The VRTrader.com VR Silver Newsletter - Monday 6/14/2010"Tools for the High Performance Trader"
Copyright ©2010, All rights reserved.
Redistribution in any form is strictly prohibited. LEIBOVIT FILES | by Mark Leibovit Leibovit Files
Monday, June 14, 2010
Rally To Resistance Underway - Check 200 Day and 50 Day Moving Averages!
Commentary below from TIMER DIGEST's #1 Intermediate Market Timer for the 10 year period ending in 2007 - Mark Leibovit
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UPCOMING ECONOMIC RELEASES/MARKET EVENTS
JUNE 14 - 18, 2010:
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MONDAY, JUNE 14, 2010:
St. Louis Federal Reserve Bank President James Bullard speaks to the Institute of Regulation and Risk of North Asia, in Tokyo.
4-Week Bill Announcement
11:00 AM ET
3-Month Bill Auction
11:30 AM ET
6-Month Bill Auction
11:30 AM ET
POST-MARKET EARNINGS REPORTS
La-Z-Boy
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TUESDAY, JUNE 15, 2010:
Turnaround Tuesday?
PRE-MARKET EARNINGS REPORTS
Best Buy
St. Louis Federal Reserve Bank President James Bullard speaks to the Institute of Regulation and Risk of North Asia on asset bubbles, in Hong Kong.
6:15 AM ET
ICSC-Goldman Store Sales
7:45 AM ET
Empire State Mfg Survey
8:30 AM ET
Import and Export Prices
8:30 AM ET
Redbook
8:55 AM ET
Treasury International Capital
9:00 AM ET
Housing Market Index
10:00 AM ET
4-Week Bill Auction
11:30 AM ET
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WEDNESDAY, JUNE 16, 2010:
PRE-MARKET EARNINGS REPORTS
FedEx
MBA Purchase Applications
7:00 AM ET
Housing Starts
8:30 AM ET
Producer Price Index
8:30 AM ET
Industrial Production
9:15 AM ET
EIA Petroleum Status Report
10:30 AM ET
Philadelphia Federal Reserve Bank President Charles Plosser on a panel discussion at an academic forum on fixing the financial system, in New York.
2:15 PM ET
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THURSDAY, JUNE 17, 2010:
PRE-MARKET EARNINGS REPORTS
J.M. Smucker, Kroger, Pier 1 Imports, Smithfield Foods, Winnebago Inds
Consumer Price Index
8:30 AM ET
Jobless Claims
8:30 AM ET
Current Account
8:30 AM ET
Leading Indicators
10:00 AM ET
Philadelphia Fed Survey
10:00 AM ET
EIA Natural Gas Report
10:30 AM ET
3-Month Bill Announcement
11:00 AM ET
6-Month Bill Announcement
11:00 AM ET
2-Yr Note Announcement
11:00 AM ET
5-Yr Note Announcement
11:00 AM ET
7-Yr Note Announcement
11:00 AM ET
Fed Balance Sheet
4:30 PM ET
Money Supply
4:30 PM ET
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FRIDAY, JUNE 18, 2010:
Quadruple Witching Options & Futures expiration
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STOCKS - ACTION ALERT -
The bulls are counting their blessing after Friday's hair-raising action and are hoping for good things this week after last week's bounce off of recent lows. The stock market fell nearly 100 points at Friday's open after the Commerce Department reported a sharp decline in retail sales for May. A better than expected consumer sentiment report fifteen minutes after the open lifted the Dow back to the unchanged line, but it failed to break through and traded with small losses for most of the session. But a violent rally in the last hour lifted the indexes to decent gains. The Dow finished the day up 38.54 at 10211.07. Intra-day, the Dow rallied 130 points from the opening low to the close. The Dow has rallied 454 since retesting the correction low last Tuesday. The S&P rose 4.76 to 1091.60 and NASDAQ rallied 24.89 to 2243.60. Breadth was positive, but volume was light.
The retail sector (XRT) led the decline Friday morning, opening down 1.98% after the disappointing retail sales report. But retailers then led the advance and outperformed on the session with a 0.66% advance.
Commodities (XLB +1.12% and XLE +0.61%) led the rally as rallies in gold, copper, and natural gas outweighed the decline in crude oil. Technology (XLK +0.88%) was another star performer after National Semiconductor's earnings exceeded expectations. Health Care (XLV +0.83%) also did quite well after Pfizer (PFE +3.69%) and Bristol-Myers Squibb (BMY +1.79%) said they had stopped a clinical trial early because the data so far suggest an experimental drug for irregular heart rhythm was superior to aspirin.
On the other hand, consumer sectors suffered after the disappointing retail sales report. Consumer Staples (XLP) fell 0.82% and Consumer Discretionary (XLY) dipped 0.09%.
Small Caps (IWM +1.36%) and Mid Caps (MDY +0.92%) did better than Large Caps (SPY +0.49%)
Though I am intermediate to longer term bearish, I call things as I see them and if a 'summer rally' is part of that plan, so be it! As I mentioned, the Dow Transports flashed a sole Positive Volume Reversal ™ mid-week and that wasn't enough for me to jump on the bullish bandwagon. Platinum covered their short positions via inverse indexes Tuesday morning near the low and are on the sidelines. Do I feel compelled to lay every rally or sell-off? Of course not. I'd love to see a rally up to resistance (the 200 and possibly the 50 day moving averages) and post renewed Negative Volume Reversals ™, as that would give us a great place from which to go short again. I've told you that weakness into or around Weird Wollie Wednesday (the Wednesday of the week ahead of options expiration) tends to be coincident with a low point in the market and generally results (in bull markets) in a rally into options expiration. I am not holding my breadth here for any sizeable rally, and, in fact, we began creeping into overbought territory on Friday, so it will be quite interesting how this week plays out.
Stepping back, I am in the camp that a new bear market either has begun or is about to begin, one that will result in substantially lower prices. For now, I am still focusing on the Dow Industrials reaching the 8900 level in the months ahead, but I could also see a test of the March, 2009 low (6469 in the Dow Industrials) in the next couple of years.
