Good Day Bill,
In all fairness, the price you gave for TM was $117 but just a day or two later a trader could have been in at $112 +/- (I was in for an avg of $113.60) and they would now be back at $116+/- for a small gain and not a small loss. There were still USD/Yen adjustments being worked out for a couple days following Thursday's panic.

Bill
I express Non-Defense Capital Goods(a proxy for Business Investment) as percentage of Durable Goods Orders. This percentage tracked well the Investment boon and bust of the IT craze of the 90's and and early this decade. Using Friday's report numbers, this ratio has remained flat.
You can see this graphically at
www.wrahal.blogspot.com

I must confess that I have difficulty believing in gold. Gold bulls persistently point to the normally reached levels, charts and statistics to reinforce their desire to remain bullish. My difficulty revolves around two fundamental issues.

The first is that gold is not the same commodity as when all the governments of the developed world had in place an agreement that their currencies would be backed by gold. That agreement created value. Since that agreement is no longer in place nothing has really replaced it to create value in gold. The desire of individuals to possess gold jewelry and to hoard gold bars is not a substantial substitute for that agreement. To use charts and statistics for gold that relate back to the time when currencies were backed by gold is irrelevant and misleading. It is a comparison of dissimilar commodities even though they both bear the name "gold". When currencies were backed by gold investors had a means to determine the value of gold. They could use the value of their currencies to determine if gold was mispriced. Thus, the commodity "gold" was mostly the commodity money. But that means of determining the value of gold is no longer available. Thus the commodity "gold" is no longer partly the commodity money, it is just the commodity "gold" that is used for jewelry and making gold bars.

The second fundamental issue is that gold bulls are fighting the US and European Feds who have been selling their gold and continue to do so. If an investor generally cannot win by fighting the Fed, there can be no valid reason to believe that he/she will win by doing so in the gold markets. Its a bet that the world monetary system will collapse and that the only store of value will be gold bars. In my view it is a misplaced bet. Compared to demand, the supply of gold is huge. The only reason I can think of for the Federal governments to be selling their gold slowly over time is to maximize their sale prices. If they sold it any faster the price of gold would really tank. I do not believe these sales will be reversed and that governments will be purchasers of gold in the future. I can see no valid reason for such a reversal. The future is not a return to gold. Instead, the monetary trend appears to favor non-physical money, e.g., bank credits.

lessmore,
thanks a million for your post on gold. so much is written by contributors (bullish) on this blog about gold & gold stocks, i think to the detriment of looking at other vehicles to trade successfully. for example the list of 41 stocks posted by bill cara on august 16 turned out to be a far better focus. plus the list was diversified & non correlated (different businesses) whereas a good many of of the gold stocks tend to move in synch. so why not look at golds as just another trading vehicle, instead of as the asset class that will eventually save the world monetary system or be the shame of central banks, whatever.

the haircut taken by many stocks (financial & others) over the last month also shows that "non-physical money, e.g., bank credits" is not where you want to place you faith either. but this class too is just another trading vehicle. just keep an open mind approach to everything - with no preconceived notions of which asset class will go up or down. if it begins to go up, fine, go long, if it reverses, fine, short it. if you cannot decide, fundamentally, technically, or for what ever reason, fine, then keep out, something will turn up tomorrow, or next month, to trade.

Bill,
I'm sorry you are having such difficulties. My post was meant as a show of support of your work.
I know you could have easily improved on the performance more then this amateur. I was trying to give your picks a complement.

If I didn't live on an island and endure regular (and sometimes extended) power, phone and internet outages I might not understand, but believe me, I **know** how you feel. At times I feel like a fricking survivalist but presently I know the only way is to install and run it myself. If they knock out a satellite I'm screwed.

My phone line runs at a whopping 28.8 KB at the very fastest, and at comparable speeds to your present condition when trying to up or download anything of size. Please accept my sincere commiseration.

"You know that August 15 through into the afternoon of August 16 was a state of panic and capitulation as traders threw away the stocks of good quality companies. Looking back now, you can see that was the cycle low I was saying would be the time to buy, not to sell."

bill-the thursday sell-off>EOD spike>friday rate cut was hands down the best ride i've had in the park...

if i try to reach back for another experience like that it would be the minute-by-minute in the '89 NBA finals, watching Joe Dumars/Isaiah Thompson/Vinnie Johnson come through time and again to take the NBA title away from the Lakers...

Comments on gold:

"The first is that gold is not the same commodity as when all the governments of the developed world had in place an agreement that their currencies would be backed by gold."

Gold has remained unchanged since then. It does not oxidize. Because of this one chemical property it remains unchanged. A basic property of a commodity, but so be it.

But as a foundation for backing currencies and agreements between governments, gold has a central role to play in backing international settlements, much like a fractional reserve system. The gold stays in place, and bills of accomodation(astronomically leveraged) are agreed upon by signatory members and trade hands. Gold still forms the measure by which these intsruments are agreed upon.

But keep gold in mind as a commodity, its very important. Where there is a currency risk (aside from the credit risk) the gold is then kept and the currency (or any kind of paper asset) the commodity that is undesired.

We just have to keep in mind at this point that playing a market of prices rather than equity may have an end to the party, and that is why gold assets are potentially favoured.
This takes a great deal of time and effort to implement.

But I don't day trade. Eventually, perhaps I will and go along with the trade in prices of various things. But that's why I read Bill's comments, because its the traders comments that are important. Its all in the trade.

Gold will eventually be traded as an asset not unlike treasuries, and, I presume, will compete with them.

craig-wife thinks the mine is too far a detour from irvine...basically it's in AZ...if you are planning to go, would appreciate reading your take...

You're right short-term Bill, but here's the problem with that - this was a snapback, and it was fueled by doing STUPID structural things.

What sort of stupid structural things?

Well, for one, the Fed removed the safeties from the nuclear weapons on Monday. They waived the 10% regulatory capital requirements from both Citibank and Bank America!

This is a particularly ominous thing, because those safety features were put into our banking system after 1929 to prevent another depression-style bank failure cascade.

Now look at the total amount of derivative contracts outstanding written by BAC and C, and compare to their enterprise value.

You will see something interesting - there are several multiples of their value outstanding.

These organizations were just given the right to put 30% of their regulatory capital into their trading affiliates, instead of the statutory 10% limit. Why did they ask for that exemption? You figure it out - its not difficult.....

Did this "calm the markets"? Sure. For how long? And what happens if this "temporary" solution fails, and one of these affiliates finds themselves 100' underwater with no dive tank?

Whistling past the graveyard the markets be, and too sanguine are those who are in the markets right now on the long end.

Yes, it may all work out and be ok.

But consider this - what if it doesn't?

There were all sorts of ODD trading patterns in the options markets this week. Like someone writing a bunch of verticals DEEP in the money on the SPY. Like the 60,000 (!) open CALL contracts on the 700 strike in the SPX.

Something bad this way comes...... we hope not, but guys - the safeties have been removed.

If the prop job doesn't work, what will be left of any long portfolio will be pennies - not dollars.

lessmore --

Very thought-provoking post on gold! But, answer me this:

Nixon decoupled the US$ from gold in 1971. So, how did the price of newly non-monetary gold run from $35 to $900?

Clearly, it took a panic reaction to exceptional circumstances: on top of oil shocks, and unprecedented inflation, the Soviet invasion of Afghanistan! And, gold didn't stay at this spikey peak.

Still, a panic reaction to extreme circumstances can recur. And now, wealth has been flowing from the countries which run the global casino, and into the Middle East, India and China -- cultures which have valued gold for millenia.

If THEY lose confidence in OUR ability (or good faith)in running the global casino, wouldn't a "flight to quality" mean a flight to gold?

As a French finance minister once said, "If I could give my tailor checks that he never cashed, I'd keep buying the finest suits."

It was French demands to redeem gold for US$ that led Nixon to de-couple the US$ from gold ...

