Actually writing this again around 10:00PM Thursday so the information will likely be stale by Friday’s trading time in the United States, but Asian markets are open and futures markets are active, so this gives me something to comment upon.
First I’ll address today’s monster blowout on the markets and try and make some sense of it. We had a 200 point pop in the markets, wiping out the losses of Tuesday and setting up another test of the recent highs. I still think there is little chance we break out higher, but just remember my comments about PROGRAM TRADING and how computers are in charge of most trades.
We came close to breaking under 12k and failed, combined with a 1 to 2% drop in oil prices and a 30 dollar drop in gold, this sent a clear signal to the program traders that it was a buying opportunity. But there is one thing that is lurking under the surface and I have not heard any real MSM commentators speaking about it and that is the dropping US Dollar and the rising YEN/EURO spreads.
The US Dollar index has dropped well into the 76 range and hit an intra-day low of around 76.43. As I type this sentence we are at 76.51 and the Euro/USD is nearing 1.40 to the Euro. Yen is sitting at 82 and has not moved much this week so far.
This all sets up some very interesting scenario’s; just remember that I have no skin in this game as I got out in the fall of 2008 and moved to cash. Since then I have moved to paying off the last of my debt, preparations in the form of 6 months food in the pantry and longer term seeds and longer term storage items like sugar, wheat, rice and the rest. What I have left is staying in cash for now and if I consider anything it will be waiting for another dip in silver and possibly buying in at these elevated levels, though it scares the living crap out of me.
So on to the scenarios.
Scenario 1: With the US Dollar dropping this fuels the DOW and other markets up further as the expected action is that it takes more USD to buy more of the DOW/S & P. Meaning that you are getting nowhere as you have these huge 200 point increase days. The US Dollar index has dropped nearly 1 ½% in the PAST WEEK ALONE… How much did the market increase? About the same, so this means that you didn’t really gain anything being in the markets. Were you in Silver or Oil or Gold, you would have gained quite a bit as those have gone up in USD relative prices on the order of about 2 to 4 %( depending on which one). And this leads me to the LEARNING MOMENT OF THE DAY!!
This learning moment is going to be centered on NOMINAL and ACTUAL gains as it relates to the US Dollar. A nominal gain is strictly a percentage gain. Today the DOW gained about 1 ½%, so if you had invested 100 dollars in a DOW fund, you would have around 101.50 in that fund at the end of the day; NOMINAL GAIN of $1.50.
But that is not the end of the story. You must factor in the inflation to figure out your ACTUAL gains. During the 1 week that you gained that $1.50, the CURRENCY THAT IT IS DENOMINATED IN has lost nearly the same amount. So in real terms you are no better off with the money you invested in the DOW than when you started.
But again, that is not the end of the story either. Were you to have stayed in US Dollars(meaning not investing at all) you LOST 1 ½% during that time frame(like me) as holding cash is causing you to absorb the entire loss of the value of the US Dollar. But were you to have invested those US Dollars in something like silver, then you would have gained 3%. But the problem with that gain is that it will not be realized (the same with the DOW) until you convert it BACK TO CASH.
And it is this point that has gotten me into hot water over and over again with the Gold bugs. My point about staying away from gold is based on the premise of priorities. I did not have any preparations done 2 ½ years ago (when gold was at 750) and I had received a large buyout from the company I worked at for almost 11 years. I decided that the better use of that money was to pay off the bad debt we had hanging over us (and buying food preparations and other long term cost saving ideas), instead of investing in gold.
Now here is the point I am trying to make. Had I taken all that money and invested in gold, instead of preparing by buying food and paying off bad debt, I would have been FORCED to sell that gold about 12 months later as I had not found employment and my Unemployment benefits were running out. My wife was facing a layoff as well and we were getting cash strapped. I would have sold that gold at about 910 dollars an ounce (the price after 12 months). I would have made a small gain in the grand scheme of things and I would still be in the same debt and I would still not be prepared.
By using that money in the way I did, I was able to fundamentally change the way I was living and reduce my monthly outlays considerably. I am now in a much better financial place, even as my wife ended up losing her job at the beginning of this year. And we are now in a place that we could even risk a little bit of our money on some silver bets and not have to worry about liquidating them in a blind rush(possibly even into a falling silver price) because we are cash strapped again.
You must understand why you are getting into any investment and what your end goals are. In my case I am not worrying about a traditional retirement as I believe that is a pipe dream. I view people running around in my income bracket (middle middle class) worrying about their 401k’s and “investments” as a study in futility. Everything is going to change on that front over the next 20 to 30 years (my retirement window), so what is the point playing by the rules of that world? I am getting to cash and getting my slate clean and getting ready for whatever is coming our way.
And from that platform is where you should do your investing. If you are as prepared as you can (and that varies depending upon your location and circumstance) and you are as debt free as you can get (always moving towards being completely debt free), then you are standing on a great platform to preserve your spare wealth. And I think from that vantage point; silver and gold and other hard investments are a great place to be. But if you are standing down in the mud and you think that taking all your cash and throwing it in Precious Metals is a great idea, I think you are delusional. You are buying from a place of weakness and should we see another replay of Fall 2008 to Summer 2009, where precious metals fell, and you are forced by circumstances to liquidate into that weakness, you would feel really foolish.
But if you are out of the mud and on your platform, you can watch these drops in prices with detachment, because you are holding gold and silver for the correct reason and that is to help you on the other side of the economic chaos….
End of my sermon.
Back to the scenarios I see playing out tomorrow.
Scenario 2: Is that oil prices re-assert themselves tomorrow as the crisis in the Middle East is still unfolding and oil prices could go up considerably from these levels. Another GLARING fact that seems to have eluded the MSM commentators on CNBC (yes I pick on them a lot) is the spread between West Texas Intermediate Oil and Brent Crude Oil prices. Right now Brent is selling above the 116 level and WTI is barely above 102 as of this writing.
I have been watching oil prices since about the middle of 2005 and I mean WATCHING THEM! I check WTI/Brent futures on an almost daily basis and up until 2 months ago, Brent almost ALWAYS sold at a discount to WTI. Whenever WTI was at 80, you would expect Brent to be around 76 to 78 a barrel. But for some reason about 2 months ago this current detachment happened. And my guess is that Brent is telling the true story and that WTI is being artificially suppressed at the moment either through market manipulation (unlikely) or because of some bubble in the system that has not yet worked itself out. Whether it is manipulation or a market anomaly, it is just a matter of time before either WTI explodes upward to match Brent, or Brent collapses to meet WTI. I bet on the former as gasoline prices are pointing towards a WTI price of about 107 to 110 at this point. And on that point RYOB gasoline prices are now hovering easily above the 3 dollar mark and will likely lead to 4 dollar gasoline at the pump in my area in a matter of 7 to 10 days at the longest(assuming no major retracement). 4 dollar gasoline is already showing up in California markets due to their high taxes.
So what happens tomorrow? Who the hell knows? But I would not use the DOW and the markets as your barometer. Remember that they are highly manipulated and they long ago lost any ability to predict the economic future as they are now run by lightning fast computer systems that no longer INVEST but rather look for arbitrage and a quick fraction of a cent gain before moving on to the next data set.
ARBITRAGE: the simultaneous purchase and sale of the same securities, commodities, or foreign exchange in different markets to profit from unequal prices.
Have a good Friday everyone.
Robert