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DOW TRANSPORTS - ACTION ALERT -
Transportation stocks continued to outperform on Friday after the Dow Transportation Index posted a Positive Volume Reversal on Wednesday, the only index to do so. Falling oil prices and a rising stock market combined to lift the group above the broader market. The Dow Jones Transportation Average jumped 48.77 or 1.14% to 4319.88.
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GOLD and METALS - ACTION ALERT -
Gold jumped after the disappointing retail sales report as traders flocked to the safe metal, pulled back after the good consumer sentiment report, but then hit a higher high in the afternoon despite the rally in the stock market.. Gold settled up 9.80 at 1227.50. Other metals finished the day mixed with silver down 0.02 to 18.22, platinum up 5 to 1539, palladium down 3 to 447, and copper up 0.0415 to 2.9040.
The bottom line for me is that the recent 1169 corrective low in the Spot Gold needs to hold if we hope to again see new highs.
Despite the recent hesitation in gold prices after hitting an all-time high of 1253.30 last Tuesday, holdings in the SPDR Gold Trust, the largest exchange-traded fund backed by gold, rose to a fresh record Thursday. The fund reported 1,306.14 metric tons (1,439.77 short tons) in holdings, from 1.298.53 metric tons earlier in the week.
Don't forget to check out the weekly VR Gold Letter which provides more intensive coverage of Gold and Gold/Silver/Platinum/Palladium and Copper shares.
www.vrgoldletter.com
If you are a Platinum or Silver subscriber, special discount rates are offered ($50 and $70, respectively, versus $125.00 per month). Please contact my office for details: mark.vrtrader@gmail.com or 928-282-1275.
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BONDS - ACTION ALERT -
Treasuries staged a big rally on Friday after the weak retail sales report pushed traders toward safety. The market was also relieved that last week's Treasury auctions saw strong demand and that the market now has a week off from new Treasury supply. The long bond future rose 1 21/32 to 124 7/32.
Philadelphia Federal Reserve President Charles Plosser said policy makers will soon have to start thinking about pulling back their monetary stimulus to ensure inflation stays low and inflation expectations remain well-anchored. Plosser also said the recovery is becoming more "broad based," which should leave the economy to grow by around 3.5% this year and next, somewhat stronger than the underlying trend growth rate of the economy, which he believes to be about 2.75%.
Federal Reserve Vice Chairman Donald Kohn announced Friday he would stay on as a governor of the Fed temporarily until his replacement is appointed, or until Sept. 1, whichever comes first. Earlier, Kohn had announced that he would step down on June 23. President Barack Obama has nominated San Francisco Fed President Janet Yellen to the post, but the Senate Banking Committee has not yet acted on her nomination. Kohn's announcement means he'll vote at the Federal Open Market Committee meeting on June 23 and perhaps on Aug. 10. More importantly, Kohn's staying means the Fed board will still have a quorum of five.
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CRUDE OIL - ACTION ALERT -
Oil fell on Friday after Chinese inflation data fueled concerns Beijing would take further steps to cool its economy, curbing demand for energy products, and on fresh worries about consumer spending in the U.S. Crude oil dropped 1.70 to 73.78.
Recently, we've seen crude oil and equities move together. That was the case Friday morning when they both opened lower. But stocks recovered their losses and closed with a gain whereas crude oil managed only a small bounce.
On Friday, we again saw natural gas moving in the opposite direction of crude, rising 0.134 to 4.781.
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US DOLLAR - ACTION ALERT -
The US Dollar saw a small flight to safety on Friday after the sharp decline in retail sales sparked renewed economic concerns. But gains were never large because the news meant a weak US economy, whereas European concerns were alleviated somewhat last week by the successful bond auction from Spain and Italy. The US Dollar Index rose 0.378 to 87.507.
Volume has turned negative the past few days in the US Dollar Index pointing to the possibility of a near-term market top. If that is true, could we see stocks, the euro and gold continue to rally? If the past repeats, the answer is yes. If we trade over 88.708 (the June 7 high), this pattern is reversed.
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ECONOMIC NEWS:
Sales at retailers unexpectedly fell in May for the first time since September following a record slump in purchases of building materials, adding to fears the economic recovery was losing some steam. The Commerce Department said total retail sales dropped 1.2 percent, the largest decline since September, after rising by an upwardly revised 0.6 percent in April. Sales in April were previously reported to have increased 0.4 percent. Analysts had forecast retail sales rising 0.2 percent last month. Retail sales, which had risen for seven straight months, were up 6.9 percent compared to May last year.
U.S. consumer sentiment rose in early June, hitting the highest level since January 2008, according to media reports on Friday of the Reuters/University of Michigan index. The consumer sentiment index increased to 75.5 in June from 73.6 in May. Economists had been expecting the sentiment index to hit 74 in June. The index hit a 30-year low of 55.3 in November 2008.
China's major economic indicators for May showed consumer-price inflation breaching the 3% level for the first time in more than a year and a half, but economists said they expect inflationary pressures to ease in the second half of the year on falling global raw material prices.
Other indicators showed the pace of economic growth in China is moderating. Fixed asset investment in urban areas rose 25.9% in the January-May period, slower than 26.1% growth in the January-April period, and industrial production expanded 16.5% in May, a tad slower than April's 17.8% rise.
COMPANY NEWS:
National Semiconductor on Thursday reported a fiscal fourth-quarter income of $79.2 million, or 33 cents a share, compared with a loss of $63.7 million, or 28 cents a share, in the year-earlier period. Revenue was $398.5 million, up from $280.8 million. Analysts had expected the chip company to report earnings of 28 cents a share, on revenue of $384.4 million. For the current quarter, the company said it expects revenue to increase sequentially by 3% to 5%. NSM rallied 5.03%.
Dell revised down its first-quarter earnings to 17 cents a share from 22 cents due to $100 million in liability that it has to record in relation to a Securities and Exchange Commission investigation, the computer giant said Thursday. The revised figure was provided in a regulatory filing submitted to explain why Dell was unable to file its 10-Q for the first quarter by June 9. DELL inched up 0.61%%.
