Paper Airplane Time

May 31, 2012 Investors bail from stock mutual funds (again): Chris Mayer on how we’ve been here before, and why it’s no reason to give up on stocks altogether
A trio of disappointments: jobs, GDP, Midwest business activity
Hopscotching the world: One of Asia’s wealthiest men spots a bigger trend than China’s “hard landing”… while Jeffrey Tucker waxes on the vibrancy of Brazil
Gluing the neighbor’s locks to keep the neighborhood nice… Readers unload on fellow readers who insist they “paid in” to Social Security… a special notice for readers of Addison’s Apogee Advisory… and more!
Gosh, could it be the Facebook effect?

Investors yanked $7.02 billion out of stock mutual funds last week, according to the Investment Company Institute. That’s the most since the first week of 2012.

Domestic stock funds account for nearly all of the outflow; that category has seen net outflows for 14 straight weeks.

The total withdrawn so far this year: $45 billion, which puts us on a pace to easily exceed the $85 billion total for all of last year. But then, this is nothing new. “People have been yanking a lot of money out of the market,” Chris Mayer points out, “something like $1.4 trillion since 2007.”

“Some people will use these outflows,” Chris adds, “to say the market can’t or won’t rise. I think that’s a lot of baloney.”

Chris points to new research from the Leuthold Group. “A new market high could potentially occur with no help at all from the public,” writes Leuthold’s Doug Ramsey.

After all, the S&P more than doubled from its March 2009 low, even as the outflows proceeded apace.

There is precedent for this: the bear market of the 1970s.

You want to talk about “weak volume” and “no public participation” in today’s market? Old-timers like technician Ralph Acampora will regale you with tales of traders flying paper airplanes on the New York Stock Exchange floor in the ’70s — so little trading there was to do.

Within the 1966-82 bear, there was a stretch from 1974-80 when the broad market rose 120%. Small caps did even better.

And within that six-year span, there was a vicious shakeout. “The sharp market declines of mid-2010 and mid-2011,” Leuthold’s Ramsey writes, “have probably served the same purpose as the 1976-77 decline — flushing out retail investors just as they were finally preparing to tiptoe back in.”

“It’s an interesting observation,” says Chris. “Stocks, as a class, then, perhaps are getting a bad rap.”

“People remember the headline-grabbing stories — and usually they are the stocks that blew up. Meanwhile, there are many stocks that just keep plodding along.”

“There are enough companies with good managers and decent businesses that give a fair shake to their owners. On a portfolio basis, such stocks can make the little guy a lot of money over time.”

Chris shares some of his favorites right here.

Meanwhile, the “headline-grabbing stories” bring little joy today.

As we write, U.S. stocks are reversing big losses early in the day on “news” that the International Monetary Fund will spend out of an empty pocket to fill the black hole known as Bankia. That’s a giant and busted Spanish bank cobbled together from a bunch of smaller and busted Spanish banks 18 months ago.

No, the eurozone is no closer to being fixed now than it was a few hours ago… but the S&P has managed to recover 1,300.

(Facebook, meanwhile, could sink below $27 before day’s end. Heh.)

Tomorrow’s market action will be “data-driven”, with the Labor Department’s monthly jobs report issued before the open and the ISM manufacturing survey after.

In a preview of the jobs report, we have the following numbers this morning:

Private-sector jobs: up 133,000 this month, according to the payroll firm ADP. Manufacturing jobs, however, turned in a second straight month of decline
Small-business jobs: up 40,000 in May according to Intuit… but that’s fewer than April’s 60,000. Hours have been cut, too
First-time unemployment claims: up 10,000 last week, to 383,000. That breaks several weeks of stagnant numbers… and in the wrong direction
All of those numbers were worse than the vaunted “expert consensus.”

For further evidence of a U.S. slowdown, we have the Commerce Department’s latest guess on first-quarter GDP.

The initial guess a month ago came in at an annualized 2.2%. This morning, it’s 1.9%.

To complete the trifecta of disappointments, the “Chicago PMI” number, reflecting business activity in the City of Big Shoulders and its environs, came in way below expectations.

At 52.7, it’s still above the 50 dividing line between expansion and contraction. But here too the Street was counting on something much better. The figure is now the lowest since September 2009.

Gold is holding steady after recovering lost ground yesterday. The spot price is currently $1,561.

Silver, however, is still stuck below $28, at $27.79.

Hot money is again flowing into the dollar and Treasuries today. The dollar index just crested 83; the yield on a 10-year T-note is down to… drumroll, please… a record 1.58%.

One of Asia’s wealthiest businessmen isn’t giving up on Chinese real estate yet.

“Li Ka-shing Stays Long on Mainland Property,” reads the headline by Dee Woo, a contributor to the fledgling Chinese edition of The Daily Reckoning, and republished at 文å*¦Ã¥ŸŽ – Ã¥?³Ã¦—¶Ã¦»šÃ¥Š¨Ã¦–°Ã©—», 本地新é—», çƒ*点论å?›, Ã¥?šÃ¥®¢ – — a site read by many affluent Chinese. (You can read a poor English translation at this link.)

At age 83, Li — known in Hong Kong as “Superman” — has an estimated net worth of $25 billion. And despite the talk of a “hard landing” in mainland China, Li is moving full speed ahead with property development there.

The reason? The Chinese central bank is cranking out unlimited quantities of yuan to keep pace with the Fed’s unlimited quantities of dollars. Real estate, in contrast, still has a limited supply… and Li is playing for the long haul.

“Brazil is a marvelous and massive country,” writes Jeffrey Tucker, continuing a quick hopscotch around the world. He’s back from a recent trip speaking to the Instituto Ludwig von Mises Brasil.

It’s a place “where private wealth thrives without embarrassment, where well-protected and healthy familial dynasties form the infrastructure of social and economic life, where technology is popular and beloved by everyone, where the police leave you alone and where Americans can feel right at home.” “My most-surprising findings in Brazil, aside from the amazing fruits that I didn’t know existed because the U.S. government doesn’t think I need them, were the young American kids who have moved here to find economic opportunity. This I had not expected, but now fully understand.”

“The world is changing fast. Freedom in America is slipping away so quickly that we are already seeing a wave of young people leaving in search of new opportunities, just as people from around the world once came to America to live the dream.”

Back in the States, people find themselves resorting to teenage pranks just to keep their neighborhoods from going to hell.

Last fall, someone moved into a vacant foreclosure house in the high-end Palmer Woods section of Detroit. Ordinarily, this would be good news. Unfortunately, he didn’t buy the six-bedroom Tudor revival; he was a squatter.

“Neighbors took matters into their own hands,” says a post at the Consumerist site. “First they got the utility company to cut off gas and electric service to the house.”

Didn’t work. Enter the teenage pranks. “One neighbor spent an entire day placing large rocks in the property’s driveway. Another thought that putting glue in the locks would do the trick.”

In the end, the only thing that worked was the filing of 11 felony counts against the squatter. He stands accused of filing false paperwork claiming ownership of three Detroit properties.

The real estate broker trying to unload the joint says the inside of the house is in fine shape and he expects a bidding war once the house goes up for sale.

Good luck with that: There are 10 vacant homes, says The Detroit News, in a neighborhood of about 300.

“I just got my first $1,600 Social Security check last week,” writes a reader stirring the pot in reply to yesterday’s mailbag. “I am 64 and expect to live to, say, 88. So I am anticipating 24 years x 12 months x $1,600 = $460,800 in government checks.”

“I was self-employed for 40 years and thus earned and put in all of the taxes myself toward Social Security and Medicare. Most of your Social Security crybabies probably only put in half their own payments and had their bosses pay in the other half for them. I believe I paid in around $120,000. Can any of your email complainers that say ‘I am not receiving a government handout, I paid into the system, it hurts my feelings when you speak meanly about me’ do any frigging math?”