If another "black swan" event ensues, 1980 suggests we'll have to be super-agile timers to get most of the benefit:

http://tinyurl.com/2auffe

"Well, for one, the Fed removed the safeties from the nuclear weapons on Monday. They waived the 10% regulatory capital requirements from both Citibank and Bank America!

This is a particularly ominous thing, because those safety features were put into our banking system after 1929 to prevent another depression-style bank failure cascade."

I think the way things are going should raise a very large political red flag! We are witnessing the misuse of government authority and the door opened to wage, price and market controls.

The reason why this is happening is their asset backed paper was formerly used as part of the reserve requirement, which is now valued at zero.

FranSix:

I'd appreciate more explanation of gold's current role in int'l agreeements and settlements. If it's so key, how can Canada's and UK's CB and others sell off so much of their gold inventory? Thanx in advance.

genesis, just a question... i see the 61,730 open interest on spx sept 700 calls..... can you venture a guess on what the strategy might be here...also, how did you figure out that these were sold & not bought, also what would be the strategy of buying so deep itm ....thx

Good afternoon Jock:
I remember participating in the gold/silver bull market of the 1970s. Many traders were sure then that the decoupling of the US currency from gold was a temporary phenomenon that would have to be undone. At first the price runup was predicated on the value that gold would have if the decoupling were undone. Like any panic buying it went much further. I for one no longer believe that the decoupling in the US and European currencies will be undone, at least not in our lifetimes.

Regarding your querry: If THEY lose confidence in OUR ability (or good faith)in running the global casino, wouldn't a "flight to quality" mean a flight to gold? So far the flight has been to US treasuries. I really do not see any evidence that gold has been the beneficiary of such a flight. The panic flight over the last month has shown no evidence of a flight to gold. To believe that future flights will be to gold requires faith. I do not invest on the basis of faith.

I am guessing on how it works, of course.

You will notice that any participating country is a signatory to an international agreement. So any country that signs the agreement is probably on the hook for large payments should they risk default on that agreement. LIke any cash position in an investment bank on the hook for sub-prime, the gold in the central bank is "sold" in lieu of defaulting on the ever-increasing payments. But what you wind up with is no gold in your central bank and vulnerable to IMF loans and demands.

on Gold - Reasons to short - Reasons to hold - my guess is that everyone's basis and bias is different from everyone else and what I might see as a reason to short gold might not make any sense at all to someone else.

I am neither short nor long gold at this point. I broke even on my long, on Friday, and closed out my position (probably the wrong short term thing to do) because I like to trade trends and a dip is not a move within a trend until it moves in the direction of that trend. GLD seems to me to have been in a trading range on the wkly chart since mid-May.

In any case, along with the excellent comments on Gold here, one might want to read the commentary at these links (note: link1 also has a promo which can be ignored, but the listed reasons to own (or not own) gold appear valid at least to me):

http://tinyurl.com/2kbxun

http://tinyurl.com/2q9wc5

Good luck
spot

re gold: for someone like kaimu, who started buying a long time ago, buy-and-hold will work...it's a much riskier strategy for anyone who opened a position after prices went above 500-550...it's now the end-game, where volatility is higher and prices can move violently either way...so it's really no different that gaming a stock price near the high...it may have peaked and then again it may break out, and opinions are all over the place...

no one bets the farm either on gold or on a single stock...keeping position sizes small is the best way to (emotionally) ride the volatility...odds of making money are high as long as you wait to buy on downturns and sell into strength...

"The panic flight over the last month has shown no evidence of a flight to gold. To believe that future flights will be to gold requires faith. I do not invest on the basis of faith."

Gold would have to enter into competition with the yields on sort term treasuries before we see a flight to quality. The prognosis is that yields on short term treasuries will decline and as such pose a risk. What matters then is gold would have to measure up favourably in terms of risk. Thus its only logical. Its very difficult to anticipate in the market, as you would a rise due to a liquidity infusion.

Gold futures and leaps on miners will also be subject to wild infusions of borrowed money, which will be shrugged off, as gold is credit-averse. (ok, its a little like talking about cupid being credit averse)

But I have to accept the buying in the gold sector is concluded by people desirous of a calamity and as such on the faith that whatever theory they have seized upon, such as 70's style 'flation du jour, hyperinflation, crackup booms, depressions, fiat currency (the most oft repeated talismanic phrase) are beliefs I don't adhere to. Just don't like 'em. (ok I like it a little bit hee hee!)

Gold is a commodity and as such would behave like a commodity, no? Ok gold is in stage II of its bull market and may trade sideways for some time until the market sorts out what it wants.

In the meantime, take a look at a 3-stage bull:

http://www.kitconet.com/charts/metals/base/spot-nickel-5y-Large.gif

Bill,
Thats a pretty impresive summary for the 41 stocks listed as of Aug 24. Buy low sell high what a concept. Regarding Gold- lessmore, very interesting post from you and the responces from jock, fransix and others, what I would like to point out is that Currency, forex and all paper assets for that matter are all about confidence. I agree that gold is subject to all the manipulations and arguments you put forth in the your post. However, with whats happened in the capital markets these past few weeks, all it takes is some key event, (geopolitical) or some economic accident to occur to shatter that confidence. What would happen to gold ? So long as confidence in the here and now being supplied by Central Bankers, (LOL) I'll be happy to have some Gold. Remember, Gold maintains purchasing power and is one of the main reasons to own it.

In addition, if I may propose a criticism, that waiting for government liquidity injections in order to arrange a profit on a short term trade is like taking welfare, or worse, having a very bad habit. One has to think about how dependant one is on such handouts and how the fed will arrange the market in your favour on such occasions. And perhaps, just how easily one is bought off.

Bill,
Why don't you use a state side dial-up account for times when your Nassau ISP is not working. You might be charged long distance charges (depending on your deal) and it would be slower (56k) than broadband, but you would get the correspondence done with less frustration.
ImageMD

ALOHA !!

lessmore ... If you can't believe in gold then why is it so easy for you to believe in paper(debt)? Essentially those are your only two choices ...

Back(1971)when governments tore up the "agreement" to back paper with gold and became "free floating fiat"(unlimited debt vehicles) they were choosing instead to back money with "debt". In actuality only one government tore up the agreement ... the USA ... then the supposed reserve currency. You would have to convince me how the "faith and credit" of the US government or any other government on the face of the Earth produces anything other than "mistakes" and "debt"! Please expalin away the ever growing global debt. I would love to hear how all this "debt" is good. The problem with most gold non-believers is that they have never endured a monetary crisis where paper(debt) becomes worthless, especially most Americans. Yet the constant devaluing of the US Dollar purchasing power means most Americans are not prospering more than their parents. I see that as a long and steady monetary crisis.

The answer to your two questions are ...
#1-You are investing in debt when you do not hold gold.

#2-The monetary trend favors "debt" of which gold is not. There are only two choices when it comes to value "debt" and "non-debt". Those that control "debt" and have power want you to believe their way is the best way. Why wouldn't a central bank sell gold in favor of fiat? If they held and horded gold then they would be admitting that paper(debt) has no value. How can a politician or a banker survive if he cannot sell debt to the gullible masses? Someone smarter than Western debt-ridden central banks are buying all the gold they sell. Have you ever heard of the Russian or Chinese central banks selling gold? Why is it we constantly hear only Western central banks announce they are selling? To sell gold you have to have a buyer(counterparty), even a central bank can't sell gold without a buyer. Ever wonder why the buyers of the gold are never announced? On top of that most Western central banks are selling gold to pay down "debt". The day will come when you see Western governments have no more monetary assets left to sell yet the debt perpetually rises. Then you will witness wholesale defaults, like the HB&B defaults you are witnessing today. What would happen to global HB&B if none of the government central banks bailed them out? You would then see the true value of owning a "non-debt" asset like gold! At some point not even the US taxpayer will be able to bailout the US government! At that point the US creditors will own the USA and those creditors will be the ones holding the vast majority of global gold supplies. Gold is an asset you only sell in times of a debt crisis, which is why you are seeing large scale Western central bank selling now, especially within the EU members like Spain. What will happen to the Euro if a couple of their members default? Live by the sword ... die by the sword!