Obama administration officials plan to issue a decision later on Friday on a plan by BP to increase the processing capacity at the Deepwater Horizon spill to a maximum 50,000 barrels a day by the middle of July, U.S. Coast Guard Adm. Thad Allen said. Currently, BP PLC is collecting 15,000 barrels a day at the site of the spill from a containment cap. Allen said Secretaries Ken Salazar of the Interior Department and Steven Chu of the Energy Department are reviewing the plan, which will include more production vessels and tankers. BP will also place a new cap over the leak and build a new riser pipe from the spill to float 300 feet below the surface of the water. BP gained 3.63%.
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URANIUM - ACTION ALERT
Ux U3O8 Prices* (Uranium)
June 7, 2010 Posting
Spot: $40.75 UNCHANGED. Bull market high in the cash market was $138.00.
The June Uranium Futures closed at $40.75. Uranium futures recent his a new bear market low of 40.00. June 13, 2007 hosted the bull market high of 154.95. Major support lies well under the market at $36.00.
The spot price of uranium quadrupled from 2004 to 2007. When it hit $138/lb, uranium became a certified bubble, which has now burst.
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Canadian TSX, TSX Venture and Canadian Dollar Commentary for our Canadian clients updated for Monday, June 14.
The Canadian market was much more stable than the US on Friday, which is not surprising considering the economic news shaking the US market around. The Canadian market was down just 0.43% at its worst level versus the US's S&P 500 which was down 0.89%, but then posted a smaller end of day gain than the US. The TSX gained 31.07 or 0.27% to close at 11666.92.
The fact the May 21 low of 11,179.97 has held and in fact retested at 11,402.45 on June 8 is a positive sign. I cannot predict new highs at this time, but the situation is improving.
Canadian industrial companies' use of their production capacity rose in the first quarter, the third straight advance from a record low last year, led by manufacturing of transportation equipment, metals and chemicals. The share of plant capacity in use rose to 74.2 percent in the January-March period from 71.3 percent in the previous quarter, the biggest increase in records dating to 1987, Statistics Canada said in Ottawa. Economists predicted the rate would be 73.2 percent.
Energy 141.80 +0.81
Financials 173.98 +0.01
Health Care 36.53 -0.22
Industrials 96.11 +0.74
Information Technology 29.08 +0.05
Metals & Mining 869.83 +11.78
Telecommunications 83.49 -0.67
Utilities 190.22 -0.27
Resistance 11,843, 12,210, 12,322, 12,375, 12,875, 12,968, 13,771, 13,875, 13,983, 14,157. Support is 11,402, 11,179. 10,990, 10,800, 10,400, 10,384, 9500, 9300, 9140.
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CANADIAN TSX Venture:
A rally in gold helped lift the Venture to its highest level in a week. The TSX Venture gained 7.88 or 0.54% to finish the week at 1460.79.
Resistance is 1490, 1514, 1536, 1636, 1688, 1691, 1730, 1780, 1830. Support is 1443, 1393.
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THE CANADIAN DOLLAR (using the FXC Exchange Traded Fund):
The Canadian Dollar fell as traders snapped up US Dollars just in case the weak retail sales report in the US is a sign that the economic recovery may fail. FXC fell 0.22 to 96.26, but had traded as low as 95.78 before rallying in the last hour as stocks moved up into the close of trading.
Resistance is 96.70, 97.13, 98.27, 99.29, 100.00, 102.00, 110.00. Support is 91.82, 91.00, 89.75, 87.50 and 85.18.
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My 'Annual Forecast Model' (VR Forecaster Report) is now posted on the VRtrader.com website and covers cyclical projections for the Dow Industrials, the TSX, Gold, Crude Oil, Ten Year Interest Rate Yields and the US Dollar Index. The Model has been published since 1987 and has garnered a respectable following among traders and investors seeking an overall 'timing' tool for the major markets. Remember, there is no price too high for good information!
Here is the link: Now at 50% off!
https://www.vrtrader...cribe/index.asp
If you have any questions, please don't hesitate to call me and leave a voice mail message at 928-282-1275 or email me at mark.vrtrader@gmail.com.
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DAILY VR LIST:
Editors note: The Daily VR List here is abbreviated with the full list only available to Platinum subscribers by clicking on 'Current VR List' on the Home Page of VRtrader.com.
Canadian shares are listed at the bottom of each section with the title: 'XXX CANADIAN STOCKS XXX'.
Silver subscribers who find this useful should upgrade to Platinum where you can pull down VR charts for many securities and watch the patterns unfold for yourself. There is no technical service on the planet that posts Positive and Negative VR! Why? Because they are proprietary to VRtrader.com!
How do you use this list?
Volume Reversals ™ are buy and sell triggers and are traders find them particularly useful, especially coming off market extremes as an indication of a change of direction. Use the VRs in conjunction with your other technical indicators and you've added a unique technical tool to your arsenal.
To see a visual representation of Volume Reversals ™, please go our Current Portfolio section and click on any recommended stock. Or, if you would like to get a VR Chart for a specific symbol, please click here. Please note that the list of symbols available is limited at this time.