“OK, so my first $120k I get back will be my own money I paid in. So ask your ‘feelings hurt crybabies’ where does the rest of my, and their, extra money windfall come from?”

“They neglect to mention they are probably going to receive three times more dinero than they, and their employers, paid in — from their government. ‘Not receiving government handouts?’ My arse.”

“How in the hell can such a badly designed system ever be sustainable?”

“I never got unemployment or any other benefit from any governmental agency, federal, state or local,” writes another.

“Now at age 72, I get Social Security, which represents only a small percentage of the total amount which my employers and I paid into the Social Security fund over the more than 50 years I worked. I did get about $150 per month from the government for serving in the U.S. Army in the U.S. and Korea.”

“I did not sign up for Part B Medicare coverage at age 65 so I now pay about $150 per month for Part B plus about $16 per month for Part D. All in all, considering all the money paid into Social Security and Medicare, my return on investment is the worst of all the investments I ever made except one I made in a company that subsequently went bankrupt.”

“I just pray the Social Security Administration doesn’t do the same. If my Social Security and Medicare benefits are a drain on the U.S. economy, just give me back the money I paid for these benefits and we’ll call it even. By the way, I am still paying into Social Security and Medicare as I write this email.”

“I get a Veteran’s disability pension and soon I’ll be getting Social Security payments. In addition I have a very small computer consulting business that doesn’t earn enough money to pay taxes, but it keeps me supplied with computer equipment and software, which is my hobby/occupation.”

“The VA pension isn’t enough to live on in Southern California, nor would Social Security or my business be. All combined, I just scrape by, and I even was able to earn enough from my business to subscribe to the Equity Reserve, and later on, by selling some gold and silver and a small loan to open a brokerage account, to do some meager investing. (The loan has since been paid back.)”

“While I am partially living on the dole, I have no illusions about where the money comes from. As you and many others have pointed out, the money comes NOT from some fund, but from general revenue. The taxes I paid ‘into the system’ were merely another TAX that went into the same general fund.”

“I also realize that the days of my or anyone receiving these ‘benefits’ (aka stolen money) are numbered not in decades, but in months or even days. So in answer, I’m getting mine while I still can. I am steadily buying precious metals and other valuable goods in preparation for the coming currency collapse.”

“I make no excuses for my ‘larceny, nor do I apologize for it. What others may call entitlements (I paid into it, or I’m poor, etc.) are, in fact, financed by the many taxes, fees and other extortions and the borrowing, which in effect results in the devaluation of the dollar which is ipso facto just another tax of the most insidious sort.”

“It is somewhat sad to realize,” writes our final correspondent, “that there are some who read The 5 Min. Forecast who actually think that they are ‘collecting what is due’ when no such contract exists between the government and you as a payer into the Social Security system.”

“The Social Security Administration owes you nothing regardless of how long or how much you have paid into the system. There are no guarantees you will receive or are entitled to anything. To stress the point, please refer your readers to the Supreme Court case of Flemming v. Nestor in 1960.”

“In its ruling, the Court established the principle that entitlement to Social Security benefits is not contractual right.”

“Also note that Congress can change the law anytime it wants. If anyone thinks that Congress cannot reduce what you think you should get as a ‘government benefit’ or make you pay more into the system, they should think again.”

“While in my 40s, I would have completely agreed with the writer who said he’d be a millionaire if he did not have to pay into the system, I am now nearly 56, and when I finally start receiving ‘what is due,’ I promise to suck as much of those government benefits as they will allow me to until the system collapses.”

The 5: The Social Security Administration was also refreshingly blunt in the “annual statements” it used to send out. “Your estimated benefits are based on current law,” it said in fine print. “Congress has made changes to the law in the past and can do so at any time.”


Dave Gonigam
The 5 Min. Forecast

The Broken Pension Promise

March 2, 2012 Whither the defined-benefit pension? How low interest rates, the “fraudclosure” scandal and one bloated dinosaur of a company are conspiring to wreck your retirement
In search of a mystery seller: Separating the signals from the noise after gold’s beat-down
Take that, Warren Buffett: How gold really can generate an income stream
Spanish town looks to collect revenue from a few of its… best buds
The economic fever-chill cycle… a query about ETFs… Ron Paul raises his silver shield… and more!
If you thought the Fed’s penchant for low interest rates were a bear because you can’t get a decent return on a bank CD, think about this: The typical pension plan of an S&P 1500 company can meet only 75% of its obligations as of year-end 2011 — a post-World War II low.

In 2010, the funded ratio was still 81%.

Put together all the S&P 1500 companies, and they’re staring at a $484 billion aggregate pension deficit.

Big companies that still maintain “DB” pensions will have to scrape together $100 billion to keep their pensions funded this year, according to the consultant Milliman Inc.

That’s $100 billion they won’t have for dividends, or stock buybacks, or — heaven forfend — expanding operations.

The situation only gets worse as the era of low interest rates persists.

“Companies from defense contractor Lockheed Martin Corp. to aviation-electronics maker Honeywell International Inc. are caught in a vise,” according to Bloomberg.

“The Federal Reserve Board’s vow to keep rates at current levels until 2014 means pension plans’ fixed-income investments are stagnating just as new rules shorten the time available to shore up funding.”

General Electric, 3M and Boeing also find themselves in the same fix.

“With the declining interest rates here in 2011,” says 3M’s CFO David Meline, “our liabilities did increase.”

Meanwhile, one of the primary “assets” held by pension funds is looking more and more shaky, thanks to the recent “fraudclosure” settlement between the major banks, the Justice Department and 49 state attorneys general.

A provision in the deal “allows for the banks to reduce borrowers’ balances in home loans that back securities which have been sold to investors, such as U.S. pension funds,” the Financial Times reported yesterday.

“Investors say they are being penalized for mistakes made by the banks, and have launched a campaign to limit potential losses to their holdings.”

Bondholders versus banks: If Vegas were laying down odds, you’d be better off picking one of 36 numbers at a roulette table.

True, private pensions are backstopped by the government’s Pension Benefit Guaranty Corp. Unfortunately, the PBGC is about to choke on the pension obligations of just one company.

American Airlines — the carrier our Dan Amoss saw as a “dead man flying” months before it filed for Chapter 11 last November — wants to terminate the pensions of 130,000 workers, foisting them on the PBGC.

“Josh Gotbaum, the PBGC’s director, has mounted an unusual public campaign against American,” Reuters columnist Mark Miller wrote two days ago, “arguing that the airline hasn’t made the case that it needs to terminate the plans.”

No wonder: The PBGC is already $26 billion in the red after the dust settled from the first phase of the Great Correction. American’s pensions would swell its future obligations by $10.2 billion.

“The use of bankruptcy court to shed pensions,” Miller writes, “raises questions about the long-term viability of the PBGC, and potential burden on taxpayers. While the PBGC has plenty of cash on hand to meet near-term obligations, the pressures could become unmanageable if a succession of underfunded plans were transferred to the agency.”

We’ll confidently make this forecast: Count on it.

The gold watch? Ancient history. And pension promises are next…

“This pension underfunding issue,” says Strategic Short Report’s Dan Amoss, “will grow to a crisis within a few years if the Fed keeps suppressing 10-year Treasury rates in the current 2% range.

“There’s no way underfunded pensions, under this low-interest rate scenario, will be able to achieve projected portfolio returns. So pensions will require massive draws of cash from their corporate sponsors” — just as GE, 3M and Boeing will have to do this year.

We know you don’t want to hear about this, especially with the weekend coming up. It’s one more bad piece of news for your retirement income, on top of low interest rates and the drawdown of the Social Security “trust fund.”

But we have a new idea that could help you fight back. More after we survey the markets…

Stocks are again cast adrift today. As of this writing, the major indexes are all down, but not much.

The S&P is holding above the 1,365 level that Jonas Elmerraji’s been watching. Small caps are taking the bigger hit; the Russell 2000 is down about 0.8%.

