Draw Your Own Conclusions

The ETF for the S&P 50 index, SPY, closed the year 2001 at 113.70. This core index closed 2011 at 125.50 essentially flat with the 2010 ending price 125.75 and just about even with the 1998 high of 124.10.

There has been essentially no progress for 13 years yet the Bureau of Labor Statistics’ Consumer Price Index tells us that it takes $1.39 today to buy what $1 did in 1998. The gain over last 10 years from 113.70 to 125.50 of 11.8 points or 10.37% pales in comparison to the $1.28 needed today to buy what a buck bought in 2001.

Yet, from 1998 or 2001, the professionals in the investment community have managed to extract tens of billions of pensioners, 401k, IRA, mutual fund holders dollars in performance bonuses. The number is probably hundreds of billions..hundreds of billions…from the supplier of the basis who have lost substantial purchasing power over that time frame. The 1998 close at 124.10 would need to be 172.499 to be break-even for those investors. From the 2001 close the break-even number is 145.436 which is in the neighborhood of the all-time high.

The SPY yearly chart:

 

 The 2011 doji  indicates indecision going into 2012. After a huge run-up in the 1990s, the most recent decade has been a wide-channel with net, net, net not much to show for it unless you played the swings and timed the markets which the pros say you can’t and shouldn’t do. Pretty much like taking a daily nap on the railroad tracks which you shouldn’t do either.

The wake up call will come when all the boomers who hope to be retiring have the lost purchasing power really hit home, the hammering of their net worth   from the loss of home valuation and the realization that they owe tax on ever y nickel withdrawn from an IRA or 401K from here on out.

Has anything worked over that time period? 

 This chart compares the ETF for Gold (gold line) and the ETF for Silver (Blue Line) with the S&P 500. Gold was up about 9% in 2011 even after a large sell-off from the April high and the September rebound. This was the 10th year in a row for superior performance for gold. You do not need to a CFA or Master Technician to know that gold has been a very, very good place to be. 

GLD simple yearly chart (this thing has only been in place since 2004)..Gold had bottomed in 2001 in the mid$200s and had crept to the low 4s where it based before exploding..correcting..made 3 or 4 attempts with sharp pullbacks before cracking $1000..same at $1500..now two approaches at $2000.

Looking at the individual years, in any of the years you could have bought gold and had it decline in price by a significant percentage, yet by the close of the following year, even if you bought at the worst possible time, you were in the black on the transaction. Holding more than 1 year, significantly so. If the pattern holds next year after the WIDE bar for 2011 with a $500+ top to bottom range, you will have some serious appreciation. 

The candlestick for 2011 shows the open at the bottom of the box, the close at the top and the upper and lower lines (wicks) show how high and how low the metal traded in the last twelve months. The upper shadow means sellers came in and that is resistance that must be overcome before the price can advance further. The upper shadow/wick on gold is now about a $400 range or 20% plus from the current close.

Interestingly, during the bear market in gold from 1981-2000, central banks were strong sellers and killed every rally. This year and despite the volatility, Central Banks and Governments have been strong, strong, strong accumulators and the breadth  and diversity of those countries is startling.

The daily noise from the paper gold markets keeps cages rattled and potential investors rattled and fearful. The physical market, real gold that you own and possess is increasingly diverging from the paper, high-leveraged, computer-driven, MF Global world of unreality and dice-rolling.

Here is some startling reality: The amount of gold that can be created by derivatives is unlimited.  The amount of physical gold in existence is probably about 5.2 billion ounces or so, according to a number of sources. Gold does not rust, tarnish, evaporate, rot, so all that has ever been produced is still here. That sounds like a big, big number but there are 7 billion human beings on the planet so there is less than ¾ of an ounce per person. When you take the gold held by central banks, who are buying, buying primarily because the realized you cannot trust the future of their dollar holdings, or Euro holdings, or yen holdings, the amount available to own is a small fraction of the 5.2B.

The day will come when everyone will wake up on the same and realize they own no gold and want some..now…and it won’t be there…this hyperinflation chart tells you that…once it starts, no one parts with real assets for paper ones…bad money drives good money out of circulation (Sir Thomas Gresham 1718). This chart has been repeated over and over in history..by the same entities and the same processes (This Time It’s Different-Reinhardt and Rogoff 2010).

