Tags: bernanke, cme, Commodities, gold, inflation, margin, markets, obama, paulson, sell off, silver, slim, Soros
The ins and outs of ‘silver selloff’ explained
Exclusive: Dan Mangru reveals why small-timers are crushed and big boys win
Posted: May 04, 2011
8:22 pm Eastern
By Dan Mangru
© 2011 WorldNetDaily
Almost makes you want to go out and register as a Democrat. That way we can redistribute some of this wealth as our current president would like.
But the current silver market is a classic case of irrational individual investors driving up the price of the market, only to have sophisticated institutions leave them holding the bag.
Well how did this happen and what happens to the silver markets from here?
The silver rally goes back to the bailouts of late 2008. After $700 billion of TARP, billions more to save the auto industry, and the election of Barack Obama, it became very clear that the U.S. was in the mood to print cheap money.
After reaching a low of $8.79, silver began to slowly rally. First it rallied due to Ben Bernanke almost tripling the monetary base. Then it rallied due to the $860 billion Obama stimulus. Then it continued to rally after Obama became the first president in United States history to rack up a yearly deficit in excess of $1 trillion.
Before we knew it silver was trading in excess of $30 per ounce.
Wow. What a move.
After going up some 400 percent individual investors started to take notice. Then as the U.S. markets started to sputter, Ben Bernanke and the Federal Reserve instituted something called Quantitative Easing 2 or simply QE2.
QE2 has the net effect of placing more U.S. dollars into the financial system and ultimately into circulation.
When more dollars are placed into the market without the necessary demand, inflation happens.
This was the impetus that individual investors needed to get in the game. Silver again started to skyrocket.
Then came news that Bernanke didn’t plan to stop QE2 by this June and planned to take it further.
We now saw silver hit intraday highs in excess of $49, a sign of major speculation and irrational exuberance.
You see in silver markets, many individual investors are leveraged buyers of the metal. What that means is they take a loan out to buy more silver than the money they have in deposit.
While some individual investors use a smart amount of leverage, many times they are tricked into borrowing anywhere between 4-8 times their money.
Case in point, if you had $10,000 cash in your account, you could buy let’s say $50,000 worth of silver borrowing at 5:1 or five times the amount of money you have in the account, for a total borrowed amount of $40,000.
Utilizing margin is supposed to maximize your profit, but when used unwisely, it maximizes your risk.
If you bought silver between $47-49 with this type of margin, your overall account value would be in the area of $37,000-$39,000 (depending on fees, costs, etc.).
That means that you have lost all of your original $10,000 and you are now liable for the difference between your account value, in this case $37,000-$39,000, and your loan value, which in this example is $40,000.
Had you just bought $10,000 worth of silver, your account would be down to about $7,500-8,000 but you would still have positive equity. With unsafe leverage in our example above, you end up owing between $1,000-$3,000. This is known as a margin call.
From $8k to owing up to $3k. That’s a very big swing.
Now getting back to overall markets. Realizing that leverage and speculation were driving prices higher, the CME Group (which is the owner of the Chicago Mercantile Exchange) hiked margin requirements three times since the beginning of last week.
This caused firms to tighten up their leverage and some firms even made stricter requirements than the CME Group.
The reduction in the amount of leverage that can be used caused selling pressure to increase last week which brought silver down to $45 an ounce after trading higher than $49 per ounce just days before.
Then add on top of this a once in a lifetime event (literally), with the death of Osama bin Laden. This sent silver prices, which rallied back to $48.22, down to $42 per ounce.
However, once the market absorbed the Osama factor, silver prices rose in excess of $47 off its Osama lows.
Institutions know the game. They knew that with margin requirements tightened that if they started selling they could trigger a significant selloff in silver. So they did.
As institutions were selling, individuals who were overleveraged in silver began what the term “margin call” means. As the price went down, it triggered individual investors to sell their positions in order to cover their investment amounts. This drove down the price of silver even further.