Oil is selling off today, after poking above $110 late yesterday. That’s when Iran’s Press TV reported a pipeline explosion in Saudi Arabia… which Saudi Arabian officials immediately denied.

Hmmm… More Sunni-Shia New War skulduggery?

In any event, with the passage of time, traders have followed the sage guidance that comes from Internet message boards: “Pix, or it didn’t happen!”

With no pictures forthcoming, oil’s back to $106.57.

Gold is losing a bit of the ground it regained yesterday after Wednesday’s vicious sell-off. The bid is currently $1,709. Silver’s getting stomped again, down to $34.77.

And the picture of what happened on Wednesday is starting to come into focus.

“Looks like a large seller of gold in the market, as a 10,000 contract traded, downticked the price by $40 per ounce, and represents 1 million ounces of gold sold,” reads a note from CIBC World Markets.

“Unusual to see such a large single trade,” it added. “Not likely due to contract expiry, either.”

“Ordinarily,” adds a note from the London firm Sharps Pixley, “if a seller wanted to get the best price for his metal, he would seek to finesse the selling over time, hunting out liquidity (finding people who are the other side of his sell order) and thereby ensure he gets the best possible profit.”

Who did it? Depends on whom you want to believe. We see claims of “a large U.S. fund” along with a claim J.P. Morgan executed the order on behalf of “an Asian fund”.

Whoever it was, “this seller,” concludes Sharps Pixley, “was clearly simply out for effect.”

“I would buy gold at almost any price,” says Evy Hambro, manager of BlackRock Gold & General, the U.K.’s best-performing commodities fund,” as long as the fundamentals are strong.

“Gold has been incredibly strong for most of the past 10 years, and I see that trend continuing… Long-term fundamentals in the gold market appear supportive of prices, driven by constrained supply and rising demand.”

“Gold mine supply,” meanwhile, “was effectively flat from 2001-2010, despite the huge increase in the gold price over that period.”

“My favorite aspect of gold is that it is still a finite resource,” chimes in our income specialist Jim Nelson. “Of course,” he adds, “there are two sides to everything.”

“Obviously, gold comes with incredible security and wealth protection against inflating central bankers and weak fiat currencies. But you can’t live on that.”

True enough. For all his gold bashing, Warren Buffett does have this fact on his side: It doesn’t pay you an income stream.

“Protecting your wealth means nothing when you are trying to pay your bills, fund your children’s college education or plan a vacation,” says Jim.

“And until now, this has been the No. 1 problem facing gold investors. Sure, bury your gold in your backyard. Fill your safe with gold coins and bullion. But don’t expect to live off it. At least that’s always been the case.”

But no more. For the past seven months, Jim has been refining a strategy in which you can generate income from gold.

One of his recommendations can deliver a 24% every year in cash paychecks. Another can give you monthly double-digit income.

This is the best of all worlds: You get the peace of mind that comes with gold… plus steady income that crushes anything you can get from Treasuries, CDs or blue-chip dividend payers.

Jim calls it his “Gold-tirement” plan: It can make any of your worries about Social Security, low interest rates or dwindling pension funds a distant memory.

A big claim, we know… But Jim has the goods to back it up. You can see for yourself right here.

In the United States, cash-strapped cities and states often look to casinos as a quick fix to fill their coffers. In Spain, they’re just going to pot.

The Catalonian town of Rasquera will allow a “cannabis club” to plant marijuana on 17 acres of city-owned property. “This is a chance to bring in money and create jobs,” says mayor Bernat Pellisa. The club will pay the town 650,000 euros annually.

Restoring solvency, stoner style…

Spain’s marijuana laws are, in the words of the UK Guardian, “ambiguous.” Growing and possessing pot for one’s own use is legal; cannabis clubs say all they’re doing is making it easier to do so. The mayor says he’s vetted the idea with lawyers and it, um, meets the smell test.

“The deal will turn Rasquera, where local produce traditionally includes olives, almonds and goats, into one of the biggest legal suppliers of cannabis in Europe,” the Guardian says.

Two thoughts occur to us: 1) The Greeks, themselves known for olives, might want to look into this. 2) We’re wondering why we haven’t heard anything from our office in Spain in a while. We’re headed over there next month to check up on them…

“I always find The 5 Min. Forecast very useful and entertaining, but so far, I haven’t seen anyone commenting on the near-term impacts from the impending confluence of several macroeconomic trends in the USA.”

“Those trends are: The ultra-bloated money supply, super-low velocity of money, incoming cash from the panicky eurozone, downward-trending leading indicators pointing to a recession on the horizon and the bubble du jour stock market.”

“Specifically, how can we know whether or not the bloated money supply will create sufficient inflation in the stock market prices to offset declining real (but increasingly inflated) earnings? How does one play such a situation when not only is the game constantly changing, but the value of the chips is no longer stable?”

“If the stock market is now rising on low volume due to liquidity created by the bloated world money supply as well as a lack of profitable alternative investments in Europe, will the mild recession forecast by ECRI be able to overcome the inflation and fear trade and cause a pullback in U.S. stock prices, or will it just appear to slow stock price growth (maybe like what’s going on in China)?

“To short (the market) or not to short, that is the question.”

The 5: This comes back to the fever-and-chills scenario we painted briefly on Monday. The economy and market recovered for much of 2009 and then slowed down after QE1 ended. Then came QE2 in the second half of 2010 and things took off again. Then QE2 wound down and everything started looking ugly in the late summer/early fall of 2011.

Now the Fed is promising ultra-low rates through 2014 and smashing the long end of the yield curve. You could be forgiven for thinking of it as QE3 by another name. And sure enough, there’s fever again.

This fever-and-chill cycle could drag on longer than you might think. But it can’t go on forever, and when it ends, it will end in tears.

“This is just a very curious story!” a reader writes. “I was investing in the Global X Farming ETF (BARN) because The 5 mentioned many times over that investments in farming should pay off handsomely in the future.”

“As this was a listed security, I was of the opinion that the responsible bourses would let only reputable companies issue and trade ETFs and they would also supervise these entities. Now I realize that the Global X Farming ETF does not exist anymore. How is such a thing possible in a totally regulated financial market like the USA?”

“Can you explain how such things happen, and also draw your readers to the fact that this company, obviously, is not trustworthy?”

The 5: Nothing suspicious as far as we can tell. Global X shut down eight ETFs last month, including BARN, because they couldn’t attract enough assets to make their operation profitable.

There’s a lesson in here about not jumping into brand-new ETFs until they get a chance to establish themselves. If it’s ag exposure you want, there’s ample liquidity in MOO for stocks and DBA for farm commodities.

“The powers that be,” writes a reader with another theory about why gold got whacked on Wednesday, “know that Ron Paul will take his best damn shot and use gold and silver as the best money.”

“What better way to give Bennie an ‘out’ than by thrashing gold and silver prices once he starts, so he can smugly point at the gold gyrations and claim the dollar is more stable and less prone to those damn speculators in the shadows?”

The 5: Hmmm… As coincidence would have it, the good doctor hauled out a Silver Eagle during Bernanke’s testimony on Wednesday, explaining it could buy four gallons of gasoline in 2006 and 11 gallons today. “That’s preservation of value.”

Silver had already fallen from $37.50 to $36 when he said that… but it plummeted to nearly $34 in the following 15 minutes.

Just sayin’…

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. “It’s a win!” says an email just in from Abe Cofnas.

We were on the edge of our seat wondering how Abe’s mock trade in the binary options market would make out this week… enough to hold off publishing today’s 5 till after the close.

“When our Wall Street 30 binaries expired at 4:00 p.m. today,” says Abe, “the underlying Dow futures were trading for 12,968 — more than enough to put our 12,925 binaries in the money. A winning binary always pays out $100. That means we made a $17.75 profit for each of our binary positions.”