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VOLUME REVERSALS FOR THURSDAY, JUNE 11:
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POSITIVE VRs
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XXX CANADIAN STOCKS XXX Canadian Stocks
BA.UN BELL ALIANT REGIONAL COMM FD
CIE.UN CLAYMORE INTL FUNDAMENTALS
CPD.UN CLAYMORE S&P/TSX PREFERRED SHR
CTC.A CANADIAN TIRE CORP LT CL A
HBU HORIZONS BETAPRO COME
IMG IAMGOLD CORP NPV
TAY.UN
XGD ISHARES CDN S&P/TSX G
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U.S. STOCKS:
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AEROSPACE/DEFENSE Aerospace/Defense Products & S
HWK Hawk Corp
TOD Todd Shipyards Corp
AUTOMOTIVE Auto Parts
SRI Stoneridge Inc
AUTOMOTIVE Trucks & Other Vehicles
STS Supreme Industries Inc
BANKING Regional - Mid-Atlantic Banks
NOVB North Valley Bancorp
BANKING Regional - Midwest Banks
CHFC Chemical Financial Corp
BANKING Regional - Northeast Banks
CEBK Central Bancorp Inc
HBNK Highland Bancorp
BANKING Regional - Pacific Banks
BSRR Sierra Bancorp
HTBK Heritage Commerce Corp
BANKING Regional - Southeast Banks
CSFL Centerstate Banks Of Florida
NBY Nbc Capital Corporation
BANKING Regional - Southwest Banks
EFSC Enterprise Financial Services
BANKING Savings & Loans
NVSL Naugatuck Valley Financial
ONFC Oneida Financial Corp
COMPUTER HARDWARE Data Storage Devices
OVRL Overland Storage Inc
COMPUTER SOFTWARE & SERVICES Application Software
PWRD Perfect World Co Ltd
WZE Wizzard Software Corp
COMPUTER SOFTWARE & SERVICES Business Software & Services
BPHX Bluephoenix Solutions Ltd
CONSUMER DURABLES Business Equipment
KBALB Kimball Internat B
CONSUMER DURABLES Housewares & Accessories
LCUT Lifetime Brands Inc
CONSUMER DURABLES Recreational Goods
CTHR Charles & Colvard Ltd
CONSUMER NON-DURABLES Rubber & Plastics
MBLX Metabolix Inc
CONSUMER NON-DURABLES Textile - Apparel Footwear & A
PXG Phoenix Footwear Grp Inc
DIVERSIFIED SERVICES Business/Management Services
HQS HQ Sustainable Maritime Indust
ICFI ICF International Inc.
DRUGS Drug Related Products
DDSS Labopharm Inc
DRUGS Drugs - Generic
SRLS Seracare Life Sciences
ELECTRONICS Diversified Electronics
QBAK Qualstar Corporation
ELECTRONICS Scientific & Technical Instrum
ATE Advantest Corp
CLDA Clinical Data Inc
ELECTRONICS Semiconductor - Integrated Cir
TQNT Triquint Semiconductor
ELECTRONICS Semiconductor - Memory Chips
NLST Netlist Inc
ELECTRONICS Semiconductor Equipment & Mate
XXIA Ixia
ENERGY Independent Oil & Gas
DBLE Double Eagle Petroleum
ENERGY Oil & Gas Drilling & Explorati
BRNC Bronco Drilling Co Inc
IVAN Ivanhoe Energy Inc
FINANCIAL SERVICES Asset Management
GROW U.S. Global Invest Inc A
FINANCIAL SERVICES Closed End Fund - Debt
BSD Blackrock Strtgc Muni Tr
CFT iShares Lehman Credit Bond Fun
FINANCIAL SERVICES Closed End Fund - Equity
BLV Vanguard Long Term Bond ETF
CZA Claymore Zacks Mid-Cap Core ET
FINANCIAL SERVICES Diversified Investments
ESA Energy Services Acquisition Co
FINANCIAL SERVICES Investment Brokerage - Regiona
LAB Labranche & Co Inc
HEALTH SERVICES Long-Term Care Facilities
BKD Brookdale Senior Living Inc
HEALTH SERVICES Medical Appliances & Equipment
APT Alpha Pro Tech Ltd
ARAY Accuray Incorporated
HEALTH SERVICES Specialized Health Services
AMS American Shared Hosp Svc
INSURANCE Accident & Health Insurance
GTS Triple-S Management Corporatio
INSURANCE Property & Casualty Insurance
AFC Allmerica Financial Corp
AFE American Financial Group Inc
INTERNET Internet Information Providers
INSP Infospace Incorporated
QUOT Quotesmith.com
INTERNET Internet Software & Services
EXTR Extreme Networks Inc
IACI IAC/Interactive Corp
MANUFACTURING Metal Fabrication
GEG Gbl Power Inc
MANUFACTURING Small Tools & Accessories
PFIN P & F Industries Cl A
MATERIALS & CONSTRUCTION General Contractors
APOG Apogee Enterprises Inc
MATERIALS & CONSTRUCTION Manufactured Housing
SKY Skyline Corp
MATERIALS & CONSTRUCTION Waste Management
CWST Casella Waste Systms Inc
MEDIA Advertising Services
VISN VisionChina Media
MEDIA Broadcasting - Radio
ROIA Radio One Inc
ROIAK Radio One Cl D
MEDIA Broadcasting - TV
GTN Grey Television Inc B
GTN-A Gray Television Inc A
METALS & MINING Gold
DROOY DRD Gold Ltd Adr
GSS Golden Star Resources
METALS & MINING Silver
EXK Endeavour Silver Corp
MVG Mag Silver Corp
METALS & MINING Steel & Iron
SHLO Shiloh Industries Inc
None None
CMM Criimi Mae(new)
REAL ESTATE REIT - Diversified/Industrial
OLP One Liberty Properties
RETAIL Drug Stores
NPD China Nep Chain Drugstore
RETAIL Grocery Stores
IMKTA Ingles Markets Inc Cl A
SPECIALTY RETAIL Apparel Stores
CACH Cache Inc
SPECIALTY RETAIL Auto Dealerships
CRMT America's Car-mart Inc
SPECIALTY RETAIL Music & Video Stores
BBI Blockbuster Inc
SPECIALTY RETAIL Specialty Retail
BAMM Books-A-Million Inc
TELECOMMUNICATIONS Communication Equipment
ACTG Acacia Research Acacia Tech
NEXS Nexxus Lighting Inc
TELECOMMUNICATIONS Diversified Communication Serv
IDT Idt Corp Cl B
XING Qiao Xing Univ Telephone
TELECOMMUNICATIONS Telecom Services - Domestic
SHEN Shenandoah Telecomm
TELECOMMUNICATIONS Telecom Services - Foreign
PHI Philippine Lg Dst Tel
UTILITIES Diversified Utilities
HTM US Geothermal Inc
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NEGATIVE VRs
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XXX CANADIAN STOCKS XXX Canadian Stocks
ATD.B ALIMENTATION COUCHE-T CL B
CCT CENTENARIO COPPER COR
RVR RICHVIEW RESOURCES IN
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U.S. STOCKS:
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AEROSPACE/DEFENSE Aerospace/Defense Products & S
AIR Aar Corp
AUTOMOTIVE Auto Manufacturers - Major
HMC Honda Motor Co Ltd Adr
BANKING Foreign Regional Banks
SHG Shinhan Finl Grp Co Ltd
BANKING Money Center Banks
RBS The Royal Bank of Scotland Gro
BANKING Regional - Mid-Atlantic Banks
BOFL Bancshares Of Florida Inc
HMPR Hampton Roads Bankshares Inc
BANKING Regional - Northeast Banks
CIZN Citizens Holding Co
BANKING Regional - Pacific Banks
CASB Cascade Financial Corp
NRIM Northrim Bank Alaska
BANKING Savings & Loans
BHL Berkshire Hills Bncorp
CSBK Clifton Savings Bacorp
COMPUTER SOFTWARE & SERVICES Application Software
SXCI Systems Xcellence Inc
COMPUTER SOFTWARE & SERVICES Business Software & Services
ANLY Analysts International
TTPA Trintech Group Plc Ads
COMPUTER SOFTWARE & SERVICES Security Software & Services
DBTK Double-Take Software Inc
COMPUTER SOFTWARE & SERVICES Technical & System Software
PDFS Pdf Solutions
CONGLOMERATES Conglomerates
FO Fortune Brands Inc
CONSUMER DURABLES Business Equipment
CHMP Champion Industries Inc
CONSUMER DURABLES Electronic Equipment
COBR Cobra Electronics Corp
CSCD Cascade Microtech
CONSUMER DURABLES Home Furnishings & Fixtures
STLY Stanley Furniture Inc
CONSUMER DURABLES Recreational Goods
MOV Movado Group Inc
CONSUMER NON-DURABLES Cleaning Products
CLX Clorox Co
PG Procter & Gamble Co
CONSUMER NON-DURABLES Textile - Apparel Clothing
DLA Delta Apparel Inc
DIVERSIFIED SERVICES Business/Management Services
PFSW Pfsweb Incorporated
PFWD Phase Forward Inc.
