Saturday, October 31, 2009

US 3rd Quarter Postive GDP growth. Trick or Treat?

Here're 2 excellent videos in response to yesterday's news that US had a 3rd Quarter positive GDP growth.

GDP is a very inaccurate measure of wealth anyway. If the governments around the world are going to print money out of thin air and pump them into the economy, of course GDP has to rise. But look at real wealth, it's the form of depreciating currencies.

Thursday, October 29, 2009

Silver Bullion

New 1-oz and 10-oz silver bars from (and my nerdy collection of books).

These bars are graduation gifts from my mum. :)

Ordered them on Monday morning. If I had waited 1-2 days longer, I could have saved $40-50 cos silver price dropped. But like Jim Rogers love to say, "I'm the worst short-term trader on the planet." (or something like that).

Anyway the long term fundamentals for silver are very intact. It's a good opportunity to buy at lower prices now.

Below these silver in the picture, you can see the book "Hot Commodities" by Jim Rogers, a billionaire investor based in Singapore. It's really great! Invest some time reading it and it might just be the best investment book you'll read in your life. Seems like I keep saying the same thing after finishing each book. Oh well, there're just so much stuff to learn.

He's bullish for both gold and silver too, but there're other commodities which will do better than these 2 precious metals, according to him. I agree too, but lack of knowledge is preventing me from investing in other commodities for now. This single book of his exposed the reader to so many different types of commodities that it can be rather mind-boggling (in a good way)!


Friday, October 16, 2009

Dow 10000, Gold $1070, JP Morgan $3.19b profit

Yesterday, the Dow finally rallied to the 10000 mark, inducing cries of joy from the trading floor in NY. It seems like the market is recovering. The V-shaped recovery that many have hoped for seems to be coming true. Most economists say we're recovering.....or is it? Unfortunately, I think they are going to be wrong again. How can we trust these very economists who have been getting it wrong year after year? They did not even predict the current crisis.

Dow at 10000 means nothing. Sure, for the experienced short-term traders who can time the market very well (this is very hard), he can make some money. But if you compare Dow to say, the year 2000, the current Dow at 10000 in real terms is actually only about 7500. That is because since 2000, the USD has dropped by 25%! Back then, Dow was > 10000. So how much has the Dow 'purchasing power' dropped?  Gold, on the other hand, has gained > 300% in terms of USD since 2000. The USD buying power has dropped, is still dropping and doesn't look like recovering, given all the crazy monetary policies that the FED and the government are implementing.

If you price Dow in terms of Gold, the Dow:Gold ratio has dropped from 1:40+ to the current 1:9+. Gold retains its value.

The picture above is the Dow priced in gold, courtesy of and  Bloomberg. Rats! How I wish I can still use the bloomberg machine in NUS. Anyway, look at how it has dropped to 9.6.

Gold is the ultimate and best currency that man has ever known. Which is why investors still flock to this 'useless' metal. For the past 2 weeks or so, gold has hit record prices 3 or 4 times. The highest to date is about $1070. It is not even close to its inflation-adjusted high in the 1980s of $2000+ yet. If you use some ratios, as I've done in my earlier posts, you can expect gold to hit USD 5-6k. Recently, an excellent article (it's somewhere in the archive of calculated that if Fed were to back its balance sheet with gold, gold will be priced at $8000. Anyway, given all these, I'm still far bullish on silver than gold. For now, I'm buying silver only. For inexperienced investors like me, the best way to invest in precious metals is in the physicals themselves, rather than paper gold/silver. Look at the derivatives market. When it bursts, there is gonna be mayhem. The current ratio of paper promises to actual physical bullions is in the region of 100:1 each for gold and for silver !! When the bubble bursts and all these people scramble to close their positions, look how the prices of the physicals will shoot to the moon.

What about JP Morgan's $3.19b profit? In fact, the Dow rally to 10000 is caused largely by this company's stellar earnings, and 1 or 2 other companies which I can't remember. I feel that it is gonna come crashing down again. JP Morgan's bulk of the profit comes from investment banking, not from consumer banking. Because of all the ultra cheap credit that Fed is providing, an illusionary rally in the stock market is happening. The US' REAL economy is shrinking, its consumers are suffering. Wall Street is happy, Main Street is miserable. Look at how many troubled states it has right now. California, the world's eight largest economy, may well become the first failed state. Rising unemployment, rising number of homeless people, rising credit card defaults, rising foreclosures. Just look up on youtube videos or read up some articles, you'll get the TRUE picture of the situation in the US right now (Don't believe what the mainstream media is saying!). Yet, stock prices are going up. Sounds funny? Yeah, it's another bubble in the making. According to estimates, for Dow and gold to realign in the median point, Dow must be at around 4000-5000. According to David Tice from Prudent Bear, Dow will only be at its book value at 3100. Now it's just way inflated.