All told, a 24% gain between Monday and Friday. “I dare you,” Abe adds audaciously, “to name another investment vehicle with that kind of reliable profit potential in four days or less!”

Stay tuned for another mock trade next week… followed soon by a chance to get in on the action yourself.
Thank you for reading The 5 Min. Forecast! We greatly value your questions and comments. Please send all feedback to

Beware the Party Mood

November 28, 2011 Holiday cheer: Retail and eurozone jubilation… The 5 deigns to interrupt with a few facts that don’t fit in
$601 trillion time bomb grows to $708 trillion in only six months
Money-grubbing local governments’ latest scheme: Decades-old parking tickets come back to haunt drivers trying to renew their licenses
Byron King on why gold supply simply can’t keep up with demand
Readers lament the onset of the police state… castigating your editor for the sins of decades ago… a unique source of yield in a world of near-zero interest rates… and more!
The S&P’s up 30 points in the first three minutes of trading. The Dow has recovered to 11,500.

“Strong Black Friday sales add fuel to investor sentiment,” reports MarketWatch, “as does perceived progress on EU crisis.”

Indeed, Thanksgiving weekend retail sales are 16% higher than a year ago, according to the National Retail Federation this morning.

Real disposable incomes, on the other hand, are flat from a year ago, according to the Commerce Department’s income and outlays report last week.

And the number of Americans earning a paycheck is up only 1.2% from a year ago, according to the most-recent Labor Department figures.

As for the latest European fix, “France and Germany,” the BBC tells us, “intend to propose a fiscal union ahead of a summit on Dec. 9, which would set binding limits on eurozone government borrowing.”

Funny, we already thought there were binding limits. Yep, right there in the Maastricht Treaty — deficits no higher than 3% of GDP. Too bad the treaty’s honored only in the breach; most eurozone governments have blown the 3% limit for years… including Germany.

The jubilation in the markets today is more likely the result of a tryptophan hangover than a sustainable rally…

The total amount of derivatives worldwide exploded by 18% in a six-month span, according to the Bank for International Settlements (BIS).

Outstanding derivatives — futures, options, swaps, including the infamous credit default swaps U.S. banks wrote on European government debt — totaled $708 trillion in the first half of 2011 — a staggering 11.2 times global GDP.

The figure is up $107 trillion from the second-half 2010 total of $601 trillion, and now exceeds the previous record set in — gulp — the first half of 2008:

How much of this sits on the books of U.S. banks, we can’t say with certainty. But the most-recent report from the Office of the Comptroller of the Currency indicates the total is $333 trillion. Of that, $249 trillion sits on the books of institutions backed by the FDIC.

That last number is sure to increase after Bank of America’s move last month to transfer an unspecified amount of derivatives from Merrill Lynch to BofA’s commercial banking arm.

Oil prices are within sight of $100 again. A barrel of West Texas Intermediate is up more than 2.5% this morning, at $99.33.

But Abe Cofnas is expecting even more this week. “Oil moves in relationship to expected global growth, supply uncertainty, as well as news out of the
Middle East,” he says. “Now, with prices hitting the key psychological level of $100 a barrel, it is becoming the center of a lot of attention.”

As Abe wrote that, January crude futures were at $100.40. He’s counting on a small move up to $101.25… delivering a 170% gain by this Friday in the one-of-a-kind market he follows.

“Binary options” are about a lot more than currencies. To learn more about Abe’s strategy, look here.

A growing number of cities are hunting people down for decades-old parking tickets. And they aren’t messing around. In Massachusetts, resident Patricia deWeever recently got a notice warning her license would be suspended if she didn’t settle tickets she got 25 years earlier. In New Jersey.

Turns out New Jersey and Massachusetts have a reciprocity agreement, cross-referencing their records. Cities including New Orleans and Toledo are also chasing down years-old, or even decades-old, parking tickets.

Typically, “the fines add up to a couple of hundred dollars,” writes AOL Auto columnist David Kiley, “and most draw the conclusion that they will pay it, rather than endure the hassle of hiring a lawyer or pursuing a Byzantine process of challenging it.”

Statute of limitations, you ask? For felonies, yes. Parking tickets, frequently, no.

“In deWeever’s case,” Kiley writes, “she will end up paying New Jersey $129 to settle the tickets, plus, a nebulous $100 license reinstatement fee, so she can legally drive in New Jersey to go visit her mother. On top of that, Massachusetts is also charging her $100 to reinstate her license in that state.”

Get used to it, as states and cities become evermore desperate for revenue. It’s the only way they can hope to get by as the mother of all financial bubbles starts to burst. You can’t fight it, so you might as well take protective measures.

Gold buyers, perhaps sensing early signs of money printing in Europe, have bid up the Midas metal nearly 2% today. At last check, the spot price is $1,712. Silver has reclaimed $32.

“The gold price is rising due to the fundamentals of supply and demand,” says our Byron King, with an eye on the longer-term picture. “More and more people across the world are buying.”

“I still recall one scene in a gold souk that I visited in Istanbul last year. Men with fat wads of cash — dollars, euros, Turkish lira, etc. — were just peeling off bills and buying gold, literally with both hands. It was kind of surreal, if not medieval.”

“All this gold buying and demand growth is happening while global mine output — aka ‘supply’ — is shrinking. Indeed, overall mine output may face a precipitous decline in the not-too-distant future. In other words, don’t argue with this chart, either:”

“It’s a busy chart, to be sure — gold mine output by region, from 1850-2010. Basically, the take-away is how precipitously South African mine output (noted in dark green at the bottom of the chart) has fallen over the past 20 years.”

“For the near-, medium and long terms, gold has strength as a store of wealth. It’s not just me saying it, either.”

“The forecast from the British bank Barclays is for a gold price at $1,875 per ounce by the end of this year. Germany’s Commerzbank is advising clients to expect gold at $1,800 per ounce, or more, by the end of the year. Another German bank powerhouse, Deutsche Bank, views gold as a ‘safe haven’ asset through 2012. In fact, Deutsche Bank calls gold its strongest ‘conviction trade.’”

[Ed. Note: If you share that conviction, there’s still time to add to your own metals stash via our one-of-a-kind offer…

Specifically, we’re offering one Gold Buffalo, 10 Silver Eagles and a unique “booksafe” storage solution… and we’re practically giving them away. But only through midnight this Wednesday. Time’s a-wastin’.]

We’re not altogether sure what to make of this gold spectacle…

This is the scene in Caracas last Friday, as armored vehicles brought in a shipment of gold bars — the first of Venezuela’s overseas gold holdings that President Hugo Chavez has ordered home.

Those overseas holdings total 160 metric tons, worth roughly $11 billion. This first shipment, if the central bank president is to be believed, is about 4.4 tons.

“Experts had cautioned,” says a Reuters dispatch, “that the operation… would be risky, slow and expensive.”

But Chavez announced the repatriation in August to “help protect Venezuela’s foreign reserves from economic turmoil in the United States and Europe,” again, according to Reuters.

“Keep in mind,” a reader writes, picking up a thread from last week and opening a grab bag of responses we got over the holiday weekend, “the police state has been funded by Homeland Security dollars.”
“I live in Houston. Even at Houston’s transit organization, they have a 10-person anti-terrorism team, SWAT Team, bomb-sniffing dogs, etc., all funded by Homeland Security.”

“Homeland Security dollars have brought out every wannabe tough-guy police chief in the country as they buy up truckloads of ‘goodies’ from the ‘law enforcement only’ vendors. Pull the plug on Homeland Security ‘grants,’ and these police departments will have to put their toys back in the bag.”

“I am one of those a**h**** your reader complained about. For my Thanksgiving flight out of Baltimore, I was subjected to an embarrassing pat down by one of the oh-so-polite TSA officers.”

“I felt violated and humiliated and let the officer know I felt it was wrong. One other passenger whispered to the agents ‘Thank you for keeping us safe.’ He would probably thank them for walking him into the gas chamber, too.”