DRUGS Diagnostic Substances
MYGN Myriad Genetics Inc
DRUGS Drug Delivery
ELN Elan Corp Plc
DRUGS Drug Manufacturers - Other
BIOD Biodel Inc
DUSA Dusa Pharmaceuticals Inc
DRUGS Drug Related Products
TBV Tiens Biotech Group USA Inc
DRUGS Drugs - Generic
WPI Watson Pharmaceuticals
ELECTRONICS Printed Circuit Boards
CLS Celestica Inc
ELECTRONICS Scientific & Technical Instrum
CAMT Camtek Ltd
PRCP Perceptron Inc
TIK Tel-instrument Electronics Cor
ELECTRONICS Semiconductor - Specialized
ASTI Ascent Solar Technologies Inc
ENERGY Independent Oil & Gas
BR Burlington Resources Inc
EEQ Enbridge Energy Mgmt
FINANCIAL SERVICES Asset Management
VALU Value Line Inc
FINANCIAL SERVICES Closed End Fund - Debt
BAF Blackrock Fl Ins Muni Inc Trus
BDV Blackrock Dividend Achievers
FINANCIAL SERVICES Closed End Fund - Equity
BGY Blackrock International Growth
COW CLAYMORE GLOBAL AGRIC
FINANCIAL SERVICES Diversified Investments
MTR Mesa Royalty Trust Ubi
SBR Sabine Royalty Tr Ubi
FINANCIAL SERVICES Investment Brokerage - Nationa
MKTX Marketaxess Holdings
FOOD & BEVERAGE Beverages - Brewers
TAP Molson Coors Brewing Co
FOOD & BEVERAGE Confectioners
HSY The Hershey Co
FOOD & BEVERAGE Food - Major Diversified
HNZ H.J. Heinz Co
FOOD & BEVERAGE Meat Products
HRL Hormel Foods Corp
IBA Industrias Bachoco Sa De
HEALTH SERVICES Medical Appliances & Equipment
ARTC Arthrocare Corp
HEALTH SERVICES Medical Instruments & Supplies
ATRC AtriCure Inc
HEALTH SERVICES Specialized Health Services
ANCI American CareSource Holdings I
INSURANCE Accident & Health Insurance
PFG Principal Financial Group
INSURANCE Insurance Brokers
CRD.A Crawford & Co A
INSURANCE Life Insurance
PUK Prudential Plc Ads Uk
INSURANCE Property & Casualty Insurance
BWINA Baldwin & Lyons Inc Cl A
HGIC Harleysville Group Inc
INTERNET Internet Software & Services
GIB Cgi Group Inc
SLTC Selectica Incorporated
LEISURE General Entertainment
CUK Carnival Plc
LEISURE Restaurants
EAT Brinker International
PZZI Pizza Inn Inc
MANUFACTURING Pollution & Treatment Controls
MFRI Mfri Inc
MANUFACTURING Small Tools & Accessories
MKTAY Makita Corp Spons Adr
MANUFACTURING Textile Manufacturing
HWG Hallwood Group Inc
MATERIALS & CONSTRUCTION Heavy Construction
GV Goldfield Corp
JEC Jacobs Engineering Group
MATERIALS & CONSTRUCTION Waste Management
TRR Trc Companies Inc
MEDIA Advertising Services
WPPGY Wpp Group Plc Adr
MEDIA Broadcasting - Radio
CJR Corus Entertainment Cl B
ETM Entercom Communications
MEDIA Marketing Services
AMCN AirMedia Group
MEDIA Publishing - Periodicals/News
MNI Mcclatchy Company (The)
PRVT Private Media Group Inc
METALS & MINING Gold
XRA Exeter Resource Corporation
METALS & MINING Industrial Metals & Minerals
PZG Paramount Gold Mining Corp
URZ Uranerz Energy Corp
METALS & MINING Nonmetallic Mineral Mining
CHBT China-Biotics Inc
REAL ESTATE Property Management/Developmen
INTG Intergroup Corp
MIM Mi Developments Inc
REAL ESTATE REIT - Diversified/Industrial
RAS Resource Asset Invest Tr
REAL ESTATE REIT - Hotel/Motel
HOT Starwood Hotel&Resort Ww
REAL ESTATE REIT - Office
CRO CRT Properties Inc
REAL ESTATE REIT - Residential
CMO Capstead Mortgage Corp
RETAIL Discount
FDO Family Dollar Stores Inc
RETAIL Grocery Stores
CASY Casey's General Stores
SWY Safeway Inc
TELECOMMUNICATIONS Diversified Communication Serv
TSTR TerreStar Corporation
XFN Xfone Inc
TELECOMMUNICATIONS Long Distance Carriers
GNCMA General Communications A
TELECOMMUNICATIONS Telecom Services - Domestic
BCE Bce Inc
TELECOMMUNICATIONS Telecom Services - Foreign
NTT Nippon Tel & Tel Ads
SI Siemens Aktien
TFONY Telefonos De Mexico Sa A
TOBACCO Cigarettes
BTI British Amer Tob Plc
LO The Lorillard Group
TRANSPORTATION Trucking
XPO Express-1 Expedited Solutions
UTILITIES Diversified Utilities
NWE Northwestern Corp
UTILITIES Electric Utilities
DTE Dte Energy Co
ELP Companhia Paranaense De
UTILITIES Gas Utilities
CPK Chesapeake Utilities Cp
NJR New Jersey Resources Cp
WHOLESALE Electronics Wholesale
ORBT Orbit International Corp
WHOLESALE Food Wholesale
DPZ Dominos Pizza Inc
WHOLESALE Industrial Equipment Wholesale
ARG Airgas Inc
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---------------------------------------------What You Always Wanted to Know About Gold
Saturday, June 12, 2010 - by Dr. Antal Fekete
Q.: Professor Fekete, you are known as a staunch advocate of a return to the gold standard. But mainstream economists are saying a gold standard is not practicable and they are fighting the idea with everything they have. How do you answer their criticism?