Add on top of this hedge fund gurus like George Soros indicating that he will start to liquidate his long gold and silver positions, and the down market can take on a life of its own.
As the market continues to go down further, shaking out most individual investors, we will start to see institutions re-enter the game, buying back in the $30s the same metals that they sold in the $40s.
You see even the institutions that are just getting out now (in the low $40s to high $30s range) aren’t concerned because they’ve been buying silver since it was trading in the $15-20 range.
So to them all they lost was just a couple bucks of profit.
But the opportunity to take silver from $49 to let’s say $36 just to buy it back again and ride it all the way to $50, that’s a score.
For silver buyers out there, key adages provide the proper insight into these markets.
The first adage to follow is to remember history. Historically, gold trades at a 16 times premium to silver. These days that ratio is at 38 (meaning the price of gold is 38 times the price of silver.
Although margin requirements on silver are now more onerous than those on gold, the underlying fundamentals and price ratios for silver make it very attractive.
Secondly, individual investors in silver should be long-term players, not short-term flippers.
Silver is a dangerous metal. It can go up and down as much as 20 percent in just a couple of days. We’ve seen that before. We’ve seen it now. And we will certainly see it again.
If you are a long-term player you can afford to sit out these short-term hiccups and just focus on the long term fundamentals. The U.S. dollar is heading down, emerging markets are consuming more, and the demand for silver (industrial, inflation-hedge, and luxury) is increasing.
Just look at U.S. debt. We have $14 trillion in unfunded Social Security liabilities, $77 trillion in unfunded Medicare liabilities, and $19 trillion in unfunded prescription drug liabilities.
That’s $110 trillion new dollars that we have to print just to cover our existing liabilities. God forbid that President Obama figures out a new way to start spending even more money.
So when you want to know where the price of silver is going, I’m going to give you the same answer that Steve Forbes gave me today while we talked at Starbucks, “Just follow Ben Bernanke.”
Because as Bernanke gets the orders to print the dollars to pay the bills, silver will go up and up and up.
Why real-estate quagmire stays, and stays, and stays … – Dan Mangru WND (WorldNetDaily) Exclusive Commentary November 10, 2010Posted by Admin in Market Commentary, News.
Tags: America, bernanke, economy, Foreclosure, housing, markets, mortgages, obama, real estate, recession, subprime, treasury, underwater, United States
Why real-estate quagmire stays, and stays, and stays …
By Dan Mangru
Posted: November 09, 2010 5:37 pm Eastern
We live in an instant society.
Want to watch your favorite movies any time of the day? We have Instant on Demand.
Didn’t think that Terrell Owens got both feet in for his touchdown on Monday Night Football? No worries, we have instant replay.
We have instant popcorn, instant pudding, and pretty much instant everything.
So with all the advances of modern technology, what is taking so long to clean up the real estate market?
We have all of the tools to fix the market.
Want to start selling foreclosures? We can use the power of the Internet to do massive online foreclosure auctions as opposed to gathering on the old courthouse steps.
Want to gather investors? Start an investment group on Facebook. It’s really that simple.
Yet despite all of the tools available to us, the real estate markets remain a disaster.
National home prices have changed -5.0 percent quarter-over-quarter. In fact, looking at national home prices since their mid-August peak, price declines are even more dramatic, changing -6.8 percent.
Roughly 1 out of every 4 homeowners has negative equity in a home (meaning that their home is worth less than their mortgage).
And just last month, all of the major banks halted the sale of foreclosed properties.
So what has been the government’s response to all of these problems?
A Candid Appraisal of the Recovery – John Browne Commentary October 1, 2010Posted by Admin in Market Commentary.
Tags: bernanke, debt, deficit, economy, elections, euro-pacific capital, eurozone, fed, gdp, global, GOP, john browne, markets, monetary policy, recovery, taxes, The Mangru Report, U.S.
A Candid Appraisal of the Recovery
By John Browne
Over the last two weeks, seemingly good economic news offered some shreds of optimism to a stock market that was desperate for a pick-me-up.