“My offense was wearing a two-part sweater that showed up as an ‘anomaly’ on their new machine. As a 70-year-old grandmother, I don’t feel like a threat to security and don’t think it is right to be treated as one. It made me less than thankful on Thanksgiving Day.”

“This may well prove prophetic,” writes a reader in reaction to the words of Thomas Paine, cited last week in Jeffrey Tucker’s review of The Idea of America. “I wonder if this was inspired by the passages in Psalms and Proverbs indicating evil men will become worse and worse, and truly righteous men will need protection from the tyrants that rise into positions of power.”

“While I retired over a year ago from my job as an expedite courier making regular deliveries into the U.S. from Canada, when I read about the police-state tactics now commonplace, I was glad that I no longer have to do that.”

“Nothing against the American people, but the government has become everything the framers of the Constitution warned and attempted to legislate against. The biggest end run was successfully accomplished by the International Bankers when they got the Federal Reserve Act passed by Congress in 1913 that, effectively, legalizes counterfeiting in place of REAL MONEY, and established a monopoly in doing so.”

The 5: Our investment director, Eric Fry, connected a few more of those dots in an interview last week with RT’s Lauren Lyster…

“Whoa, is it Halloween or Thanksgiving?” writes a reader.
“What a scary 5 on Thanksgiving Eve: corrupt insider trading, the stealing of a man’s livelihood that he has spent his life working for (the big catch), the growing Nazism of the TSA, giving power to the incompetent who couldn’t find a job otherwise and the broadcasting of the next financial disaster to come.”

“I used to be bullish, but in these pages, I have learned to begin to see the various future positioning of the contrary view — finding ways to build positions to bet on the black, shorting the various markets. It seems anything the government wants to promote anymore is a sure bet to the contrarian side.”

“Thank you for your service and ability to think and report.”

“Reading about the Covered Bond Act of 2011 on Thanksgiving Day,” adds one more reader, “I was filled with thanksgiving that there are sources of information available that do more than parrot the misinformation, disinformation, spin, obfuscation and downright lies from government and corporate sources, whose goal is to distract our attention while plundering yet another part of the wealth of the citizens.”
“Thanks. And keep up the good work.”


Addison Wiggin
The 5 Min. Forecast
P.S. Even as the broad market swooned last week, Options Hotline readers were sitting pretty. The Dow shed more than 500 points between Monday and Friday… but Steve Sarnoff’s recommended put options on a major energy producer were up 86% after only three weeks.

Options Hotline is available right now at a significant discount. Grab it here.

As of this morning, a 10-year Treasury note yields 1.96%. A 3-year CD pays a paltry 1.95%.

Clearly the old “rules” for retirement investing no longer apply. Which makes this Overtime briefing from our income specialist Jim Nelson more important than ever…

Navigating Your Way Through a Choppy, Zero-Percent Interest Rate World
Three Secrets to Generating Thousands in Monthly Income

If you’re counting on interest from your savings to fund your golden years, you’d better think twice about those retirement “dreams” you had…
As you know all too well, it’s near impossible to find a savings account that will pay you even 1% annually.
That means all the things you had planned will squeeze your wallet harder than you may have expected. Dreams of cruising the world… golfing on exotic courses… even just treating the kids or grandkids to a day of fun… all become harder to achieve.
The same thing goes for counting on stocks and government bonds…
If you dumped $10,000 into the S&P 500, you’d be “rewarded” with an average income of just over $200 per year. Worse yet, you’d be putting your money at risk in one of the most turbulent markets we’ve ever encountered.
And inflation is running much higher than the yield on government bonds. No matter how you calculate it.
But there are few little-known income moves that you can make to double, triple, even quadruple the income you’re currently receiving.
One of those moves is designed to return more than $1,000 a year in income… from just a $10,000 investment — roughly five times the average stock yield.
This move doesn’t require any quick in and out trading, either. You can make this move today… and then simply forget about it for months. The income is scheduled to come in like clockwork.
And best of all, this move has nothing to do with touching the risky stock market… options market… or currency markets.
This move not only crushes the income most stocks produce, but it can actually provide more safety, too.
If you’re skeptical, I can understand. Greater income… with more safety… sounds like another “Wall Street scam,” I know.
But it couldn’t be further from what Wall Street’s lead you to believe…
For example, one of the reasons you probably haven’t heard about this unique move is that there’s no “easy money” in it for brokers.
The other reason you’ve probably never heard about this secret is that this move does require a little more work than, say… just buying or selling a stock. Since it isn’t in a brokers best interest to teach you things, he probably ignores this move.
But I’ve found that all good things in life require at least a little bit of extra work. Building a business… becoming good at a sport… even starting a new relationship, all require some time and knowledge. Investing your hard earned money is no different.
My point in telling you this today is simple…
Despite all the things crumbling around you… despite the “pay nothing” savings accounts… despite the rumor-driven volatile stock market… and despite your income not keeping up with rising prices…
I believe there are still a few relatively hidden, safe income-boosting moves you can make to help secure the retirement you’ve dreamed of living.
That’s why, over the next few days, I’ll use these 5 Min. Forecast overtime briefings to introduce you a whole new way to think about your retirement dreams.
We’ll kick off tomorrow with the first of these secrets — something I call “Income SAFE IOUs.” I believe you can use this little-known move to generate always-known, contractually obligated income in the range of 8-10% per year.
So if you’re at all worried about rising prices…
If you’re frustrated by the government’s zero-interest policies…
Or if you’re concerned about outliving your savings in any way…
Then you won’t want to miss tomorrow’s 5 Min. Forecast overtime briefing.
James Nelson

Thank you for reading The 5 Min. Forecast! We greatly value your questions and comments. Please send all feedback to

Ignore the Noise… Opportunity Here

November 21, 2011 Short-term noise: Supercommittee encountering kryptonite, and other not-surprising factors knocking down stocks on a Monday
A long-term moneymaker: Far from the noise of Geron’s stem cell failure, Patrick Cox finds “the most successful medical blockbuster in history”
Gold takes a beating along with nearly everything else: John Embry on a buying opportunity
“Truly an awful currency”… Chris Mayer returns from the road with some useless paper souvenirs and one fabulous investment idea
Readers weigh in: Our favorite caudillo, bank failures and the relative merits of U.S. and Canadian border guards
“Stocks Move Sharply Lower,” read the headlines this morning on countless financial websites. The reasons cited include…
The “supercommittee” that’s supposed to solve Uncle Sam’s chronic indebtedness for all time is due to announce after today’s close that gosh darn it, they really tried, but they can’t reach agreement. As if no one saw this coming. Or that even if they succeeded, they would trim the annual deficit by a not-so-whopping 9%
Europe. No, there’s nothing really new, but when the market drops these days, it’s always a handy excuse
China’s vice premier made some intemperate remarks — intemperate for someone in a lofty position like his anyway. “Right now,” declared Wang Qishan, “the global economic situation is extremely serious and in a time of uncertainty the only thing we can be certain of is that the world economic recession caused by the international crisis will last a long time.”
Or maybe, as we indicated on Friday, the case of MF Global is making people wonder if their funds are safe anywhere other than the First National Bank of Serta.


Time to take stock of opportunities yet explored on The 5’s desk.

“Scientists Think Embryonic Stem Cell Research,” says a headline at ABC News. It’s an especially weak attempt to “advance the story” a few days ago about Geron Corp. dropping the world’s first clinical trial using human embryonic stem cells.

“The company’s technology for acquiring therapeutic stem cells is flawed and obsolete,” says Patrick Cox, who wasn’t surprised at all. “It’s somewhat amazing to me that it’s taken this long for the company to admit it bet wrong, but it finally has.

“Financial and nonfinancial media, however, have inevitably treated the company as if it is the only really important stem cell company.”

