Infographics: The Bre-X Scandal: A History Timeline

From Visual Capitalist

Courtesy of: Visual Capitalist

Video: Doug Casey: We are Living in the Middle of the Biggest Bubble in History

In the following video, Goldmoney’s Andy Duncan interviews, one of my favorite investing savant, Doug Casey. 

At the final minutes, Doug Casey predicts that “There will be many bubbles created in the years to come especially bubbles that has been created by trillions of dollars”, which will filter over or permeate to different parts in the economy and to the world.

Importantly Mr. Casey notes (28: 04) "Right now, we are living in the middle of the biggest bubble in history and when this bubble burst it’s going to be a catastrophe for most people"  

[Yes, I agree, all one needs to is to see how bubbles have morphed into a mental pandemic as the public's addiction to artificial booms have seemingly become deeply entrenched. Hardly any thoughts have been given to possible adverse consequences or myriad risks from all the cumulative inflationism and interventionism implemented by global central banks and their respective political authorities, including the BSP and the Philippine government]  

Mr. Casey point outs that bonds are right now at the peak of the bubble cycle (a view which I have been saying) and further predicts a coming bubble on gold stocks, particularly Gold exploration stock. 

Watch the interview.

Are Falling Gold Mining Stocks Signaling Deflation?

Gold mining stocks in the US seems to have diverged from prices of gold.

There have been suggestions that such divergence could be indicative of “deflation”. For some of the hardcore devotees of the Keynesian religion, any price declines (be it consumer, equities, commodities) represents “deflation”. The definitional context of the term has been lost out of the desperation to prove the merits of their case.

However it’s really not just gold, but the same underperformance can be seen in prices of oil stocks.

Charts above from US Global Funds

Commodities, in general seem to have foundered since March whether in Agriculture (GKX), Energy (DJAEN) or Industrial metals (DJAIN) [chart from stockcharts.com]

And feebleness in commodity prices may get reflected on consumer prices.

Yet the current price weakness in commodities seems coincidental with the price declines of the Spain’s equity market via the Madrid General Index…

…along with China’s Shanghai index, both of which saw significant slumps in March.

Nevertheless global equity markets, overall, remains buoyant in spite of the reemergence of the euro debt crisis and of concerns over China’s economic slowdown.

Yet current conditions suggest that following the strong surge from the start of the year, global equity markets may be in a natural consolidation phase, perhaps awaiting for the next round of central bank actions. You see, no trend goes in a straight line.

And lower CPI prices will likely motivate central bankers to go for more credit easing measures.

So the above exhibits the divergences playing out between stocks and commodities.

Does this signal "deflation" in the monetary sense? Obviously not.

What we are seeing instead has been the relative effects of money on asset prices. While commodity and commodity related stocks have generally underperformed (perhaps partly due to China or the Euro crisis) much of the money from easing policies of major central banks have been flowing into equity and other financial “credit” assets. In short, central bank policies have produced more asset (price) inflation than commodity (price) inflation

Proof of this is of the record flows of investor money into hedge funds.

From Reuters,

Investors poured billions of dollars into hedge funds in the first quarter, helping to send total industry assets into record territory, data released Thursday shows.

Investors allocated a net $16 billion to hedge funds in the first three months of the year, according to Hedge Fund Research, which tracks industry flows and performance.

With the new capital, as well as average gains of about 5 percent for hedge funds in the first quarter, total industry assets reached $2.13 trillion, HFR found. An earlier record was set halfway through 2011, when total capital invested with hedge fund managers hit $2.04 trillion.

In one of its worst annual performances in history, hedge funds lost about 5 percent in 2011. However, the industry seemed to get its groove back in the beginning of 2012 as global equity and credit markets rallied, and managers recorded the best first quarter of performance in five years.

Thus the weakness in the commodity sector may have filtered into oil and gold stocks which have caused their divergences with the prices of gold and oil. Such anomaly will likely be resolved soon as gold and oil prices should move higher.