The week before last, the National Bureau of Economic Research declared that the US recession had ended back in June 2009. At the beginning of last week, news came in that month-on-month retail sales had risen by 0.4 percent. Combined with successful government debt auctions in the eurozone, increasing expectations that Republicans will take back the House (thereby blunting the leftward drift of Washington), and hopes that a new round of quantitative easing will pump up growth, mainstream analysts are developing a feeling of near-euphoria.
Although it hard to begrudge the punch drunk for grasping at a little hope, investing is a dispassionate endeavor that calls for close and realistic analysis. In that spirit, let’s dig deeper into the recent ‘good news.’
First, the single month’s rise in retail sales was a blip on what has been a long-term downtrend. Furthermore, retail sales in August typically get a large boost from seasonal ‘back to school’ spending. This year, retail sales were boosted further by temporary tax incentives and vendor discounts.
Second, the successful auction of debt from worrisome eurozone countries, like Ireland, only served to further camouflage the ongoing risk of sovereign default by these states. None of them have committed to a comprehensive program of austerity and market liberalization – Ireland maintains a ‘too big to fail’ doctrine while Greece is on the verge of riots from its so-far modest efforts at privatization. None of the PIIGS would have had successful bond sales if Germany hadn’t been pressured into becoming a ‘sovereign of last resort’ for the whole currency area.
Apart from health of the weakest nations, a more important issue is understanding how sovereign debt is analyzed by investors in the first place. Those who consider buying government debt have for many years relied on backward-looking measurements such as debt-to-GDP to analyze the investment quality.
But that’s only half the picture, and oftentimes it’s even less than that. It does not include off-balance sheet items such as unfunded pensions, social security payments, or health obligations. For the US, I estimate this total debt amounts to some $134 trillion – nearly ten times the ‘official’ figure.
On a deeper level, using the public debt-to-GDP ratio to assess sovereign solvency implies that governments have access to the entire annual production of their economies. In reality, they have access only to that portion which is taxable. As taxes increase, there are natural limits imposed by increasing inefficiency and avoidance behaviors. Therefore, ‘net GDP,’ the portion available to the government for debt service, is significantly smaller than the gross GDP of the nation.
With real government debts, including off-balance sheet items, far larger than officially recognized and net GDPs far smaller that top-line GDP, the solvency of many sovereigns should be considered dubious at best.
For example, the debt-to-GDP ratio of the United States is currently 65 percent, which puts the country towards the solvent end of the debt spectrum among developed Western nations. However, the real debt-to-net GDP ratio is a staggering 358 percent, making the US the most insolvent nation in the group, behind even Greece!
In the interest of brevity, I will only touch on the fact that the above number is actually still an underestimate. It does not account for the portion of gross GDP claimed by state and municipal governments to service their debts. After all, all levels of government tax the same base. So, the effective portion of GDP available to the US federal government is even smaller still.
The third problem with the late round of ‘good news’ is that while a GOP sweep of House races looks likely, it is unlikely to make a large impact on policy. It is doubtful that the small number of freshman GOP Representatives will be able to win over their more mature, big government-minded colleagues. Any pending GOP ‘small government’ revolution will be heavy on talk and short on accomplishments.
It should come as no surprise that the Republicans’ “Pledge to America” lacked specific commitments for cost-cutting. Republicans are terrified of becoming the party of austerity, and the next Republican President will want to avoid being seen as ‘Hoover 2.0’. Therefore, any structural changes will come slowly – and perhaps too late.
Finally, whatever actions the Fed takes in the name of further stimulus will have the same unintended consequences as all previous stimulus efforts. Long-term sustainability will be sacrificed in favor of a short-term boom. Since World War II, the underlying strength of the US economy has allowed the central bank to get away with this strategy, as the economy simply outgrew the inefficiencies caused by monetary manipulation. But what happens when we are in a period of secular decline?