Thus does ABC declare: “Many experts say the announcement signals a symbolic end to the era of embryonic stem cell research that many researchers worked so hard to launch.” Which is true… but the article leaves the reader with the impression that embryonic stem cells are the only kind worth researching.

“Geron’s failures on the stem cell front were, actually,” says Patrick, “evidence that BioTime Inc. is the real leader in regenerative medicine.”

BioTime has pioneered its own pure stem cell production technology. “Known as ACTCellerate,” Patrick goes on, “it involves the mapping of stem cell development shepherding cells through the phases of development to produce large, pure quantities of identical purified stem cells.” BioTime CEO Dr. Michael West presented the genetic evidence that he can do this during our Vancouver conference last July.

More recently, BioTime linked up with Cornell University to produce commercial-scale quantities of “endothelial precursor stem cells.” Essentially, they convert a few drops of your blood to stem cells, and then into endothelial precursors — a proto-cell of the kind that lines the inside of your arteries and veins.

In time, they build you a like-new heart.

“The patients’ own cells are first converted to become induced pluripotent stem cells,” Patrick explains, “identical in function to embryonic cells. They are then potentiated to become endothelial precursors, suitable for rejuvenating the heart and vascular and immune systems.”

“This technology will, I believe, be the most-successful medical blockbuster in history. As heart disease kills most of us, it will significantly extend healthy life spans. Moreover, it will happen much sooner than almost anybody believes.”

“If you believe, as I do, that Dr. Michael West and BioTime are the true innovators, then we will probably have a valuable opportunity to buy BioTime at artificially depressed levels.”

[Ed. Note: And that’s after BioTime shares have appreciated 501% from
Patrick’s initial recommendation.

Don’t feel bad if you missed out. Patrick is equally, if not more, enthusiastic about another company he’s been following in his premium advisory, Breakthrough Technology Alert. Access here.]

So what of Geron’s future? “The company still has important assets,” says Patrick — including a sizeable portfolio of stem-cell intellectual property. It will continue to generate revenue for the company even as it turns its attention to its cancer treatment.”

“This sort of action isn’t unusual for small biotech companies,” adds Patrick’s associate Ray Blanco. “With scarce resources, putting programs with longer time horizons on hold in favor of lower-hanging fruit that can pay off in the nearer term makes economic sense. It helps prevent the dilution of the shares, and preserves capital for advancing programs that can produce revenues sooner. It is a shareholder-friendly move.”

What’s more, Geron’s cancer treatment holds out great promise:
“Many cancer drugs,” says Ray, “will not treat cancers located in the brain or central nervous system. The blood-brain barrier, which protects the brain from foreign substances, filters out many chemotherapy drugs and renders them ineffective.”

Not so with Geron’s drug: It “takes the popular commercial chemotherapy compound paclitaxel and links it to a proprietary peptide molecule,” Ray explains.

“Since many peptides — which are small protein molecules — are allowed to pass through the blood-brain barrier by the body, paclitaxel gets to hitch a ride into the brain, where it can then do its work on cancer tumors.”
Early clinical trials are promising. Ray advises readers of his entry-level newsletter Technology Profits Confidential that Geron’s still a keeper.

Better yet, both of the stocks mentioned above are on sale today because traders are unloading both the bad and the good. The Dow is down 300 as we write.

The S&P has given up not only 1,200, but 1,190. All the gains of the last six weeks — poof.

Gold has sunk below $1,700 for the first time in nearly four weeks. As of this writing, the spot price is $1,694. Silver has surrendered $31.

“We have a big option expiry coming up on Tuesday, and this is just business as usual,” says Sprott Asset Management’s John Embry of gold’s price action.

Mr. Embry subscribes to the theory that powerful forces manipulate the price of gold — which in this case is working to your advantage. “I think it’s spectacularly bullish that sentiment is so incredibly weak in the metals. I can’t believe that people are basically being influenced to this degree by price action and they are just ignoring the fundamentals.

“That is exactly what the people who are creating the price action want… Gold and silver prices are going to multiples of the current prices in the not-too-distant future. And if you don’t own this stuff, you’re going to get killed.”

With gold on the way down, Treasuries are the last refuge of the safety trade. The yield on a 10-year note is back below 2%, the yield on a 30-year bond back below 3%.

Even the dollar doesn’t look that perky today. At 78.2, it’s up only fractionally from Friday.

“The Vietnamese dong is truly an awful currency,” says Chris Mayer, now back from his investment-scouting trip to Southeast Asia. “The Vietnamese inflation rate is officially 20%.”

“This is why the Vietnamese buy more gold per capita than anyone else in the world. They even pay 9-11% premiums over the world gold price to get it. They want to get out of the dong, the value of which rots like Mekong catfish left in the sun.”

Looks impressive, but not even worth $1

“It takes about 21,000 dong to get one dollar. In 2008, it was about 16,000. So it’s falling off a cliff against a currency that is not exactly a pillar of strength. This makes it tough for foreign investors in Vietnam. You need to overcome this depreciation before you make any real money!”

“In Cambodia, the coin of the realm is the riel. ‘It’s not a serious currency,’ my contact told me. It takes about 4,000 riels to buy a dollar. But it seems people use riel only for transactions less than a dollar. Otherwise, they use U.S. dollars.”

“The Thai baht is the most stable of all these Asian currencies. On my way home, I went through Bangkok again. I forgot to change all my dong before I left Vietnam. So I went to the money-changers in Bangkok to convert my dong to dollars. The Thai money-changers would have nothing to do with the dong. It made me think well of the Thais.”

Thus did Chris bring back some dong as souvenirs. He also met up with an investor he called “the Warren Buffett of Thailand.” It’s this individual who turned him on to the idea so lucrative he wouldn’t even tell us back in Baltimore what it is. But now he’s written it up and the information can be yours right away with a membership in Mayer’s Special Situations.

“In your comment concerning a ‘dictator’ in Thursday’s issue, I presume you are referring to President Chavez.”

“I am utterly appalled by this. Too bad we don’t have a Mr. Chavez to run for president. Then things would really turn around. FYI, President Chavez is/was always elected by the people, and furthermore respects to the last ‘we the people.’ (Have we all forgotten the meaning of this very important phrase?)”

The 5: Aha! Thanks for the good belly laugh.

“You folks used to mention on a regular basis how many banks were closed in a given week and the accumulated number for the year. We have not seen anything for a while. Have the bank failures stopped?”

The 5: No, but they’ve slowed down appreciably. The number peaked last year at 157. So far, this year the number is 90, including two last Friday. At that pace, the final tally for the year should be around 100. Curiously, 23 of those come from one state — Georgia.

“I’m inclined to call B.S.,” writes a reader of the American who says Canadian Customs threatened him with jail if he ever tried to visit again. “I’m an American who has been crossing into Canada a few times a year for the last 20 years.”

“If it did actually happen, I’m guessing that either this guy was himself such a jackass that he provoked that response, or at worst he encountered a jerk who may have been on the verge of snapping, which as we know can happen just about anywhere.”

“Seems to me that lots of people that are involved in any kind of security field either have big chips on their shoulders or are bored $#!+less and come across with poor attitudes, but my experience at the Canadian border has been no different than anywhere else. Canada is a great country, our ally and neighbor, and I won’t hesitate to keep visiting.”

“The customs officer that treated and spoke to the American as described should be fired and then kicked in the ass, hard, on his way out the door,” writes a Canadian reader who finds the story believable.

“We all have bad days, but there is a limit. I have had a bad experience with a U.S border guard. I’m sure he wanted to be a cop, but couldn’t get in. However, the majority of guards are great, and have even made me laugh. I will always travel to the States, and I hope our friends in the USAcome visit us always.”

“As a Canadian, I’ve been dealing with customs agents and immigration officers on both sides for many years.”