Outside the policymaking actions, seasonal factors could also be a factor

Chart from US Global Investors

But I won’t give so much weight on this

And finally falling commodities, which may translate to lower consumer price inflation, does not translate to the absence of a brewing boom-bust cycle.

The great Murray Rothbard explained that consumer prices had not been a factor in 1920 recession or boom bust cycle (America’s Great Depression p.169-170) [bold emphasis mine]

Actually, bank credit expansion creates its mischievous effects by distorting price relations and by raising and altering prices compared to what they would have been without the expansion. Statistically, therefore, we can only identify the increase in money supply, a simple fact. We cannot prove inflation by pointing to price increases. We can only approximate explanations of complex price movements by engaging in a comprehensive economic history of an era—a task which is beyond the scope of this study. Suffice it to say here that the stability of wholesale prices in the 1920s was the result of monetary inflation offset by increased productivity, which lowered costs of production and increased the supply of goods. But this “offset” was only statistical; it did not eliminate the boom–bust cycle, it only obscured it. The economists who emphasized the importance of a stable price level were thus especially deceived, for they should have concentrated on what was happening to the supply of money. Consequently, the economists who raised an alarm over inflation in the 1920s were largely the qualitativists. They were written off as hopelessly old-fashioned by the “newer” economists who realized the overriding importance of the quantitative in monetary affairs. The trouble did not lie with particular credit on particular markets (such as stock or real estate); the boom in the stock and real estate markets reflected Mises’s trade cycle: a disproportionate boom in the prices of titles to capital goods, caused by the increase in money supply attendant upon bank credit expansion.

For as long as central bankers remain on a monetary expansionary mode or continues to adapt rampant inflationism, my expectations is that current weakness represents a temporary and natural outcome of the relative effects of money.

Ron Paul’s Outperforming Investment Portfolio

Presidential aspirant surely Ron Paul practices what he preaches…

From Jason Zweig at the Wall Street Journal,

Congressional financial-disclosure forms report holdings only in wide dollar ranges (for example, $15,001 to $50,000). If Rep. Paul owned gold bullion, estimating his investment performance would be fairly easy. But he doesn’t; he owns gold-mining stocks instead. And since the size of each stock holding is disclosed only within a broad band of valuation, there’s no way an outside observer can derive a long-term rate of return for Rep. Paul’s portfolio (or for any other member of Congress, for that matter). We did ask for comment, but his office didn’t respond.

And Mr. Paul’s portfolio generates investment returns almost parallel to Warren Buffett’s Berkshire Hathaway (20+% annual)…

There isn’t much doubt that Rep. Paul’s portfolio has outperformed the U.S. stock market as a whole. Ten years ago, the NYSE Arca Gold BUGS Index, a basket of stocks in mining companies, was at $65; this week, it’s at $522. That’s roughly a 23% average annual return; over the past decade, by contrast, the Standard & Poor’s 500-stock index, counting dividends, has returned some 2.9% annually.

Yet Mr. Zweig downplays Mr. Paul’s outperformance with the following self contradictory analysis…

In short, investing isn’t just about maximizing your upside if you turn out to be right. It’s also about minimizing your downside if you turn out to be wrong. Putting two-thirds of all your assets into one concentrated bet is a great idea if the future plays out just as you imagine it will – but a rotten idea if the future turns out to be full of surprises.

That’s why most investors diversify: to get cheap insurance against the two greatest risks we face.

One is the danger of other people’s ignorance and error: that governments will pursue reckless policies, that corporations will be run into the ground, that speculators will drive valuations of assets to euphoric highs and miserable lows. This is the kind of risk that Rep. Paul has insured against, so far very successfully.

The second risk is the danger of our own ignorance and error: that we will underestimate the resilience of people and markets, that we will mistake likelihoods for certainties, that we ourselves will be swept up in manias and dragged down into depression when markets go mad. Above all, it is the simple risk that we will end up so sure of our own view of the world that the future is certain to catch us by surprise. And this is the risk that Rep. Paul’s portfolio doesn’t appear to insure against at all.