So we see that Wall Street is again playing the part of Pangloss. Unfortunately, their purported inklings of a renewed rally in the US markets do not stand up to candid appraisal.
John Browne is the Senior Market Strategist for Euro-Pacific Capital and a featured panelist on The Mangru Report on Fox Business. To view his previous commentaries please click here.
Tags: Boom, Bull, business, Columnist, commentary, dan, Doom, faber, finance, fisher, Fisher Investments, Forbes, Fox, Gloom, ken, mangru, Marc, markets, report, retirement, stocks, talk, tv
Dan Mangru of The Mangru Report interviews Forbes Columnist and Fisher Investments (www.fi.com) Founder, CEO, and Chairman Ken Fisher. In the One-on-One interview with Mangru they discuss everything from bull markets, his top stock picks for 2010, whether or not there is hope for retirement, his thoughts on gold, and a retrospective on his last 25 years as a Forbes Columnist and market strategist.
Tags: analysis, anthony, commentary, correction, crash, dow, equities, euro, eurozone, finance, gold, greece, italy portugal, markets, NYSE, pulieri, stocks, United Bullion Group, VIX, wall street
Below is market commentary from Anthony Pulieri of Joseph Glenn Commodities (www.jgcommodities.com) and Expert Panelist for The Mangru Report:
The stock market has come too far way too fast as I discussed on The Mangru Report this past Saturday. The retail investor needs to get out and if you look at what happened this week, it is a fundamental break down in the market. I have been looking for heavy volume as confirmation and with almost 460 million shares trading on the Dow, this is it. Technically speaking a 15-20% correction to the downside in the stock market is exactly what this market needs and it could be much more aggressive. I see support at around 9800 on the Dow, which we last hit on February 5 of this year and which we touched briefly today. In addition, over the last several days we broke the trendline that we established off the March 6 lows of 2009 (see DOW chart below).
Most likely, I do think 9000 will be hit quickly on the Dow admist a global selloff. Fear and uncertainty have permeated the markets. The VIX (aka The Fear Index) has literally doubled in the last 3 days.
This is a dramatic move and it seems retail investors are getting shook out very fast. The Eurozone is falling to its knees right before our eyes. This is a major factor along with the wild currency moves we have seen daily. The situation in Greece, Portugal, Spain and now Italy is part of a deleveraging process that is spreading fast into global markets. This is just the beginning. I am looking for this trend to continue and the fall of the Eurozone as we know it is here. The sense of panic we saw in the American stock market has crushed confidence and I think it showed a lot of people just how vulnerable the current situation is. Without confidence in a system that is already damaged I will tell you to just sit on the sidelines and take your profits. The correction has started. Don’t get caught!
Now GOLD is a different story because it is the only true safe haven asset. The stock market rally, which you can see in the DOW chart I posted earlier was built off of relatively weak volume (the last time the DOW had significant volume was back in April of 2009. Gold on the other hand has had a strong rise built on strong volume, a classic trend confirmation (see chart below).
It is true currency as we have seen this week, and for the last 5000 years people forget it is the only asset that does not rely on other people’s ability to pay. It continues to hit new highs in all currencies and with the printing press running wild globally, inflation is inevitable. The general level of the price of goods will continue to rise and the purchasing power of your dollar will continue to erode.
Its not just companies going under. Now we have actual countries coming apart at the seams. Greece is the birth place of democracy. With all these issues going on, what we saw was the 1200/oz level in gold get breached with relative ease in the face of a strong dollar. Gold’s high will be broken very quickly and my target is 1500/oz by years end . Long term gold is poised for much higher moves 2500/oz at the minimum. Technically we have short term support at 1160 and at 1080 lies the all important 200 day moving average. The 1000 dollar level has a mountain of support and I fully expect we wont see for a long time. With the Central Banks being net buyers of gold and the geopolitical and economic instability Gold is your safe haven. There is just too many question marks. Gold has the support technically and fundamentally. You throw in record level investment flows globally it is a must in everyone’s portfolio!