Living by the monetary rules of Wall Street, the FED and BIG GOVERNMENT means you can only invest in "debt" ... either your own ... your governments ... or corporations. As we are all now witnessing "debt" can be manipulated a hundred thousand times more than gold. When the central banks run out of gold and "confidence" you will be able to see gold's historically proven long term value. Until then its all smoke and mirrors!

I do not suggest that everyone run out and buy only gold or silver. I suggest you take out a monetary insurance policy and buy gold, at least a 5% holding. We take money for granted, but like your health it needs to be insured also.

Jock ... I have been buying gold and silver coins since 1975(back then a hobby), but more so since 2000. I still buy gold and my last purchase was at $651USD. When POG goes to $1000 will you still use the same reasoning as to why you should not buy gold? Or are you waiting for a USDX crash? I look at it like this ... Would I rather load up on stock markets full of indebted corporations selling debt or would I rather own an asset impervious to bankruptcy or debt? Like Bill says ... "we are trading prices" but he does not say that we are also "trading debt" ... That should be obvious now! Look how many people lost out by betting on the debt of CountryWide! Even those who sold CountryWide with a profit are paid in "debt" ... a US Dollar. All you do is switch from the debt of CountryWide stock to the debt of the USA stock! When measured against "reality"(value) like gold or inflation adjusted those investments are losing money(ie:purchasing power=value).

On the other side I also hold XOM and CVX. Hard assets will survive a debt crash ... debt won't! Of course XOM and CVX have debt but they also possess hard assets that are valued more than the debt they own and they pay a dividend. In a debt crisis those assets rise. Most all of America is about "debt" ... most especially our government. Like my Father used to say, "If Exxon ever files bankruptcy that means the US goverment is already broke!" Well according to the head of the GAO the US government is already broke, meaning, beyond the means of paying back the debt! Isn't that the definition of "broke"?

Genesis and score22, re. the 60,000 SPY calls. If they show up, aren't they both sold and bought? And isn't that a $0.5B transaction @ around $70/contract? In any case that does not seem to be a naked sell, so perhaps someone desperately wants to sell those 6M SPY shares without causing a major drop on the price. Seems just like a transfer of shares, but if that is the case, why bother going on the open market? Obviously major players involved, perhaps raising needed funds for liquidity. An expert here with brokers and these types of transactions, could you please have a look at this and let us know what you think. Thanks.

In the 60's, my econ. professors scoffed at the gold standard as a relic: why shackle the (sacred) growth of world trade and investment to amount of gold that miners can pull from the ground?

So, what's to limit the printing of paper money now? With major gov'ts seemingly unable to behave responsibly, I guess we have only debt crises to help us - after the manipulations of the PPT and CB's no longer have effect ...

Yes, its true, money supply can't be expanded based on gold in the ground. But can't it? Gold hedges and derivatives do just that.

So let's say you can't prevent retreats in money supply because of credit failures. Somebody needs to be a lender of last resort with a supply of liquidity on hand that has to be backed with something. Right now, they're accepting a used pair of shoes as collateral. I wish I could drop off a pair of shoes at the sally ann and walk away with hundreds of millions in a line of credit.

The money supply would have been expanded only just enough to accomodate growth in credit, not print money exactly. If credit goes away, then money will be in very short supply.

Bill,

Thanks for the update.

I'd like to understand more on where you think we are now and where we go from here. A lot of my stocks have come back to various degrees from the overall market downturn and I did close out shorts and add some longs into the panic of Thursday (actually, I scaled in Wed, Thurs and Friday).

Where I'm stuck now is that a lot of stocks have moved up quite a bit already and the best opportunities are gone. So, is it still time look for opportunities to buy, or is it time to start trimming positions, or (the default) just hold onto what we have and start looking for signs that things the overall market is starting to turn down.

Any thoughts by you or others would be appreciated.

What happens when a newspaper can't get it's money market back? Sun-Times has not been repaid funds that had ABCP with National bank's Ironstone Trust and Coventree's Capital Planet Trust.

$25M were due Aug. 21 plus $3M yesterday, and no $ in sight.

http://tinyurl.com/22wub9

20070825_0755

The Canadian stock market perspective - Weekend commentary

The past 8 trading days have been a cyclone for those in the stock market. The hedge on a bearish down move in the stock market has worked out. The intervention by the Fed has certainly changed my outlook on the week ahead. My mildly bearish outlook has changed for the coming week to Bullish. I am not even mildly bullish or wildly Bullish. Our gold stocks that we have been holding should show a good improvement in prices. I am not sure if we will see in the short-term (1 to 2 months) a return to the highs of the past three months in individual stocks. We will have to ponder whether to sell in strength to reduce our losses or in some cases some of the stocks currently showing a profit. Buying Lower and selling Higher is what we are trying to do with this market.

----
You can hide but you can't hide your tracks.

That is how I view HB&B during the last two weeks. We may not have a fly on the wall in the trading room, but the prices of what we follow has the tell. Gold and gold stocks are poised to make a move up from here per my TA review this weekend (MACD, Bollinger Bands, Stochastics) on individual stocks.

I don't care now if the general market goes up or down (I expect it will go up based on my review of TA). Gold is the focus. Undervalued short-term and for volatility you are not going to find a better trade this week. Hold on to your gold stocks. Might not get to their former highs, but this could be the short-term move to sell half or all your positions to buy back later at lower prices (October 2007?). That is the plan.

----
How low is low.

Gold stock prices are underwater. Even if the price of gold only moves up moderately from here to $690, there just has to be a blowout move up in some of the gold stocks we follow in this blog. Talk about undervalued stocks. Either these stocks go up or gold goes down. This is a major disconnect in my opinion. I will be adding to my gold positions early next week. We can always sell if it does not work out.

----
What will happen next?

No one knows what the future brings when you are a small investor. What does the Fed plan to do by September 18 to influence the market? With this market you will have to be ready to change gears and maybe reverse at the next curve in the road. Traders who can follow this market during the day are cleaning up if they avoid the noise out there. I don't follow the market during the day. I just don't have time. Maybe I should. [014]

Good Afternoon Kaimu:

With all due respect, you have not provided answers to my issues about gold:

The first issue is that "gold is not the same commodity as when all the governments of the developed world had in place an agreement that their currencies would be backed by gold. That agreement created value. Since that agreement is no longer in place nothing has really replaced it to create value in gold. The desire of individuals to possess gold jewelry and to hoard gold bars is not a substantial substitute for that agreement. To use charts and statistics for gold that relate back to the time when currencies were backed by gold is irrelevant and misleading. It is a comparison of dissimilar commodities even though they both bear the name "gold". When currencies were backed by gold investors had a means to determine the value of gold. They could use the value of their currencies to determine if gold was mispriced. Thus, the commodity "gold" was mostly the commodity money. But that means of determining the value of gold is no longer available. Thus the commodity "gold" is no longer partly the commodity money, it is just the commodity "gold" that is used for jewelry and making gold bars".

The second issue is that "gold bulls are fighting the US and European Feds who have been selling their gold and continue to do so. If an investor generally cannot win by fighting the Fed, there can be no valid reason to believe that he/she will win by doing so in the gold markets".

Your response to me does not answer my issues.

I agree with your view that comodities like oil and gas (XOM) have value. Oil and natural gas is also my investment of choice. The demand is virtually limitless while the supply in safe areas is limited and diminishing. But this is not the situation with gold.

We disagree with respect to owning US Treasuries. In my view, it is good debt to own. Notice that the most recent debt panic resulted in a major increase in the value of US Treasuries. It did not cause them to be devalued. However it did not result in a major spike in the price of gold. For gold, it was a non-event. The obvious reason is that investors do not expect US Treasury debt obligations to fail and agree with me that US Treasury debt not gold is preferable to own in a crisis.