A.: To say that the gold standard is not practicable is the same to say that honesty is not practicable, and Constitutions are made to be blithely ignored when convenient. The American Constitution, for example, mandates a metallic monetary standard for the United States in the clearest possible language. Opponents of the gold standard have never been able to muster up the moral fortitude to amend the Constitution so as to formalize the abolishing of the gold standard. Yet in 1933 president Roosevelt confiscated the gold of the citizens, gave them irredeemable paper in exchange, and proceeded to write up the value of gold in terms of the paper by 75 per cent. Might makes right: if you cannot do it fairly and legally, then you can use the strong arm of the government to do it through chicanery, backed by the constabulary and the jail cell.
More recently, in our own century, Switzerland changed her Constitution in which the gold standard was also enshrined, through a referendum. Citizens were given a week-end to debate and decide the merits or demerits of the proposed constitutional changes. The indecent haste with which they were railroaded through the constitutional process betrayed the bad conscience of the authors.
One of the key principles supporting a gold standard is that jurisprudence cannot tolerate a double standard of justice. The government, its departments and agencies ought to be subject to the same contract law as are citizens. There are no valid grounds to allow the Treasury and the Central Bank to issue obligations which they have neither the means nor the intention to honor while everybody else doing it will be dealt with according to the Criminal Code. To say that the gold standard is not practicable is the same as saying that the government should be exempted from the provisions of the Criminal Code in its dealings with its subjects.
Q.: What would be the basic steps involved in reintroducing a gold standard? How to proceed?
A.: Three indispensable steps are involved.
First, the government should open the Mint to gold. This means that everybody who wants to convert his gold of the right quantity and quality into gold coins of the realm should be able to do so at the Mint, free of seigniorage charges, and with no limit imposed on the amount. In other words, they would get gold back, ounce for ounce, in coined form, and the cost of minting would be absorbed by the government, the same way as it absorbs the cost of maintaining highways in good repair. Conversely, owners of the gold coins of the realm must have the right to hoard, melt down, or export them as they see fit. This is designed to vest the right to regulate the money supply in the people, rather than in unelected bureaucrats.
Second, "legal tender protection" of paper money must for once and all be declared unconstitutional. This is designed to remove coercion whereby labor can be forced to accept irredeemable currency for services rendered.
Such coercion was first legalized in France and Germany in the year 1909, just five years before the outbreak of World War I. These countries wanted to make sure that civil servants and military personnel could be paid in chits, thus putting the entire labor force at the disposal of the government regardless of the state of budget and collection of taxes in case of war. The motivation behind the second provision is that governments should not be able to wage undeclared and unpopular wars, as could kings of old, but must raise taxes. World War I would have come to an early end but for the legal tender laws. As soon as treasuries had run out of gold, the belligerents would have been forced to make peace, unless the electorate agreed to pay for the continuing bloodshed and destruction of property. And the world would have been the better for it.
Third, the principle known as the "Real Bills Doctrine" of Adam Smith should be observed. Bills of exchange drawn on fast-moving merchandise in most urgent demand by the consumers, which mature into gold coins within 91 days (the length of the seasons of the year), must be allowed to enter into spontaneous monetary circulation. This would guarantee the flexibility of the monetary system not through government coercion, but through the voluntary cooperation of producers and consumers in satisfying human wants.
It can be seen that the market for real bills is the clearing house of the gold standard. In 1918, at the end of World War I, the victorious allies decided not to allow the world to go back to multilateral international trade. To be sure, they wanted to go back on the gold standard, witness Great Britain's decision to make the pound sterling once more convertible into gold at the pre-war exchange rate in 1925, but with only bilateral trade allowed. This meant nothing less than the castration of the gold standard: once its clearing house was amputated, it could not perform.
The allied powers did this out of spite and vengeance: they wanted to cripple Germany over and above the provisions of the Versailles peace treaty. Forcing bilateral trade upon Germany was equivalent to peacetime blockade whereby the allied powers could monitor and control Germany's imports and exports. The measure backfired. The Great Depression and the 1931-1936 collapse of the international gold standard was due to the forcible elimination of the multilateral financing of world trade with real bills.
The gold standard did not collapse because of its "contractionist nature" - as alleged by Keynes. It collapsed because of its clearing system, the bill market was blocked. Falling prices in 1930 were not the cause of the Great Depression: they were the effect. The cause was falling interest rates. Incidentally, falling interest rates were in turn caused by the illegal introduction of "open market operations" by the Federal Reserve of the United States in 1921, whereby the central bank pays bribe money, in the form of risk-free profits, to bond speculators for bidding bond prices sky-high.