“In the hundreds, and possibly over a thousand times, I have dealt with immigration and customs officials, they have been very professional and ask all the questions they need to satisfy their respective laws. However, very early in the morning, or even late at night, one of them will act as if there is a chip on the shoulder and you are invited to knock it off, only to start a verbal war that you will always lose.”

“Bear with them, keep your remarks professional and you will get through the process with little fuss and perhaps a second thought about the dull, somewhat simplistic routine that such an agent has to follow just to satisfy the regulations. They do not have time for ‘small talk,’ and by the nature of their job cannot appear to be friendly or inclined to make you, the tourist, feel special.”

“Mr. Benko does not know what he speaks about,” writes a reader who rejects Ralph’s 90-second manifesto. “In fact, the Elite Ruling Criminal Class will take a complete and incendiary effort to remove them from their position of Swindle, Embezzle, Murder and Mayhem, in my opinion.”

“We have been in a Cold Civil War in this country, aided and abetted by the above-mentioned Elite, for a very long while, at least since the ’60s, and it is going to enter a hot period before it has its conclusion.”

“The Federal Criminal Cabal in Washington is rapidly installing a police state in this nation, and some are not going to accept it without a vibrant fight.”
“If We the People want to impact the Elite Ruling Criminal Class and reassert OUR Constitution, then one very simple way is to buy gold and silver and make the Elite Ruling Criminal Class eat their worthless paper.”

The 5: He didn’t say they’ll go down without a fight.

“So what’s up?” writes a reader who saw Friday’s “can’t-trust-the-system” issue. “I have an account with optionsXpress, and I trade options. Are you saying along with Ann Barnhardt that we need to get out now?”

The 5: No. Only that it pays to do your due diligence.

Gerald Celente, who lost a bundle with MF Global, didn’t even realize he was doing business with MF Global. His account was with Lind-Waldock, which was acquired somewhere along the line by MF Global and continued to answer the phone, “Lind-Waldock.”

“Go long New World Order and go short personal freedom,” writes a reader who saw Barry Ritholtz’s remark about going short banks and long mattresses.

“Whatever you believe, the facts show the NWO is alive and metastasizing. Do a baker and his pals eat better than his clients? Do those who print fiat currency and their pals enjoy a similar advantage? Of course.”

“Hey, they control the money, what’s next…food, military, governments, corporations, education, oh crap. Either way, the reality of the progress of macroeconomic global domination tyrants will continue, and it’s not likely to collapse until the Second Coming.”

“Or, just keep pointing out the mouse holes for us.”

The 5: Yes, we’re much more comfortable seeking out pockets of refuge.

Dave Gonigam
The 5 Min. Forecast

P.S. “It’s important that there’s a private initiative to do something,” said Addison during the lunch hour on Baltimore’s NPR affiliate. He was talking about Starbucks’ “Jobs for USA” program.
If you’ve been in a Starbucks this month, you know what it’s all about: Collecting donations of $5 or more to put in a kitty for lending to small businesses. Contribute, and you get a wristband:
“I’m skeptical that more credit is the route to creating more jobs,” says Addison echoing a theme from the introduction to The Essential Investor, which we unveiled over the weekend, “but this gets the thing going in the right direction. If we can have a private conversation separate from the political football kicked around in Washington and up to Wall Street, that’s a good thing.”
Addison says he riffed on the topic at the Mt. Vernon Club — a local hangout for the wives of Baltimore’s muckety-mucks — Thursday night too. He hasn’t said anything about being on a community outreach program lately… but neither has he been editing The 5 much lately, either. Between these engagements and the above-mentioned Essential Investor launch, he’s been busy.
If you’d like to listen to the local radio discussion, Addison was playing nice with Moody’s Mark Zandi. The discussion will be archived later today at this link. The discussion begins about 40 minutes into the 12:00 hour.

Thank you for reading The 5 Min. Forecast! We greatly value your questions and comments. Please send all feedback to

Gold and the Love Trade

The 5 min. Forecast
January 12, 2011 01:24 PM

by Addison Wiggin – January 12, 2011
China, India go for gold: Frank Holmes on “the love trade” in emerging markets
$426 million into $10 billion? Patrick Cox on the awesome potential behind one “wealth quake”
Complacency rules… Jim Nelson on why the VIX is sure to rise, and a sure way to play it
“Clarify your gross assumption”… Readers unload on our Chinese correspondent, and call our letter to Harry Reid “a waste of time and effort”

On the surface, our favorite yellow metal isn’t doing much this week. The spot price has moved within a tight range around $1,380. But just below… we sense something lurking.

Retail buyers in China can’t get their hands on gold bars fast enough. The premium in Hong Kong, for example, has reached $3 an ounce over the spot price, a level last seen during the Panic of ‘08.

“I don’t have any gold,” one dealer told Reuters yesterday. “Premiums are very high. Some say they have no stocks on hand.”

Chalk it up to inflation — officially at 5.1%, but probably double that — and the run-up to the Lunar New Year. “The jewelry sector is gearing up,” another expert tells Reuters, “and giving gold bars as a gift has been getting very popular.”

Likewise, the first gold-oriented fund in China has had no trouble meeting its goal of raising $500 million. Lion Fund Management hung out its gold shingle barely six weeks ago, giving ordinary Chinese access to overseas gold ETFs for the first time.

In the limited space of funds allowing Chinese to invest overseas, this was the biggest offering in three years. Perhaps not a surprise for the world’s No. 2 consumer of gold.

Meanwhile, the world’s No. 1 consumer of gold likely set a record for imports last year. Final figures aren’t in yet, but Indian purchases totaled roughly 800 metric tons — a massive increase from the previous year’s 557 tons, according to the World Gold Council.

Investment demand for bullion surged 73% in the year ended Sept. 30, says the Council’s Ajay Mitra. “Price is no longer a factor,” he adds, reinforcing a point we made here last week: Indian buyers no longer wait for a 10% pullback before backing up the truck.

We have visited gold markets in Mumbai and Beijing over the past year and can attest to the irrational desire buyers have when they get near the stuff.

“There are two main drivers of gold demand,” says U.S. Global Investors chief and Vancouver favorite Frank Holmes, helping put the demand in perspective: “The Fear Trade and the Love Trade.”

The Fear Trade is what we have in the West, “driven by negative real interest rates — where inflation is greater than the nominal interest rate — and deficit spending. Whenever you have negative real interest rates coupled with increased deficit spending, gold tends to rise in that country’s currency.

“In the U.S., we’re in the middle of an extended period of negative real interest rates that will likely last through the year.”

By contrast, “The love trade is significant and unique to gold,” Frank continues. “People buy gold out of love and those in emerging markets are especially amorous of the metal. It is customary in most emerging countries to give gold as a gift to friends and relatives for birthdays, weddings, and to celebrate religious holidays.

“What is important to remember when looking at the history of gold is that in the 1970s, China, India and Russia were isolationists with no significant global economic footprint. The world’s population was 3 billion, and today we have witnessed an awakening of epic proportions.

“These countries are growing with free market policies and massive infrastructure spending. In the 1970s, gold rose on the fear trade and the Cold War. Today, the world is significantly different and the love trade drives gold.

“It’s impossible to predict where gold prices will be 12 months from now,” Frank concludes, “but we think gold prices could double over the next five years. This would mean roughly a 15% return if you compounded it annually.

And that’s just the bullion. If you haven’t checked out Byron King’s report on ways you can still get rich with gold, he has a list of nine right here.

“At long last,” Patrick Cox wrote his Breakthrough Technology Alert readers yesterday, “we can begin to view the No. 1 cause of death — aged hearts and vascular systems — as a preventable disease.

“The ability to restore the heart, vascular and immune systems to full youthful health, using the donors’ own cells, has so many enormous implications.” One of the tiny companies Patrick follows unveiled plans last week to accelerate the development of a revolutionary treatment for both heart disease and autoimmune disorders.