You claim that "Someone smarter than Western debt-ridden central banks are buying all the gold they sell." You really can't be sure that the buyers are not fooish to be fighting the central banks. You speculate that China and Russia must be some of the buyers. Is there some factual basis to that speculation?

Like SiO2, I'm very interested in what others think of the SPY (and SPX) activity. I'm no expert and my view has changed over a couple days. Initially, I assumed this was very bearish. Now, I'm thinking a big money actor bought some insurance before binge shopping: Expecting upside, but smart enough to carry more protection when times warrant.

Assuming smart money is. . . analyzing and understanding the unusual options activity, may provide an important clue for those who care about the market's short-term direction.

Bill, some of us are interested in short plays too. Do you have a ticker for your ISP? :)

--Jack

Considering the unassailable logic that should short term treasuries yield less than a day's trade in gold spot prices, and then maintain that gold is not a liquid instrument because its a thing, then Silberman has the chart of the week for you:

http://blog.goldandoilstocks.com/2007/08/gold-stock-market-quote-says-buy.html

Lessmore
What are you talking about? In terms of price gold has never been more "valued" than in 1980... long after all currencies were detached from the so called "gold standard".
Gold has risen in value at the very time that paper assets were believed to be valuable (since 2000).
What is happening today is a loss of confidence in all paper assets (which will effect shares in miners, at least for the short term).
If confidence is not restored VERY QUICKLY in debt obligations and other paper promises, there will be no other place for people with wealth to turn but to gold and other hard assets just to protect their wealth, not to increase it.
This has happened quite frequently throughout history and appears ready to occur again.
Based upon what I see in the markets today, a bet against the fed may be the "trade of the century". Only time will tell, but based upon the quick capitulation on the Fed's part, I smell fear, and I want to be ready for them to, or should I say "when they" do their political duty.
Treasuries are liquid short term insurance, but when the sh.. hits the fan, gold has always been the resource of last resort.
I take comfort in that, and hope that, in spite of your expressed beliefs, that you too have at least an insurance position, for your sake.

lessmore,

Re your statement: ". . . gold is not the same commodity as when all the governments of the developed world had in place an agreement that their currencies would be backed by gold. That agreement created value. Since that agreement is no longer in place nothing has really replaced it to create value in gold."

By asserting that the value of gold depends upon agreements between governments you are declaring gold itself to be merely "fiat currency"! From the Austrian point of view, this is an inversion of the meaning of "money value". "Mises therefore defined money as the most marketable commodity." [Mises on Money: http://www.lewrockwell.com/north/north83.html ]. The value of gold as money has emerged across centuries of diverse economic transactions, not by fiat.

When FDR confiscated gold and paid out 28 reserve notes of printed paper per ounce, he was calibrating the value of the printed reserve note in relation to an ounce of gold. Soon after, having amassed a large quantity of gold, he re-calibrated the reserve notes by setting each dollar equal to 1/35th ounce of gold, thereby "paying for" the cost of confiscation by making all the reserve notes immediately 25% less valuable (in relation to gold). Gold did not change in value when FDR reset its price; the relative value of the paper reserve notes (the promise of value) changed!

The value of gold derives from relative value against other commodities and assets bargained in countless transactions over eons of cultural exchanges. It is always relative to cultural context and ongoing economic circumstance. But the impetus to own gold has reasserted itself time and time again. Yes, it may be an irrational legacy, but so are desire, fear, love, hope . . . and all the other subjectively grounded dimensions of valuing.

As Mises insists, money value is not a measure of anything; rather it is a ranking against all other available transactable commodities and assets. "If it is impossible to measure subjective use-value, it follows directly that it is impracticable to ascribe 'quantity' to it. We may say, the value of this commodity is greater than the value of that; but it is not permissible for us to assert, this commodity is worth so much. Such a way of speaking necessarily implies a definite unit. It really amounts to stating how many times a given unit is contained in the quantity to be defined. But this kind of calculation is quite inapplicable to processes of valuation " [Mises: On the Measurement of Value ]

Mises held that every economic act hinges on a comparison of values. Thus, when someone decides to gather in some gold [or any other commodity] they are simply judging that it will be more valuable in some future need for an exchangeable commodity [money].

I can't eat gold, but I'll bet I can usually trade it for something to satisfy my hunger . . . .

ALOHA !!

lessmore ... if you can't see that owning debt, whether it is a US debt(TBill) ... a US Dollar ... CountryWide ... or a MBS based TD involves high risk then I cannot help you any further! How can anyone today keep their head above water with a 4% return when true inflation is running at 9%+? Derivatives were essentially invented so that massive amounts of global money supply could be accomodated by an above average return. If hedge funds and HB&B cannot generate a better return than a simple passbook savings account they can kiss their bonuses and high commissions adios! Now we are seeing these "debt products" have never actually been market tested! Let me translate for you ... "ficticious demand"! So far the only counterparty to take these untested debt derivatives are money printing central banks and heavily ladened derivative banks like Bank America. Where's the unregulated CDS ETF for the public? Now they are into stratospheric gambling in the $$trillion USD range. Used to be $billions was outlandish! What would you consider outlandish? It seems the sky is the limit for you on money printing and bailouts! While you are taking all this in the US government is passing on the bailouts to you in the form of monetary inflation and soon to be tax increases. So now the US government and the US banks are not only exporting debt but out-and-out MBS fraud to boot!

You still fail to understand there is a counterparty to all the Western central bank selling ... that is called "demand" in my book! What is it in yours? Don't you think there is a counterparty or is this all just make believe? You'll notice gold never needs a "bailout" ... When is the last time taxpayers had to bailout gold? When was the last time a central bank had to announce they could not find a buyer for their gold because the price was too high?

Good luck on your future as a debt based gambler!

Among 37 sector ishare etfs good short term relative strength includes financials and health. In the top 20percentile are two ytd underperformers that have decent charts:
For financials, iak/insurance. (other subgroups have less desireable charts,imo)
For health, ibb/biotech; ihf/healthcare providers;iyh/health.

Anyone have any comments where financial and health fit in the economic cycle? Any fundamental reasons for these two areas to have legs...or just "regression to the mean" under performers?

ALOHA !!

Hawaiians have an expression here ... "If can ... can! If no can ... no can!" Simply put it works until it doesn't!

I am not willing to throw in with a government and a paper debt dollar that has shown no historical evidence of financial appreciation much less financial responsibility and solvency. I don't need to be hit over the head with a sledgehammer on that bet!

johoho ... I love how FDR stole gold from the citizens that had the foresight to take prudent and wise monetary actions in the face of irrational government sanctioned folly.

It is always the productive people in this world that take care of the unproductive. I can see no more "unproductive" entities on the face of the Earth than politicians and bankers!

As I have said many times ... it is not the POG that is going up but the purchasing power of the US Dollar that has been going down. From $28USD to $670USD in some seventy years. Its like an inverse chart of the US Dollar's purchasing power!

Good evening:
johojo:
Thanks for post the Von Mises quote which he made in the first half of the 20th century when gold still enjoyed the reputation of money. I enjoyed re=reading it. But it is merely an historical truth that prevailed a long time ago.

Rigdon:
With regard to the gold price runup from 1971 to 1980, I previously posted as follows "I remember participating in the gold/silver bull market of the 1970s. Many traders were sure then that the decoupling of the US currency from gold was a temporary phenomenon that would have to be undone. At first the price runup was predicated on the value that gold would have if the decoupling were undone. Like any panic buying it went much further. I for one no longer believe that the decoupling in the US and European currencies will be undone, at least not in our lifetimes."

Kaimu:
We all have different investment styles. I personally like buy stocks on deep dips as in 2002, let the market take me out of my positions over time, move the proceeds from each successive position into treasuries until the next large dip.

Lessmore,

I appreciate you coming to this site and posting an alternative view. It doens not happen too often so I commend you for that.

Today's reality for gold does not support your hypothesis. Today, gold is valued at $660
+/oz. The value is what the market will bear. You seem to imply that someday soon we will wake up and the value of gold will have devalued to it's rightful valueless place.