Rep. Paul’s supporters admire him for the consistency of his political views. But if the future happens to unfold in ways he doesn’t expect, then his hot investment portfolio is likely to go cold in a hurry.

It would represent an oddity, if not impertinence, for Mr. Zweig to conclude that in any event that things don’t go as expected for Mr. Paul “his hot investment portfolio is likely to go cold in a hurry”. Such premises assume that Mr. Paul’s portfolio is in a permanent state, or that Mr. Zweig knows exactly what is in the mind of Mr. Paul and what Mr. Paul’s prospective actions are.

In addition, Mr. Zweig harangues Mr. Paul’s concentrated exposure on mining issues based on the vulnerabilities of ‘ignorance and error', yet ironically applies presumptive analysis and generalization of Mr. Paul’s portfolio which is also subject to Mr. Zweig's ‘ignorance and error’.

Ignorance and error would be especially magnified if we dismiss central banker’s actions as having lasting positive or “healing” effect on the markets and economy...

As for Mr. Zweig, he should heed Buddha’s advise:

Do not overrate what you have received, nor envy others. He who envies others does not obtain peace of mind.

Philippine Mining Sector’s Pause Signifies Buying Opportunity

Even if the mining sector could be in a consolidation phase over the coming week/s, this would likely be temporary event.

A Resurgent Boom in Global Gold Mining Stocks?

With gold prices drifting just a few percentages below the newly established record levels at over $1,900, gold mining stocks in the US, Canada and South Africa seem headed for a breakaway run following what seems like a serial or concerted breakout attempts from about one year period of consolidation.

This can be seen in the charts of US major mining indices, such as the CBOE Gold Index (GOX), the Gold Bugs Index – AMEX (HUI), the Gold & Silver Index - Philadelphia (XAU) and the DJUSPM Dow Jones Gold Mining Index, where except for the XAU which is at the resistance levels, the rest are in a resistance breakout mode.

While price actions of the local mining index has had little correlations with international mining indices, one cannot discount the possibility that a continuity of the recent price advances or of the breakaway run of global mining issues may also filter into local issues.

And considering that local participants have increasingly been more receptive to the mining industry, then share prices of the composite members may just get a second wind going into the yearend.

And part of the mainstream story has been the recent $14 billion political economic concessions[1] “investments” ‘within the next 5 years’[2] signed in China by President Aquino during his latest State visit.

The local mining industry has easily become a political tool for gaining approval ratings.

Mounting Inflationism is a Plus For Gold

The unravelling European debt crisis and the conventional wisdom of heightened recession risks appear to be provoking more aggressive policy responses from a previously ‘dithering’ officialdom.

Central banks as the Swiss National Bank have aggressively been inflating the system[3] allegedly to curb the rise of the franc (which in reality has been part of the scheme to save European banks). South Korea has also reportedly been into the game too[4] but at a modest scale.

Yet as the crisis deepens, political pressure will bear down on political authorities who have represented the inflation hawks camp or dissidents of QEs or asset purchases by central banks such as ECB’s Juergen Stark who recently resigned out of policy schism.

US Federal Reserve chair Ben Bernanke has once again signalled that further ‘credit easing’ (a.k.a. inflationism) is on the table, aside from proposing to modify the mix of the Fed’s existing balance sheet via the ‘Operation Twist’ or the lowering of long term interest rates in order to induce the public to take upon more risk[5]. The Fed’s trial balloon or public communications management or conditioning tool comes in conjunction with President Obama’s $447 jobs program, apparently meant to shore up the latter’s sagging chances for re-election.

In other words, political “do something” about the current economic problems is being impressed upon to the public for their acceptance or for justifications for more political interventions from both the fiscal and monetary dimensions.