 

 

The holders of paper, financial assets lost ALL of the purchasing power of everything they had worked for and saved and in the blink of an eye-look at the timeline on this chart-the blink of eye and years of effort and prudence was gone. We have all seen the pictures of the wheelbarrows full  of money to buy a dozen eggs and the girl throwing bundles of bills into the furnace for heat but no believes it can happen here of to them. History says it can and it will.

The Argentinian nationalization of pension funds is a warning, the MF Global theft of customer funds for a failed speculation and no criminal charges is a warning, no repercussion, the legality of Insider Trading by Congress people, the lack of performance and enforcement by the SEC all flashing neon signs and trumpets sounding that everything you have is at risk.  Added to the mendacity of our government “protectors” is the explosion of derivatives from $600 Trillion (600 thousand billion) to $703 trillion in 6 months at a time when the economy is slowing and should be declining not escalating at an annual 40%+ rate, all based on the premise that every party to the chain can and will meet their obligations when called upon even though they are levered 12-15-40-80 to one and small declines can wipe out their entire capital. Small potatoes MF Global couldn’t do it…but neither could the largest insurance company ever in existence AIG do it when the day of reckoning arrived and demanded to made whole. If you think there are no more weak sisters in the financial world please leave orbit and return to earth immediately.

EVERYBODY KNOWS the debt levels around the world both public and private cannot be repaid. Which means that governments quit buying worthless debt and let the contraction take place or create the money to “pay” the things off. Everybody knows about the value of the promises of politicians.

In the last month, out of the blue, I have had a number customers who are beginning to take action to preserve their own assets and be their own central bank. It is amazing how owing gold and silver is considered risky UNTIL you own some-then the realization and awareness switches to the risk of not owning any.

I can help you if you wish. I am a Precious Metals Specialist with one of America’s leading bullion houses and known for their integrity and fair-dealing.

John Cox

651-353-7972

johnr@coindealsforyou.com

 

PS..the coindealsforyou.com website is under construction…after moving, rapidly and widely expanding duties and two computer wipeouts, I am  finally getting there.

 

 

 

4 thoughts on “Draw Your Own Conclusions”

  1. Hi John,
    Thank you for a great article which put into perspective the deterioration of ones portfolio against the dollar and of course the SP index that went nowhere and taking into account real inflation it got left at the starting post as it were.
    I have been in stockbroking since 1964 and have I feel been rather successful at what I have been doing both as a contrarian and a fundamentalist.
    In this 11 year bull run on gold I actually started buying gold and the shares on the 17th Dec 1999 as was the precise time at which I felt the market had bottomed.
    Now we deal in the juniors and mid tier for the most part and needless to say gold bullion.
    Having said all of the above I would like to dispel the stupidity of bullion commentators that gold doesn’t pay dividends .Well it damn well does and way above inflation divs at that.We can declare a div at anytime just by selling a portion of the holding which by the way is has always been in profit as our entry point was initially extremely low NB $275 .
    So what we do with the clients that we have is that we sell a portion of their holdings and simply credit their accounts.
    As clients are always putting in further cash into their accounts we buy back our sold gold at lower prices.The same can be done for exploration shares and the juniors.
    So there you have it the MYTH is broken. Its just a case of applying ones mind.
    HAPPY NEW YEAR
    Neville

  2. Very interesting article, and a bit unsettling given the numerous evidences of some obvious warning signs such as the MFglobal debacle and the Argentine “nationalization” of pension funds.
    I have to ask the unthinkable > do you see a possibility that the US government would also someday reach out and TAKE the nations privately held IRA’s and 401K’s ?
    This is something that bothers me, I did the so called ‘right’ thing and have saved for almost 30 yrs in IRA’s, there’s a nice chunk multi-decade accumulated savings there that has grown. I can’t imagine how horrific it would be to wake up one day and hear in the news that the federal government just “nationalized” everyones privately held IRA’s.
    So what to do ? What a decade till age 62 ? Or take the IRA now and PAY the 10% penalty plus all federal and state taxes. Dilemma — –

    1. I say do your own homework and go with your gut feeling. Just look at the economic numbers (e.g. US debt, EU debt…etc.) and ask yourself: “Do I feel lucky?”.

      1. assumes, of course, that there are no more MF Globals, and that all the counterparties can honor their commitments so that if you do win you collect your winnings

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