I only need to look at the amount of capital that individuals and corporations invest to pull gold out of the ground to know that there is value.

Real estate, gold, art, it all has value in a global economy where the few that lord over the masses literally create money from a printing presses.

Gold is worth approx. $660. an ounce today because the market thinks it is. It is up dramatically over a time when the stock market has enjoyed a huge bull move as well. How can that be?
One of these "assets" is mispriced.
Could it be a function of the value of the currency in which these two assets are traded?
By historic standards the POG today is very cheap. On an inflasion adjusted basis, POG should be well north of 3 figures.
My belief is that the POG will appear extremely undervalued when the hybrid financial products created by this last group of "geniuses" so called derivatives etc are atually marked to market. Not to fantasy.
I think the criminals who have served this Ponzi scheme on world markets already know that their goose is cooked and what we are seeing now is "exit strategy" positioning and the Bush cartel buying land in Paraguay (for what other reson than) to avoid extradition and justice.
Did I just say that?
I probably should worry my passport will be pulled and to expect a visit from the IRS.

PS. Loosing the passport would be serious, an IRS audit would only prove that there is no blood in a turnip.

lessmore,

Re: ". . . when gold still enjoyed the reputation of money. . . . it is merely an historical truth that prevailed a long time ago."

In considering observations by Minyanville's Mr. Practical on Friday:

"""
The Fed is changing the rules of finance faster than the average man can think. The discount window in the past, borrowing directly from the Fed, has been like going to the emergency room. It has been a place of last resort for sick banks. Now the Fed wants (needs) to make it the place where everyone goes.

First, they lowered the [discount] rate. Then they changed the collateral they were willing to take from pristine treasuries to riskier assets, the assets that every bank now is stuffed with. Today they made a change that removes further restrictions in the source of collateral.

Essentially the Fed is trying various means to get credit (liquidity) to banks that are seizing up because the market does not want to give it to them. The more risky the assets the Fed is willing to accumulate, the more markets become nationalized: the government itself making credit decisions.
"""

Does this mean that by your construction "money value" is whatever happens to congeal out of the Fed's and other central banks' churning of the markets? And if such serendipitous money value evolves only through never-ending revelations of historical misconstruction and delusion, then why would anyone ever engage in any economic transaction? How could monetized economies ever have evolved in such a floating world of transient expectations?

The obsessive counting of schizophrenics is not mathematics at work. Nor is the failing of monetary politics economic process.

"Well, for one, the Fed removed the safeties from the nuclear weapons on Monday. They waived the 10% regulatory capital requirements from both Citibank and Bank America!"

Thanks for this info Genesis. Anyone have a link for this? Is this common knowledge?

moab,

See the two most recent (Aug 20) docs here:

https://www.federalreserve.gov/boarddocs/legalint/FederalReserveAct/2007/

Warning, they are small in page length, but 3MB files.

This one, from June, is also quite interesting:

https://www.federalreserve.gov/boarddocs/legalint/BHC%5FChangeInControl/2007/

"After carefully considering your request, and subject to the conditions listed below, the Board has approved an exception to the guidelines that permits Citigroup to treat Reg. T margin loans in a manner that differs from that set forth in the guidelines. Specifically, the Board will allow Citigroup to apply a 10 percent risk weight to its Reg. T margin loans."

moab,

Look at Mish Shedlock's post: http://tinyurl.com/d8q6j

and Peter Eavis on CNN's Money: http://tinyurl.com/3aqaod

gb34 I got a theory on gold

Maybe it's not as valuable as AK40s and bottle water

when it gets to that point

there won't be any system that says your gold is of value

When you think of the NAzis they just took it,

No, I think if things get that bad for gold to BE then it's too late and it's bottled water and AK 40s

If fiat(SP) fails then ...... what does your tribe want? gold? Oats?...

Have you ever experienced a cell phone running out of power just at the critical time when you need it? Would you not love a cell phone that runs 6 months straight without needing recharge? Or a laptop computer that works a month at a time?

The technology is finally here! They spent billions of dollars on this thing for years and it's finally ready for mass marketing later this year. It's called DMFC, Direct Methane Fuel Cell. Read it all on Fuel Cell Today.

Fuel cells, like DMFC, MUST utilize precious metals palladium and platinum. Supply of PGM is very limited. The whole world produces only 7 million ounces of palladium per year, and consumes more even without fuel cell. There will be a huge shortage, driving the price of PGM metals, especially palladium, to the stratosphere!!!!

That brings a huge opportunity buying the SWC stock, which rallied 7.60% up on friday and is clearly on an up trend off the 52 week low. SWC is the one of the only few PGM metal producers in the world, the ONLY one in the USA. The stock is cheap because it has NOT been making money yet. But with huge demand of PGM kicking in as DMFC goes to mass market soon, you bet you can make HUGE money in SWC BEYOND YOUR WILDEST DREAM!!!

SWC has a price/sales ratio as low as 1.2. What kind of P/E will it have if PGM metal price just increase 4 or 5 times? Click on my name to read more on my blog.

Hi Kaimu,

Re: "Where's the unregulated CDS ETF for the public?"

Be careful what you wish for...

As of June, you can now trade CDOs for these companies on the CBOE.

NYSE:GM NYSE:F NYSE:LEA NYSE:HOV NYSE:SPF

Without exception, they're all down from June.

Here's 15 minutes of results from searching Google for CDO ETF...

CDS ETFs in Europe
http://tinyurl.com/2sn9k4

CBOE TO LAUNCH CREDIT DEFAULT OPTIONS ON FIVE COMPANIES ON TUESDAY, JUNE 19, 2007
http://tinyurl.com/36ae5g

CBOE's contracts are cash-settled binary call options that pay $100,000 when CBOE confirms that a credit event, such as a default on specified payment obligations, has occurred.

"Credit Default Options are a natural extension of CBOE's product line and will bring great benefits and tremendous cost savings to a market that has exploded into a $26 trillion business," said CBOE chairman and chief executive William J. Brodsky, in a statement.

New Credit Conditions Index
http://tinyurl.com/2jduca

The NDR CCI has been trending mainly downward since peaking in early 2005, although the index remained largely flat through 2006 before dropping sharply in 2007 from a level around 75. The subprime credit meltdown is widely agreed to have hit the markets in late 2006.

Kamakura Integrates Markit Credit Default Swap Pricing for Kamakura Default Probability and Correlation Service
http://www.kamakuraco.com/pr_081505.htm
HONOLULU, August 15, 2005: Kamakura Corporation and Markit Group Limited ("Markit") announced today that Kamakura has integrated Markit’s credit default swap pricing database. Joint customers of Kamakura and Markit will be able to use it as a key modeling input to the Kamakura Risk Manager default probability and default correlation products. Markit provides credit default swap pricing on over 2,600 individual entities based on contribution of mark-to-market prices from 50 dealing firms in the credit default swap market.

CDS Index Comes Stateside
http://tinyurl.com/3xzpeq

U.K.-based Markit Group Limited and CDS IndexCo are close to launching the first credit derivative swap (CDS) index in the United States.

CDS' are a complex and fast-growing type of financial contract that is used by bond buyers to hedge default risk. If a bond goes bust, then the seller of a CDS will repay the buyer the full value of the bond.

The global market for credit derivatives more than doubled last year to cover more than $34.5 trillion of securities; it was the third consecutive year of 100%+ growth. The contracts are the fastest growing corner of the $370 trillion market for derivatives, according to Bloomberg. Despite their widespread use, however, there is currently no established U.S. credit derivatives index. In the U.K., indexes from iTraxx have been around for more than six months. The iTraxx indexes were launched by the International Index Company (IIC), with Markit as the calculation agent.

The new LCDX Index (Liquid Credit Derivative Index) will track prices on credit derivative swaps for U.S. junk bonds. The index has been delayed more than once since its originally scheduled launch date in mid-March, but should begin dissemination within the next couple of weeks, in mid-May.

"The LCDX has been keenly awaited by dealers and institutional investors," a Markit spokesperson said in a statement.