Eventually, in the immediate years down the road, the great global trade imbalances have to re-balance again. It has been extraordinarily out of whack for several decades. The Western world will see their currencies depreciate by a lot, the Eastern nations will see their currencies appreciate by a lot. The Western currencies will lose their purchasing power, standards of livings will drop. The Eastern nations will see their exports reduced, because of the lowered Western purchasing power and because of the Eastern currencies' appreciation. Both sides of the world will enter recessions that dwarf even the current one. Those who actually saw the current crisis coming say that the recession down the road is going to be the biggest Depression in history. One of them is Gerald Celente, a highly respected trends researcher. He has been right in predicting more than 40 major world events over the years, including financial crisis, economic crisis, issues on politics and terrorism. You can find some videos of him on youtube.

The big nations that we know of: US, UK, Spain, they are all in huge trouble. UK still holds on to its faint hope of regaining its former superpower status with its sterling pounds. That is why it did not join the Euro. Another reason is that UK is US' close ally, and the US asked the UK not to use the Euro currency, for fear that this will further diminish the power of the USD. With a lot of nations increasingly using the Euro as a reserve currency, and with reports that oil will be priced using a basket of currencies, including the Euro, the UK stands to lose out. Recently, the USD only makes up about 1/3 of NEW reserve currencies, down from 2/3 in the past! The Euro and the Yen now makes up the other 2/3. What does this mean? This simply means that central banks around the world are increasingly doubting the USD. They are buying up the Euro and Yen for their reserves, instead of the USD. That said, these banks still hold a large amount of USD reserves though. But clearly we are seeing a trend away from the USD here.

What about Spain? With unemployment of more than 20%, and lots of troubling reports recently about its very bad state of economy. On a side note, I think very soon, the EPL and the Primera Liga are gonna be affected too. With fans' purchasing power reduced, revenue will drop too. These leagues currently look like a big bubble to me, especially the EPL. But then again, they have a huge fan base in Asia. And the entertainment industry tends to do well during crisis (not sure if these leagues are in the sports or entertainment industry, or both?). So who knows.

Ever since I started this blog, gold has gained 10% in USD, about 9.6% in SGD, and silver has risen 13% in SGD. There is more to come! What about copper, nickel, zinc, iron, agriculture, and other commodities? They are going to do extremely well too, according to legendary billionaire investor Jim Rogers. The base metals has risen 100-200% in the past year. Sugar has risen 100% in the past year. Even orange juice has risen 30+ %, according to data I last saw a few weeks back. The world will go back to real physical assets soon. Already, China is buying up huge amounts of commodities, and they are going to buy even more. They also have > 95% of the world's rare metals, metals which are important for use in technology stuff. And they are planning to export only a small amount of those metals, an amount that will not even satisfy Japan's demand alone. Anyway, all these indicators point towards a rise in commodities in the next few years. Ride the wave while you can!

And oh yeah, Happy Birthday to fellow investor Ms.Cheng!


Wednesday, October 7, 2009

Gold Jumped to Record High Today

Picture from

It beats the $1033.90 record set in March 2008.

And we ain't see nothing yet!

“Gold is acting like the ultimate currency,” said Chip Hanlon, the president of Delta Global Advisors Inc. in Huntington Beach, California.

“Gold has just begun its ascent,” said John Brynjolfsson, the chief investment officer of Armored Wolf LLC, a hedge fund in Aliso Viejo, California. “As central banks print more and more money, the private demand for gold as an investment and inflation hedge is destined to grow. It’s pretty clear that gold will be at $2,000 by 2012, and it could happen a lot faster.”

“Gold is not just seen as an inflation hedge here in the U.S. but is rather acting as a hedge against all currencies,” said Dan Greenhaus, the chief economic strategist at Miller Tabak & Co. in New York. “As your currency depreciates in value, the consumer has less purchasing power and therefore it costs more to buy the same number of goods. Gold in inflation-adjusted terms is well below its highs.”

Think everyone is jumping on to the gold bandwagon yet? Unfortunately, (or fortunately for investors), not yet. For every 3 of these dudes above (they're called gold bugs by the anti-gold crowd) supporting higher gold prices, there'll be 1000000000 people opposing them.We will know gold mania has come to town when the media starts to talk about it everyday.

Silver is gonna follow soon. Other commodities will do well too. Read Jim Roger's books if you want to know more. He also talks about why many people shun/look down on commodities. He's a multi-billionaire investor based in Singapore.