How much will this breakthrough treatment cost? Patrick compares it favorably to a biotech darling of the recent past: “I don’t believe it will be more than Dendreon’s anti-cancer vaccine Provenge, which costs about $93,000 per customer.

“Dendreon estimates $400 million in U.S. sales this year. If you divide total expected revenues by the cost of the therapy, that amounts to only 4,301 prostate cancer patients. Analysts are predicting sales of over a billion annually. That’s 10,752 patients buying a therapy that on average extends life by about four months.

“Now think about the market for a nonsurgical cardiopulmonary therapy, delivered through transfusion, which could easily extend life by a decade.

“Let’s pretend this firm charges $200,000 for the procedure, clearing $100,000 per procedure. Also, pretend that only 5% of the world’s high net worth individuals buy rejuvenated cardiopulmonary system every year. One clinic in Hong Kong could perform that many transfusions easily.

“Regardless, that’s 100,000 procedures at a profit of $100,000 each, for a total profit of $10 billion a year.” All for a company with a market cap today of $426 million. No wonder Patrick sees this as one of the five “wealth quakes” coming in 2011. To learn more about all five, check out Patrick’s predictions for the year. Don’t hesitate; this presentation goes offline at midnight on Friday.

U.S. stocks are adding to yesterday’s gains, traders cheered by the news Portugal pulled off a bond issue successfully. The S&P 500 just topped 1,280.

Canada’s TSX is also up for a second straight day, driven by acquisition news: Cliffs Natural Resources, the country’s largest iron producer, is buying out a smaller competitor, Consolidated Thompson.

This is sweet news for readers of Mayer’s Special Situations. Chris recommended Consolidated Thompson in July 2009 at C$3.11 a share. Cliffs’ offer is for C$17.25 a share. That’s a 455% gain in just 18 months. Did you buy it? If so, we’d like to know.

If you’re interested in Chris’s favorite special situations of the moment, he lays out the story on four of them in this presentation.

The Volatility Index is down over 3% this morning — not to the ultra-complacent lows of last month, but as Chris would put it, “fear is still cheap.”

“As you’ll recall,” writes Lifetime Income Report’s Jim Nelson, “the VIX measures how much implied volatility investors foresee in the S&P 500 through the volume of puts on the index.

“This is based on the idea that investors buy more puts on stocks when they think the stocks could fall. It’s the easiest way to hedge investments. So the higher the VIX, the more hedging there is on the S&P.”

Jim sees a number of speed bumps facing the market this year. “The number of objections we often list — continued stubbornness in real estate, weak commercial financing, energy prices on the rise, the muni bond market’s ticking time bomb, etc. — are just the start.

“With the endless lists of potential mini-crises about to unfold in the next several months, we’re going to see investors begin hedging their bets. The VIX should fly.”

Last year, Jim uncovered a one-of-a-kind way to play a rising VIX. And it has nothing to do with VIX-oriented ETFs, which do a notoriously awful job of tracking the movements of the index. Best of all, this one pays you a dividend; that’s right, you collect checks as market volatility takes off.

Jim lays it all out in the current issue of Lifetime Income Report, released just yesterday. If you’re not yet a subscriber, here’s where to go.

After a week in which the Chinese notched a record buildup of forex reserves, test-flew a stealth fighter jet and completed the world’s longest bridge, what’s next?

They’re taking one more step toward making the renminbi a global currency.

Starting today, the Bank of China is allowing U.S. firms to trade in renminbi. Heck, even individuals can open renminbi-denominated accounts (minimum balance: US$500).

On first glance, there’s no real point. There is still something of a yuan-dollar peg; the yuan can move no more than 0.5% in a day. Standard Chartered figures the people’s currency might appreciate 6% this year.

But the general manager of Bank of China’s New York branch makes it clear. Echoing a trend we first identified in the 2005 edition of Demise of the Dollar, Li Xiaojing explained, “We’re preparing for the day when renminbi becomes fully convertible.”

Tim Geithner, call your office.

“I’ve been enjoying your letters…”

[And the inevitable ‘but’]

“however, sweeping the Tea Party into the tragedy in nearby Tucson is a real reach and insult to [your readers]. There was NO reference by anyone to the Tea Party re the tragic events in Tucson.

“Mein Kampf, The Communist Manifesto, etc., were among [Jared Loughner’s] reading. There wasn’t a scintilla of reference directly or indirectly to the Tea Party. I am shocked and disappointed.

“You might care to clarify your gross assumption, which was totally ungrounded in fact.”

The 5: We assume nothing about the mind of an assassin who’s clearly unhinged. But you missed our contributor’s point: To those on the outside, the Tea Party smacks of populism fueled by anger. He made the leap to violent ultra-nationalism from there. And suggests whether the association is accurate or not, we will see more violence in the future.

“I know you had the wisdom to say you didn’t necessarily agree with the ridiculous comment from China about the Arizona gunman and his (nonexistent) connections with the Tea Party. But you spread the lie, so you should also spread the truth. Here it is:

“A friend described him as decidedly ‘left-wing’ as recently as 2007. On YouTube, he flagged as a favorite a video of a person dressed as a terrorist burning the American flag. Only a lunatic or a leftist would do that. His favorite work was a staple of every left-wing bookshelf, The Communist Manifesto.

“If we take the evidence as presented and not as the media and the left would have it presented, the gunman is clearly not of the right. More precisely, the shooter is neither left-wing nor right-wing. He is crazy and evil — a word not used enough.

“By the way, as an exit thought, the Tea Party movement won in November. Winners don’t go on shooting sprees.”

“Who cares what China thinks about our political system?” asks another. “We have no intention of allowing our system to deteriorate to the point that China has.

“For them to equate what a insane jerk did to a political view is just what a radical left-wing nutjob wants you to believe, I am dismayed you give such viral a platform.”

The 5: You have no intention of letting the system deteriorate… how do you propose to stop it?

For the record, it was one reader’s point of view. While he’s a high school teacher in Beijing, I don’t think he can be thought of as speaking for the entire Chinese nation.

Having said that, what makes “their” point of view interesting is the $900 billion pile of U.S. debt the Chinese government holds… on top of the other $1.4 trillion pile of U.S. dollars.

“Addison’s letter to Congress is excellent, and I agree with every word. However…”

[Here we go again.]

“sending it to Harry Reid and most members of Congress is most likely a waste of time and effort. Too many in Congress only care about their next election, and the easy path is to give things to people ‘for free.’

“Since most people know there is no such thing as a free lunch, they fool people into believing they are entitled to these ‘free’ things, that they have earned them or paid for them, when the cost is just being passed on to others.

“If all this spending results in a disaster, many politicians just see that as an opportunity to expand their power and influence. As Rahm Emanuel says, ‘Never let a serious crisis go to waste.’

“Nothing will really change until the people understand Addison’s message and recognize the promises of something for nothing and ‘entitlement’ for what they are, lies to buy votes and power. I applaud I.O.U.S.A., but wish it had been seen by more people. It should go to colleges and high schools.

The 5: Amen.

Addison Wiggin
The 5 Min. Forecast

P.S.: Tomorrow, we hear from the attorneys representing both the kingdom of Spain and Odyssey Marine regarding the WikiLeaks cables that reveal a shifty deal proposed by the then-U.S. ambassador to Spain offering to turn over the coins Odyssey found in their ‘Black Swan’ shipwreck find in exchange for a painting (stolen by the Nazis), which now hangs in a museum in Madrid.

The painting reportedly belonged to a California family with some weighty political connections in Washington. That said, we’re told the WikiLeaks cables will have no bearing on the court case currently in progress regarding the “ownership” of the $500 million cache. Uh, right. We’ll see.

[Program Note: We’ve been granted an extension on our deadline to submit the film we’re making about the Black Swan treasure to the Tribeca Film Festival. This week remains a critical week in the development of this first festival cut, however. Wish us luck. We’ll continue to let you know how things develop.]