Q.: To what extent should money be "covered" by gold?
A.: The Real Bills Doctrine provides the answer to that question. There are on average 75 business days in a quarter. Therefore on each business day, on average, one-seventy-fifth, that is, 11/3 percent of the outstanding real bills mature into gold. Sufficient gold must be available at all times to pay the bills at maturity; more if the discount rate is rising, less if it is falling. In normal times the commercial banks should have that much gold flowing to them in the ordinary course of business, with which they can pay the maturing bills. If times are abnormal, banks go to the bill market and sell at a discount a sufficient amount of bills from their portfolios to raise the gold. This should be no problem: a maturing real bill is the best earning asset a commercial bank can have. At any given time there are commercial banks somewhere in the world overflowing with gold. They scramble to acquire earning assets. The value of real bills increases every single day through matur ity. They represent "self-liquidating credit". Sale of the underlying merchandise to the ultimate consumer provides the wherewithal for their liquidation.
Q.: What happens if a country has no gold in its coffers?
A.: Such a country will experience a rise in the discount rate. The appearance of a positive spread between the discount rates prevailing in two countries improves the terms of trade in favor of the one with the higher rate. It can offer lower cash prices on its exports, while paying lower prices (91 days net) for its imports. This means that the country gets the gold for its exports 91 days before its bills payable in gold for its imports fall due. In addition, the higher discount rate will induce an inflow of short term capital that will help finance both exports and imports. We have to remember that imports are financed by exports, not by gold. Gold is there to tie the country over through temporary imbalances.
Should this help not be sufficient to meet the shortage of gold, then consumers, if they want to eat, to keep themselves clad, shod and, in winter, warm, will have to dig into their pockets and come up with the gold coin to pay the bills for their imports upon maturity.
The point is that a shortage of gold need not cause privation: thanks to the discount-rate mechanism it is a self-correcting condition.
Q.: You have announced that in August you will start a school, and call it the New Austrian School of Economics, in Budapest, Hungary. Why new? Why Austrian? Why in Hungary?
A.: The Austrian School of Economics was started by Carl Menger (1840-1921) of Austria-Hungary who deserves the epitaph, along with Isaac Newton, humanis generis decus (pride of the human race). The first members of the school, like Merger himself, were all great monetary scientists who abhorred the idea of irredeemable currency. Keynes introduced the notion that the gold standard is a "barbarous relic" and should be discarded. Through bribe and blackmail academia was enlisted to rally to the new doctrine, while the Austrian School withered.
When the intellectual bankruptcy of Keynesianism which turned things upside down in castigating the virtue of thrift and lionizing the vice of prodigality has become obvious, the Austrian School has gone through a renaissance, especially in the United States, calling for sanity and return to the gold standard. However, the "American Austrians" are vehemently against the Real Bills Doctrine of Adam Smith for doctrinaire reasons, as it contradicts their holy of holies, the Quantity Theory of Money. They do not understand that real bill circulation is spontaneous and its suppression is nothing less than unwarranted interfering in the operation of the free market. They do not see the difference between the discount rate (yield on real bills) and the rate of interest (yield in the gold bond).
This prompted me to start my school in Hungary where I live. It would be a disaster if the American Austrians succeeded in making their "100 percent gold standard" a reality. It would not survive the first Christmas shopping season. Markets would seize up, and the gold standard would be given a bad name for the second time.
Austria and Hungary used to be a dual monarchy during the days of Carl Menger, sharing not only the monarch, but also their scientific and cultural heritage.
Q.: Why a gold standard? Why not pick a basket of precious metals, or of some other marketable commodities to serve as the standard unit of value?
A.: American money doctors are in the habit of ridiculing gold in comparing it to frozen pork bellies that, horribile dictu, have been trading in the same pit since gold was expelled from the Monetary Paradise. This reflects a mindset suggesting that gold, at best, is just one of several marketable commodities, and a basket of wider selection could provide a better monetary reserve than gold.
This position is false. Gold is not frozen pork bellies wishful thinking of the American money doctors notwithstanding. The reason is that the marginal utility of the former declines more slowly than that of the latter. In fact, the marginal utility of gold declines more slowly than that of any commodity (or a basket of any commodities) known to man. That's what makes gold what it is: the monetary metal par excellence. That's what makes gold the only monetary asset that has no counterpart as a liability in the balance sheet of someone else.
Incidentally, there are only two monetary metals: gold and silver. Other precious metals such as platinum and palladium are not monetary metals. What sets monetary metals apart from other precious metals is their stocks-to-flows ratio. They are a high multiple for the monetary metals, but a small fraction for other precious metals.
Q.: Critics say that historically, under the gold standard, the world economy languished, trade was sluggish, technological and therapeutic innovation was unexciting, in a word: the gold standard has never worked well. How do you answer that?
A.: This allegation is just the opposite of the truth. The heyday of the gold standard was during the 100 years' period between 1815 (the end of the Napoleonic wars) and 1914 (the start of World War I). This was the age of transcontinental railways, intercontinental shipping, when all the key inventions were made that ushered in the age of electricity, of the internal combustion engine, of aviation, of wireless telecommunication, of the X-ray, etc. Financing these discoveries and their applications in transportation, telecommunication, and therapeutics would have not been possible without the gold standard and the accumulation of capital that it facilitated.
Q.: Introducing a gold standard hardly seems possible today, in view of the gigantic injections of new currency into the economy world-wide. How could the gold standard handle that?
A.: It wouldn't. The new gold standard would let the regime of irredeemable currency run itself aground and boil in its own juices of excess fiat money. When it can no longer handle the task of delivering food and other necessities to the people, when it can no longer provide employment to the majority of the population, the gold standard will spring back to life spontaneously. People have to eat, and they also have other necessities. They must have work to be able to earn a living. It will dawn on the world, maybe unexpectedly for the majority, that gold has a place underneath the Sun. Gold is that hard core of capital that can be destroyed neither by inflation nor by deflation, that will survive any consolidation of balance sheets. Gold is at the heart of the healing process of the world economy that makes survival possible.
Q.: Is a gold standard the ultima ratio to cure the human weakness, the belief that you can multiply wealth by printing money without limits? Is it not true that no central bank could ever stand up to do-gooder politicians?
