big concern that the rating companies would still label that as a ‘default,’ thus roiling the markets. Since then the issue has gotten overshadowed by the U.S. debt ceiling debate and the threat of a U.S. bond default. The debt ceiling has been resolved, for a while, and now Italy and Spain are at the center of another EU bailout scheme.

“Did Greece ever get the bailout money? And have a soft default? Did the ratings agencies react? Or is that still unresolved?”

The 5: Yes, yes, no and yes. Greece got another bailout, and the terms of the restructuring are, in the real world and in plain English, a default.

But the rating agencies haven’t classified it as such, lest it trigger the cascade of events we’ve described before that would ultimately set off another crisis in U.S. money market funds.

And nothing has been resolved. Under terms of the bailout, Greece has put more “austerity measures” in place. That will make for a further drag on the economy, suppressing tax revenue and forcing the Greek government to go back to the bailout well yet again.

Sometime, this will have to end in tears. Certainly that’s what traders in the credit default swap market believe. This morning they still peg Greece’s likelihood of default in the next five years at nearly 79%.

   “I seriously doubt that bus cost $1.1 million,” writes a reader of the presidential motorcade through the upper Midwest. “That’s probably what it cost to buy it from the factory, but after the Secret Service was done with it (armor, communications, etc.&#41, I’m sure it more than doubled.” “And what’s with the black? Looks a bit ominous to me.”

   “The motorcade,” another reader picks up where the previous left off, “reminds me of the movie Doctor Zhivago, set during the Russian Revolution.”

“At one point the family takes a train to the country to escape from Moscow. On the way, they have to stop and pull over on a sidetrack to let another mysterious black train pass. It contains the head of political correctness, who’s been burning out villages he thinks have helped those rebelling against the new order. It is a scary comparison.”

   “That was not the Obama motorcade,” adds one more. “It was the funeral procession for the economy.”

   “On your comment on an ‘imperial presidency,’ you should see how we overseas at American embassies treat our congressional ‘royalty.’ The money spent to serve their every need is truly incredible.”

“I work at the embassy in Paris and am saddened by the money that is spent on these visiting dignitaries. But it is not only the money, it is also how these royal visitors expect to receive this treatment and no longer understand what the rest of us or our friends deal with on a daily basis.”

“So it is not just the retinue of servers that travel with our president, but also the rest of government executives that expect the same. The consequences are obvious.”

   “Personally,” writes our last, “I’m sick of Congress and the political parties throwing blame at the other when they all had a hand in destroying our country.

“I think the Congress, Senate and the president should all have to live on what the middle class make for a living, and they should have a limit of what they get for a retirement package.

“I’ll bet all their money is in gold and they have it stashed overseas.”

The 5: If that’s true, at least they’re following an investment strategy we could get behind.


Addison Wiggin
The 5 Min. Forecast

P.S.The volatility index (VIX&#41 is back above 40 as we write — the third time it’s crested that level this month.

Multiple spikes in a short time span don’t happen often. They can signal the onset of a bull market — as in 1998 and last year. Or they can signal worse to come, like 2001 and 2008.

Which will it be this time? More important, what’s the best thing to do with your money right now?

That’s the question we set out to answer with our 3-Part “Market Volatility” Strategy. The first two parts you can access right away: the teleconference convening six of our editors and the special report detailing our editors’ favorite gold stock picks.

The third part comes in October, with our urgent Summit here in Baltimore. This event is so important, we’re going all out to make it possible for you to join us. But we have room for only 300 people. So please, take this opportunity right now to review this invitation.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More