A Balanced Look At Credit Derivatives
http://tinyurl.com/343fvu

"Here is a shocker for you:

1. The turnover (size) of this activity is above $27 Trillion last year.
2. Every derivative of every kind, including short of gold derivatives, has an interest rate factor and therefore every derivative of every type has some form of a credit derivative."

"The market really does not trade in risk - it trades in illusion about risk. Risk seems like a lollypop when probability computations run in basis points; when the probabilities blow up, all computations of price to charge for risk go insane."
http://www.credit-deriv.com/

And my favourite one so far, from Jim Sinclair...

"A Letter To Chairman Bernanke"
http://tinyurl.com/2l694c

Here is a quote from Bob Hoye's Pivotal Events directly related to the loosening of reserve requirements to Citi and BA:

"Additionally, there is one massive assistance that the establishment continues to ignore. In the fall of 1929 the head of the New York Fed opened the discount window and bought bonds out of the market. He exceeded his authority by a factor of 6 times, thereby injecting a remarkable amount of liquidity."

http://www.institutionaladvisors.com/pdf/070816_HOYE-PIVOTAL_EVENTS.pdf

For the gold discussion, I have calculated the inflation and adjusted prices since 1929 using nominal rates. Data below.

- Using July rates (July 1929 to July 2007): inflation was 1,103%, or 12.03X (for an annual rate of 3.24%)
- Using average annual rates from 1929 to 2007 the inflation was 1,082%, or 11.82X

- If the price of an ounce of gold was $28 in 1929, today it would be inflation-adjusted to approx. $336.

- Gold's peak was $850 in 1980. Since 1980 the inflation rate was approx. 240% (2.5X), inflation corrected price would be $2,140.

Using Kaimu's figures, the price of gold has appreciated from $28 to $660, that is 2,157% (22.5X), for an annual rate of 4.07%.

Of course, these are nominal rates, which are not considered by many to be real rates, and who knows what the rates represented 50 years ago (different baskets).

If we add extra percentage points to each annual rate, the inflation since 1929 would be:

- Extra 1%/y: 2,454% (25.5X) (gold at $714)
- Extra 2%/y: 5,281% (53.8X) (gold at $1,506)
- Extra 3%/y: 11,160% (112.6X) (gold at $3,152)

Pick your number...

For those who are interested in social justice I recommend reading Bill Gross. Here is his last paragraph which I think is quite forceful.

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+September+2007.htm
"'The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue. Fiscal, not monetary policy should be the preferred remedy, one scaling Rooseveltian proportions emblematic of the RFC, or perhaps to be more current, the RTC in the early 1990s when the government absorbed the bad debts of the failing savings and loan industry. Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 LTCM crisis, yet throw 2,000,000 homeowners to the wolves in 2007? If we can bail out Chrysler, why can’t we support the American homeowner? The time has come to acknowledge that there are precedents aplenty in the long and even recent history of American policy making. This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation. And for those who would still have them eat some Wall Street cake as opposed to Midwest meat & potatoes (The Wall Street Journal editorial page suggested they should get darn good and used to renting once again) look at it this way: your stocks and risk-oriented levered investments will spring to life like the wild flowers in Death Valley after a flash flood. And if you’re a Republican office holder, you’d win a new constituency of voters – “almost homeless homeowners” – for generations to come. Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC – Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you?"

Market dynamics, charts, and a recent CARA 100 chart in play (YHOO)...

I'm expecting the 'crisis is over' (ridiculous) talk to dominate the early week talk.

Last week I posted a question for traders who have actually shorted gold; "why short a market that is so fundamentally bullish?". Unfortunately, no actual gold shorts have posted (I wonder if there are any), but it's great that a debate has begun, thank you.

lessmore said; "I must confess that I have difficulty believing in gold. Gold bulls persistently point to the normally reached levels, charts and statistics to reinforce their desire to remain bullish. My difficulty revolves around two fundamental issues.

The first is that gold is not the same commodity as when all the governments of the developed world had in place an agreement that their currencies would be backed by gold. That agreement created value. Since that agreement is no longer in place nothing has really replaced it to create value in gold. The desire of individuals to possess gold jewelry and to hoard gold bars is not a substantial substitute for that agreement. To use charts and statistics for gold that relate back to the time when currencies were backed by gold is irrelevant and misleading. It is a comparison of dissimilar commodities even though they both bear the name "gold". When currencies were backed by gold investors had a means to determine the value of gold. They could use the value of their currencies to determine if gold was mispriced. Thus, the commodity "gold" was mostly the commodity money. But that means of determining the value of gold is no longer available. Thus the commodity "gold" is no longer partly the commodity money, it is just the commodity "gold" that is used for jewelry and making gold bars.

The second fundamental issue is that gold bulls are fighting the US and European Feds who have been selling their gold and continue to do so. If an investor generally cannot win by fighting the Fed, there can be no valid reason to believe that he/she will win by doing so in the gold markets. Its a bet that the world monetary system will collapse and that the only store of value will be gold bars. In my view it is a misplaced bet. Compared to demand, the supply of gold is huge. The only reason I can think of for the Federal governments to be selling their gold slowly over time is to maximize their sale prices. If they sold it any faster the price of gold would really tank. I do not believe these sales will be reversed and that governments will be purchasers of gold in the future. I can see no valid reason for such a reversal. The future is not a return to gold. Instead, the monetary trend appears to favor non-physical money, e.g., bank credits.

Posted by: lessmore at August 25, 2007 10:56 AM"

So in a nutshell; the two fundamental issues that don't make sense to him are: since currencies are not backed by gold it is not worth what it used to be worth and is only worth the commodity price of making jewelry and gold bars AND traders are fighting the fed who always wins so why fight?

To the first issue; currencies are still backed by gold, not 100% but your statement is incorrect. Developing countries, BRIC for example, have openly stated that they are purchasing gold for their reserves for currency stability issues. Central Bankers around the world disagree with you, who are we to argue?

You also state that gold is only worth the commodity price that people are willing to pay. Maybe that is why the supply deficit due to growing demand is pushing the "commodity" price higher. (I don't know where you got the idea that gold is in demand deficit - gold production is in deficit to gold demand, the central bank sales make up the difference). The global population is willing to increase quantities of gold purchased at these prices, maybe I should buy some more here. I guess we have two things that create value in gold; central bank reserves and physical demand. Sorry, but your argument doesn't hold water.

Your second issue is that you can't fight the fed so why try? Look at the price of gold in the last 5 years. Those of us who have been long gold have been laughing in the face of the fed - they have been losing and if they really lose control, where would the price be now? $1000 plus?

score22 said; "lessmore,
thanks a million for your post on gold. so much is written by contributors (bullish) on this blog about gold & gold stocks, i think to the detriment of looking at other vehicles to trade successfully."

score22, "thanks a MILLION"? To the DETRIMENT"? Since the Traderwizard site started, there have been many more posts on stocks than gold - in many multiples in fact. I for one always own, in some percentage, gold, oil, individual stocks, etf's, bonds and T-bills. I trade this ultra diverse portfolio and know that there are many securities to trade. MarkM can attest to the success of my/this style of portfolio management. Since the Traderwizard site, I have posted much more on gold because of the fact that I saw that gold was the place to be and that the community needed to learn about it. See my mid June call on buying bonds (hope some here paid attention to that post and successfully got long) if you wonder if I have posted on other things. The bottom line is this; for the past 5 years, gold has drastically outperformed stocks and bonds, more than doubling as a matter of fact. By not being involved in the gold market you left your "millions" for others to make and staying out of the gold market has been to the "detriment" of your portfolio.

As long as the central banks of the world print money and create debt instead of fixing the problem, I will continue to be more excited about gold than any other trading vehicle, although I will continue to own all asset classes. When the credit market is fixed and politicians mind the house better, I will go to overweight stocks again, until then I will continue to outperform the S&P without much effort by trading these "other" asset classes, IMO.

Thanks again guys, hope the discussion continues and please don't take any of my comment personally.