A.: Friedrich Hayek, the Nobel-laureate Austrian economist thought so. He said that there would be no need for a gold standard but for the propensity of governments to spend beyond their means.
I don't believe that. I see gold everywhere, independently of the government's spending propensities. Even without a gold standard, gold has a role to play in forming prices, wages, rents, the rate of interest. It helps to find the balance between short- and long-term satisfaction; it determines the marginal productivity of capital and labor. It is like air, we don't see it yet it's there and, without it, there is no life.
You need a yardstick to measure value. Gold is the raw material of which that yardstick is made.
Q.: In the past states also went bankrupt, some repeatedly, e.g., ancient Athens, Rome, or France in the 17th and 18th centuries. This shows not only that such occurrences are possible under a gold standard, but also that the powers-that-be could always circumvent limitations put on coining money and restrictions on banking whenever the idea of scarcity of gold takes hold. What makes you think that a future gold standard may be more successful, and could endure for a long period of time?
A.: There is no hard-and-fast limit on the amount of self-liquidating credit that can be safely built on the unit weight of gold. Improvements in clearing techniques, such as those in telecommunication, freight-forwarding and warehousing will increase the amount of credit outstanding while there is no corresponding increase in gold bearing that credit. It is this property that makes gold the ultimate extinguisher of debt. It is simply not true that restrictions put on the economy by the gold standard are "contractionist", and that the "powers-that-be" are justified in breaking those fetters.
Gold is not scarce: in terms of its stocks-to-flows ratio gold is the most abundant substance on earth. But for the gold standard to endure man has to have confidence in the promises of government to pay gold. If this confidence is impaired, gold tends to go into hiding and then the system may break down. The answer to the problem is that the government must keep faith with its subjects without fail.
Q.: What is your opinion of the governments' handling the great financial crisis, the Greek crisis, the crisis of the Euro, and the other currency crises brewing? How long can they contain the "debt-firestorms"? Will they be able to extinguish it with a shower of new debts?
A.: The governments of the industrialized countries bear full responsibility for bringing the world to the brink of this crisis the greatest financial and economic crisis ever. They should have resigned in admission of their guilt, and let new governments armed with a better economic theory take over and work out the remedy. Instead, they doggedly cling to power. Their analyses of the causes of the malady are faulty; the remedial measures they have recommended are the old nostrums, incredibly inept, nay, counter-productive.
Take the example of the runaway growth of the debt tower. The great financial crisis, the Greek crisis, and all the currency crises still at the brewing stage, are part of the same problem, namely, the debt problem. It goes back to the year 1971. On August 15 of that fateful year the U.S. government defaulted on its international gold obligations. By now the debt tower threatens with toppling, and burying the world economy under the debris.
The reason for the exponential growth of debt in the world is that the international monetary system has been lacking an ultimate extinguisher since 1971. Total debt in the world can only grow, never contract. We should do well to remember that, since time immemorial, gold has successfully acted as the ultimate extinguisher of debt until it was forcibly removed from the international monetary system in 1971. Paying debt in gold extinguished the debt, period. Since 1971 governments have pretended that paying debt in U.S. dollars extinguished it, too. But in fact it did not. Debt was merely transferred from the debtor to the U.S. government and kept accumulating. Transferring debt is not the same as extinguishing it. Debt accumulation has a natural limit. This limit has now been reached.
Your description of the debt-tower as a firestorm is apt. Governments of the leading industrialized countries will not be able to contain the firestorm they have started. They are just pouring oil on the fire.
Q.: How will the current situation unfold? Do you think resolution will come in the form of hyper-inflation or deflation?
A.: One has to be careful with these terms. Both inflation and deflation mean destruction of wealth through destroying the value of obligations; the former through depreciation, the latter through default. It is also possible to have a mixture of both simultaneously.
But if you insist on my answering your question, chalk me up in the deflation column. Signs of deflation are all around us. Rivers of new money are unable to turn receding prices and interest rates around. Confidence in promises to pay is evaporating. Banks do not trust one another with overnight money. Paper gold is being pushed down the throat of those wanting physical gold. Worse still, vanishing confidence has reached the stage of contagion. Paper wealth is disintegrating before our very eyes. The domino-effect is spreading: the collapse of one firm brings down two other. Most frightening is the shrinking of employment. It is leading to a break-down in law-and-order. Governments are completely unprepared and think that it is just a matter of printing more money, for which they are superbly equipped, to prevent further contraction.
Q.: Your answer to my next question would certainly interest our readers very much. Are you invested in gold, silver, and other precious metals? Would you still buy them at these elevated prices?
A.: I take exception to your use of the word "investing". To my way of thinking holding monetary metals is not investing but more like taking out an insurance policy. I don't think the other precious metals (or stones, for that matter) make good investments. As far as the monetary metals, gold and silver, are concerned, you would be well-advised to buy some more every month routinely, regardless of the price. You should look at your holdings as you look at your fire insurance policy. If you never need to collect, well, so much the better.
At the optimum, you would track the value of your assets not at their dollar price but at their gold equivalent. In other words, you would carry your balance sheet, both on the asset and the liability side, not in dollar or euro units, but in gold units (ounces or grams). It takes self-discipline to do that, but this is the only way to avoid the pitfall of always looking at your own face in a curved mirror. The torsion of the image may easily translate into torsion of the mind.
Q.: I come to my final question, if I may. What do you think the gold price will be in terms of U.S. dollars or euros in 3 to 5 years' time?
A.: I am sorry, but I am not a practitioner of clairvoyance. I think I would compromise my reputation as a scientist if I ventured to answer this question. Besides, I don't think I am very much interested in knowing. Guesses at the future price of gold are dime a dozen.
A more appropriate and interesting question may be whether the dollar and the euro will still be around in 3 to 5 years. I am not sure about the euro, but I think the dollar will definitely be around 3 years from now. 5 years maybe not, but I wouldn't be surprised if the staying power of the dollar extended beyond 5 years.
It is dangerous to underestimate the strength of the poison you have to live and work with.
Interviewer: Thank you for your time to talk to us.
Professor Fekete: Thank you for the opportunity to express my views.
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