And it wouldn’t signify a farfetched idea that a grand coordinated QE project or credit easing measures by major central banks something similar to the Plaza Accord as predicted by Morgan Stanley’s analysts could be in the works too[6]. The Plaza Accord was a joint intervention in the currency markets by major economies to depreciate the US dollar in 1985[7]. This time, perhaps, the biggest economies will all act in concert to devalue their currencies impliedly against commodities.

Thus, any of the realization of these ‘arranged or independent’ acts to reflate the system to stem the current wave of liquidations of malinvestments meant to preserve the troika political system of the welfare-warfare state, the central banking and banking cartel and to further attain a permanent state of quasi-booms would be exceedingly bullish for gold.

The current stream of inflationism would be added on top of the existing ones which only would expand the fragility of the incumbent but rapidly degenerate monetary system.

Finally I would like to add that while many see mines as ‘investment’, my long held view is that in absence of a local spot and futures market for commodities, local mining issues would represent as proxy to direct gold ownership or as insurance against mounting policies aimed at destroying the purchasing power of the legal tender based paper money system for Philippine residents.

As gold has been shaping up to be the main safe haven or as store of value, so will gold’s function be represented here. This is where the divergences will likely hold—the gold mining sector.

At this very crucial time, I would seek haven in gold and precious metals.

---

[1] See P-Noy’s Entourage is a Showcase of the Philippine Political Economy August 31, 2011

[2] Inquirer.net $14-B investments in mining eyed from China within the next 5 years, September 7, 2011

[3] See Hot: Swiss National Bank to Embrace Zimbabwe’s Gideon Gono model September 6, 2011

[4] See South Korea Joins the Currency Devaluation Derby, September 8, 2011

[5] See US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus, September 9, 2011

[6] See Will the Global Central Banks Coordinate a Global Devaluation or Plaza Accord 2.0? September 9, 2011

[7] Wikipedia.org Plaza Accord

Hedge Fund Wizard John Paulson Loads Up On Gold

Interesting trivia on Hedge fund manager John Paulson.

According to Casey Research,

``Not familiar with Paulson & Company, or founder John Paulson? You should be, and here’s why:

Picture from Businessinsider.com

• Paulson’s bet on the subprime mortgage debacle earned $3.7 billion in 2007.

• The company made an estimated £606 million profit selling short British bank stocks in September 2008.

• John Paulson ranked #2 on Alpha’s Highest-Earning Hedge Fund Managers of 2008.

• Two of Paulson & Co.’s funds ranked #1 and #4 on Barron’s Top 100 Hedge Funds 2009 list."

So what has the top notch been loading up lately?


The answer is gold and gold mining stocks.

Again Casey Research, ``The privately owned hedge fund sponsor Paulson & Co. added over $3.7 billion in new gold positions during the first quarter of 2009, increasing its total investment to $4.3 billion. About 46% of the equity portfolio is now allocated towards gold and gold stocks."

Why?

Telegraph's Ambrose Pritchard thinks this has been due to reflation.

``The world's top hedge fund manager John Paulson has built a gold position of at least $5.5bn, the biggest such move since George Soros and Sir James Goldsmith bet on Newmont Mining in 1993...

``Paulson & Co has bought $2.9bn in SPDR Gold Trust, the biggest of the gold exchange traded funds (ETFs), which now holds 1106 tonnes − three times the Brown-gutted reserves of the United Kingdom.

``Mr Paulson has also built up a $2.3bn holding of Anglo Ashanti, Goldfields, Kinross Gold, and Market Vectors Gold Miners. The fact that he is launching a "Paulson Real Estate Recovery Fund", reversing the bet against sub-prime securities that made him rich, tells us all we need to know about his thinking. This is a liquidity-reflation play."

On the contrary having 46% of one's portfolio in gold suggests that it isn't just a liquidity reflation play, since reflation suggests of an economic recovery which should translate to a more diversified portfolio.

Instead it does seem to look more like a "super" or "hyper" inflation play.