Thursday, October 1, 2009

The Great Global Trade Imbalances

Gold was a natural balancer for global trade imbalances. Gold forces governments to be disciplined with their budget. No one can print extra gold. But ever since the last of this discipline was removed along with the collapse of the Bretton Wood system, the world has gone on to print an unprecedented amount of currencies, and global trade imbalances have grown extraordinarily wide. I have lots of figures and graphs to substantiate these. Try googling for them, maybe you can find some.

Anyway, here are some harmful effects of global trade disequilibrium:

1. For nations with trade surplus:

Prime examples are asian countries. Asia has been using the model of export-led growth, which is unsustainable in the long run. Trade surplus may mean more currency flowing into the country, but this is highly inflationary. When Asia has a trade surplus with the US, they have tonssssss of USD. There are 2 choices they can make with this USD: convert the USD into their own currencies, or recycle the USD by buying up US assets. If they choose the 1st option, there will be so much credit going into the banking system, and with those credit futher inflated through the fractional reserve banking system, inflation is going to be wild. In fact this was the PRIMARY cause of the Asian currency crisis in the 1990s, and the burst of the Japanese bubble. So much credit flowed into these "Asian Miracle" countries, driving property and stock prices up , giving people the illusion of wealth, until it finally culminated in a burst.

Asian nations favoured the 2nd option more. They recycle the USD by buying up US treasury bonds. Now it is becoming increasingly clear that the US financial health is questionable (in fact I think it's the worst disaster history is going to witness), and less foreigners are buying up the US bonds. They need to find some other places to recycle their USD. They can buy up US assets within the US itself, but with the US in disarray, this might not be a good option too. Or they can dump the US and buy commodities, and GOLD! This is what China has been doing. On a side note, China has yet to see a bubble burst in the country. It will face this problem in the future too. Its huge trade surplus with the US is going to cause it a lot of problems down the road.

2. For nations with trade deficits:

These are mostly the Western nations, especially the US. For decades the US has been consuming what the world produces. How do they do that? By going deeper and deeper into debt. The government has been stepping in during recessions and injecting lots of liquidity into the market, in an attempt to stimulate economic growth. This won't work in the long run. Just look at Japan. Government spending has been so huge that now government(or public) debt in Japan is 200% of its GDP. By doing this, the US government has to sell more and more bonds to keep themselves afloat. And with most trades still denominated in USD, a lot of countries have excess USD, which they will use to buy even more US bonds or assets. This recycled USD, coupled with the crazy amount of USD printed by the government, have been providing the US with lots of credit. So the credit enters the banking system, got even more inflated through the fractional reserve banking system, and voila, you have tons and tons of paper USD.

Some day, the world is going to stop buying so much US bonds. Already, there has been increasing talks on using other currencies as the reserve currency. Without foreigners lending money to the US (by buying up the US bonds), the US will be severely, acutely, don't-want-to-imaginably short of cash. The US will then have 2 options at this juncture:

Option 1. Swallow the ever-increasing bitter medicine. Let the bubble burst, let deflation set in, suffer unimaginable pain, experience a huge drop in standards of living. Recover and then move like how it does during the Great Depression (back then, even though it was really depressing, it was not protracted, because the Fed did not come in and pump money and mess things up). Back then, the Depression was allowed to run its full course, balancing everything up again, cleaning up all the mess. Therefore, the US were able to get out of it after a few years. So that's for option 1.

Option 2. Print money. print print print and try to get out of the problem. We know what will happen here: hyperinflation.

So there you go, a simplified version of what is to come. To explain everything step by step will take another 100000 posts. To end this post, here's a scenario which I conjured, after studying this interesting topic of economics:

A surplus nation, say China, has a lot of USD from trading with the US.

Tons of USD --> enter banking system --> credit explosion due to fractional reserve banking system --> economic boom as businesses borrow money cheaply, stock market and property prices go up because the money needs to find some place to go to, inflation sets in  --> overproduction and overcapacity  --> deflationary pressure on prices of goods --> increasing corporate unprofitability  --> falling wages, increasing unemployment  --> defaults on loans  --> bubble burst

In fact, this is exactly what will happen if Gold is still used as the mode of payment. Countries with trade surplusses will have surplus gold payments from the importing countries. Credit expands in the surplus country, causing inflation, and making the country's goods less competitive in the market. Now the country will be a net importer instead of a net exporter, and gold flows out again.

A country with gold flowing out will try to export more, so that gold will come in again. It will tighten credit, thus putting a downward pressure on prices. This way, its goods become more competitive, and thus the country will be able to export more. Gold flows into the country again.

So there you have it. How gold is such a great natural balancer of trade imbalances. Without this correcting mechanism in place, the world will continue to face financial and economic turmoils in the looonnnggg roads ahead.
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