Are there any shorts out there?

One of the links earlier in this session indicates at least one of Pimco's funds is heavily into GNMA paper. Fancy that!

I may be a little cynical (OK maybe a lot) but most government actions to help out the small guy end up benefiting the wealthy.

lessmore, you seem of similar vintage to me, yet you maintain faith in government. How? The UK government managed to put the low in the gold price by selling half the country's gold (presumably for US currency) - not history's best investment. Note that I did not say US money, as the USD does not maintain value, one of the historic roles of money.

Wish I understood all of what I've been reading today on these derivatives - the numbers are just so big I can't relate them to my reality :-(((

Good morning cyderman:
I am pleased to meet someone who is in my age group. Each year there are fewer and fewer.

I share your distrust of government, but I think Bill Gross does have a point. The mortgage foreclosure crisis is getting progressively worse. I think it was on CNBC that it was said that more folks than ever are electing not to pay their mortgages but to make their credit card payments. CNBC attributed this phenomenon to their assumption that people value their credit cards more than their homes. Others assume that more and more of these homeowners are merely opportunists who expect a bailout - since others who aren't paying their mortgages and are going to get bailed out, why shouldn't I? However, these are all assumptions which are being made to justify the harm that will occur to many families, while ignoring the harm.

Do not assume that the mortgage industry or the mortgage service industry will not enforce its rights. I can tell you from my personal experience that they view it as an essential part of their business. It is not a consideration that in some instances the cost of foreclosure exceeds the value of the house. They view foreclosure as a deterrence. They want to deter future mortgage defaults. They want to force the beleaguered debtor to make his/her mortgage payment first.

At one time the US government was capable of providing benefits to the needy without further enriching the wealthy. They did it in 1935 with Social Security, probably because ithe government thought it had to avoid social unrest. So far it appears only a few people like Bill Gross think we are close to social unrest in the US today.

Lets look at who benefits from Bill Gross's bailout proposal in a hypothetical zero down recent mortgage . In the case the homeowner loses house, he/she had no equity, has costs to move to rental. Mortgage broker has already got his - see Gretchen Mortensen in Sat. NYT for details on commissions. CMO holder takes hit for lost interest and principle. So we are really bailing out the money man. If you want to be populist, revoke refinance penalties or prohibit mortgageholders from suing for loss from sale on reposessions against the defaulting mortgage homeowner. That removes the moral hazard. That is not what Gross is talking about.

Good afternoon Bill:
Welcome aboard your charter boat and Bill Gross' position. I also want to let you know that I find a lot of value here, especially in the identification of good companies. I will use that information for my purchases in the next big dip. Thank you for all your input here. Best of luck in your relocation and your endeavors.

Bill,
Much appreciate how you are distinguishing short and long term horizons. Along this line, what is your thought about gold mining stocks? Do you think at some point in a bear cycle these stocks would decouple from the general equity mkt or is this wishful thinking?
fwiw, we haven't seen pictures but lately everytime you post I am conjuring an image of a nomadic blogger conflicted with frustration and delight. I also imagine hearing a symphony off metal cables/stays hitting the mast.

Re: Bill Gross's bailout proposal, from Paul L. Kasriel of Northern Trust Company:

"""
So, there is no free bailout to the predicament we have gotten into as a result of Greenspan's cheap credit and moral hazard policies. For those that think there are free bailouts, I suggest that they read the writings of Frederic Bastiat, a 19th century French political economist, who preached that in economic analysis, one must take into account not only what is seen, but what is not seen. In other words, employ general equilibrium analysis, not just partial equilibrium analysis.
"""
More at http://tinyurl.com/yopqwa

And Mish Shedlock says,

"""
So let's instead list reasons why the "Gross Bailout" is complete foolishness.

* It bails out irresponsible lenders at taxpayer expense.
* It bails out irresponsible borrowers at taxpayer expense.
* It bails out irresponsible homebuilders at taxpayer expense.
* It bails out irresponsible real estate agents at taxpayer expense.
* It encourages more irresponsible lending.
* It encourages more irresponsible borrowing.
* It encourages more irresponsible homebuilding.
* It encourages more real estate fraud.
"""
More at http://tinyurl.com/d8q6j

I'm underwater on a few of my stocks. Perhaps I can get that nice Mr Johnson of Fido to write a letter to the fed government asking for a bailout. Pity he's not a TV star like Bill Gross.

To say that a person is irresponsible and therefore requires punishment as their morality is in question is not a position I share with Mish.

Mish depends on a localized taxonomy of sub-prime borrowing as the "cause" of the collapse of credit. In matter of fact, credit spreads have been widening long after the acknowledged peak of the housing bubble.

Not too many people that I know decided that they were going to "rip off" the system at the outset and could care less if the entire credit bubble collapsed, they merely wanted value for their homes and needed a place for their family to live.

Whomever allowed the relaxation of the rules in which to entrap as many homeowners as possible in overwhelming debt is clearly negligent. Whom might that be?

Bill,,,,Do you use the McClellan summation Index as an indicator(nyse/nasdaq)?

When the mkts are erratic the indicator can be a bit erratic itself, however when you get a correction I think it gives a very good indication of the bottom.

I use in conjunction with it's 10 day sma and a cross up/down is the confirmation.

+900 - 1000 signals tops and -900-1000 signals bottoms.

This last correction turned near -941(nasdaq) and -919(nyse).

Both bottoms were signaled on the big down day and reversal of 8/16(thurs) and confirmed on 8/24.

If anyone has any thoughts on this, please wade in.

Dab

FranSix,

Why are the natural consequences of people's freely taken decisions to be construed as punishment or indictment of their morality?

How does it encourage prudent behavior to rescue an entire class from their own choices? And why must all taxpayers subsidize such paternalism?

Can liberty and paternal governments long co-exist?

The flip side of the coin of irresponsible homeowners is how lacking in moral leadership banking is, and how quickly and easily government rushes to their aid.

The ironic thing is, Mish obligingly and willingly creates the notion that its all due to homeowners who are less than credible in their desire for a home. Without being paid a single dime for his effort.

The latest credit wrinkle has all of the warts and features of every previous liquidity crisis in history, yet Mish spends all of his time using homeowners as his favourite punching bag.

It would be a pretty rotten job, even if he WAS paid.

Cap'n Bill,

Now that you are situated on the boat, I was expecting your post on POG to be " Yarr, Goldie, you be a fallen woman now, and I be the one to pick ye up !"

FranSix -

Isn't the tendency to blame the sub-prime borrowers quite normal? In today's America it seems, if you're poor, it's because you are DEFECTIVE. You've been unable to become Horatio Alger. You've been unable to take advantage of the bounty and opportunity which America offers - offers rather more selectively than most acknowledge.

Conversely, if you're a mortgage banker who motivates his sales team to seek out sub-prime borrowers, knowing they will generate the most fees and penalties (=profit) you're welcome at the Country Club - as long as you're screwing lower income people in an institutional way, not face-to-face.

It's just the dance of the "successful" pioneering a new "market segment". Those inferior creatures should have read the small print that the salesman convinced them to ignore !

My experience tells me society is rather a random distribution with a certain % of klutzes found at the top ("the decider") and some very smart people found stuck at the bottom.

Considering gold spot & futures prices.

If there is a massive liquidity injection through the discount window and the lowering of reserve requirements to major financial institutions, this could temporarily pull the carpet out from under the dollar. If so, the liquidity has to go somewhere.

As the consensus is that Gold has a direct inverse correlation to the dollar, then it follows gold prices will be bid up along with the markets.(I believe mostly a buildup of short and secondary lien type financings)

Yes, its quite normal, Jock!

"My experience tells me society is rather a random distribution with a certain % of klutzes found at the top ("the decider") and some very smart people found stuck at the bottom."

We would forget to screw on our heads in the morning if we were suddenly bestowed upon by real & imagined priviledges.

August 26, 2007
Week in Review #34 (2007-08-26)
posted 3:45:39 today.
----------------------------
thank you bill cara. for effort & dedication above & beyond the call of duty!

Long-time reader, first time poster.

Bill, to echo many others, thanks for providing this space for discussion.

A quick question for the crowd. I enjoy the investment discussion. The political, cultural, social commentary? Gotta be honest, it's like listening to a dog yap.

Am I alone in this feeling? If so, I'll shut my keyboard about it. If not, can we stick to investing? In my view, that's the value of this site.

MarkM....et al
Interesting energy sector, bullish percent, chart.
20ema put in a buy signal on friday's close. see $BPENER at stockcharts dot com. Bill's commentary is sobering but if the mkt can keep trucking for the shortterm, china's retracement/fxi continues to support the demand story for energy. Wishful thinging? Will this positive for gold stocks too? Ditto?

MTHood,

I agree that the political, cultural, social commentary can get old. But if you understand those issues as related to them on a historical basis, fundamentals will be much easier to understand. History and fundamentals are important to investing, so unless you simply want to trade using technicals, you need to understand political and social issues - they are of major importance. Kaimu, for example, is correct in many ways and it can get old if you understand where he is coming from - but he is trying to help those that don't understand historical monetary issues. Kaimu, thank you for your time.

Bill's wir...another great read, all the moving parts come together, I greatly enjoy this skill on almost any topic. Great to have him back. Give him connectivity and the juices flow. (Of course, doesn't hurt to read encouragement about miners)

On last Monday, even with Bill's guidance about Brazil and the commodity asset class not being a subprime issue, it would have taken both a nimble and brave investor who had just been stopped out of half his positions to go back in. I continue to look forward to information on a letter premium letter that can help me keep the focus when under stress...and other advisory services.

Finishing my own review of the mkt, small and mid cap indices stand out. Not clearly above 200ema, and 20 and 50 in downtrend. May need to have both the latter ma's kiss off the 200, as in past recovery. Translates into 2% more down.

Here's an article which more or less covers some of the concerns about gold as an investment, and how its role in the market nowadays differs from decades ago, and that gold prices did not appreciate on credit concerns because much has already been priced in:

Going for the gold might not pay off this time

By Myra P. Saefong
MarketWatch
August 26, 2007

http://tinyurl.com/yvdybt

FranSix:

Your article says; ""Gold would perform differently in each type of recession," O'Byrne explained. Gold would be the "asset class to own in a hyperinflationary or severe stagflationary scenario as it was in the brutal hyperinflation in Germany in the 1920s and in the stagflationary U.S. in the 1970s," he said."

Inflating money supply + slowdown in economy due to housing slowdown = STAGFLATION -->> higher gold prices. We are looking at a possible stagflationary environment. Where does the statement "Going for the gold might not pay off this time" fit in to what is going on now?

The recent sudden decline in short term treasury yields shows how gold might come under investment demand ( as opposed to speculative demand previously) as it competes eventually with treasuries.

Its pretty clear that money supply growth has levelled off with the sudden aversion for credit. So the speculative aspect of higher gold prices due to stagflation will come to a close, though it was valid for a time.. there was a spike in M3 during July.

So perhaps a surge, a correction, and a resumption.

Bill's comments:

“Now with a Discount Rate so low, I have to believe it is time for the gold market to start a rally, with bullion back to 690 and beyond (perhaps 750 before the cycle runs out). The goldminer shares are late to rally among all sectors and industries, but if the broad market rallies, and the liquidity injections and Discount Window status remains unchanged, then I believe the miners have to start moving higher. If so, look for confirmation in a falling $USD – hopefully a mildly deflating USD so that the Fed and other central bankers don’t come rushing in to prop it up.”

The Yen carry trade is likely to resume, and as the Yen is defacto pegged to the dollar around 120, then conversely, the dollar is defacto pegged to the Yen. A declining Yen means a declining dollar.

MTHood,
Check the title of Bill's blog
"Capital Markets and Social Equity - perspective and discussion"
For many of us, the two are very much intertwined, as the current debate on subprime bailout highlights. I remember very clearly my first house purchase, with 20% down, at 2*gross income, and being alternately worried that I'd overpaid or I'd bought at the top, after worrying that I'd never be able to afford a house. It's a very real pain for first time buyers, but they're not a homogeneous group. Some with no initial equity will simply turn in the keys and walk away. Others, especially those with a significant downpayment will suffer as they try to hold on to their dream. Yet others, the "investors" not buying for personal use, will attempt to minimise their losses but keep their credit rating intact. All have been victims of sorts to the lure of easy money, but it's the second group that deserve our sympathy, but if they've got a lot of their own money in it, and are making a house into a home, they'll survive. I see no reason the banks and mortgage lenders who provided the lure to the first and third groups should be rewarded beyond the money they've already made. Risk and reward go hand in hand. Bill Gross has it wrong.

"I'm glad I don't get seasick though because working on a computer while the boat is rocking in the waves is a unique experience."

So now we all know something for sure that previously we only suspected: Bill Cara rocks!

I apologize for not reading all the responses but and fwiw I'm long gold and the miners, but I seek to bridge the gap between lessmore and the rest of us. I believe, and may be mistaken, that what he is saying is that gold doesn't produce a dividend or is of any valuable "use" other than as a store of value, much like paper money. Gas is a valuble commodity because it fuels machines. Food feeds us. Even copper has a use in wiring, piping etc. Gold however, is simply a precious metal whos only value is that its in limited supply and costs resources to mine it. I prefer it as a store of value than paper money, because paper money can be printed endlessly, but I believe this is the point lessmore was making.

For those who have the time, here is a video link to "The Money Masters - How International Bankers Gained Control of America"

http://video.google.com/videoplay?docid=-515319560256183936

It's an interesting 3.5 hour documentary that attempts to support the theory that the Federal Reserve (among all of the world's central banks) is controlled by private interests with the primary intent of self benefit. I goes through the entire history of our modern monetary system.

The video quotes Thomas Jefferson as saying, "I believe that banking institutions are more dangerous than standing armies." Sounds like something that Bill would say.

JLM

Looks like US Steel has become a part of and closed the book on one the greatest rip offs of stockholders in distant memory:

http://news.yahoo.com/s/nm/20070827/bs_nm/stelco_ussteel_dc_2

ALOHA !!

Here it is right from the horse's mouth some 200+ years ago. The KING of all bankers throughout history ... The Rothschilds ... Obviously once you control a country's money why would you care about their laws or its citizens?

“Give me control of a nation's money and I care not who makes it's laws."
- Mayer Amschel Bauer Rothschild

The problem with America is that we have these guttless politicians, bought and owned by the banks, who continually bailout banks yet offer no repurcussions. If a bank gets bailed out, like Goldman Suchs just got $3bil, then they need to be put on a repayment plan with interest to take the heat off the US taxpayer who now has to face higher taxes and inflationary pressure. If the bank cannot pay off the "bailout loan" then the banks and its management/directors go into foreclosure where all their assets are attached(bank property, mansions, Rolls, boats, etc)and they face the same bankruptcy laws US citizens face. Right now the banks operate with impunity knowing they will get bailed out if their "bet" goes wrong. Compared to the banks the Mafia are girl scouts! ~Boy, I sure wish I had it that easy!

And, who believes the banks, sub-prime lenders, appraisers and realtors didn't understand the terms of the contracts *they* were signing?

If the buyer is stupid, then what do we call these cretins? They are in the business and they knew THEY wouldn't sign one of those contracts. Variable rate reset loans, Pre-payment penalties? Are you kidding?

How could a professional knowingly sell someone a home they know fully well they will default on, unless they were knowingly ripping them off?

The speculators and banks that got caught out should pay/declare bankruptcy. The poor first time home buyer taken advantage of by those with superior knowledge and feduciary responsibility should have some legal recourse against the predatory criminals trying to steal their money/property. Otherwise we make a mockery of the feduciary.

This type of loan needs to be re-negotiated, perhaps with a longer term and more favorable rate...at the expense of those with knowledge that didn't act responsibly. That would be the lenders and their agents.