Hedge Funds Are Killing Gold

The price of gold has been kept down by hedge fund redemptions. These redemptions will end in a week and after that a nasty hand that has been holding the price of gold down will be lifted. As we begin this new year news is starting to trickle out demonstrating that hedge funds as a whole have had a horrid performance last year.

According to incoming data nine out of ten hedge funds failed to beat the S&P 500 last year. According to a recent report by Goldman Sachs their average return was 8% while the S&P 500 posted a 13% gain for 2012.

What is worse is that the third worst fund tracked by HSBC was the Paulson Advantage Fund. This fund of 19 billion dollars lost 19% last year due to bets that the European euro crisis would continue and that gold would rise. It is one of the largest holders of the SPDR Gold Trust ETF (NYSE: GLD) and has been forced to meet investor redemptions.

These redemptions have undoubtedly caused selling in GLD in the past few weeks and will probably continue to hold gold prices down for another week. John Paulson also runs a gold fund that gave its investors a negative 25% return last year too. Paulson is not the only hedge fund manager facing big losses being forced to sell to meet investor redemption requests.

Most funds though didn’t generate huge losses, their program trading algorithms simply failed to beat the market. Ironically a few funds did beat the market last year by investing in places others wouldn’t. Dan Loeb’s Third Point hedge fund posted a 21% gain in 2012 by betting big on Yahoo and by buying Greek bonds. Pine River Capital Management also made 30% by holding depressed mortgage securities.

If you are a gold investor I do not think you should worry. Gold prices peaked out in the Fall of 2011 and since then have been consolidating in what I believe is a mere pause in a long-term secular bull market. The price of gold now has resistance at 1800 and support in the 1550-1600 zone. I think it will likely break out above its 1800 resistance level later this year, probably in the summer, and then begin a new bull run.

I know it’s easy to get anxious and worried when you see gold just slug around. I want you to know that much of the recent selling from hedge funds will soon be over. That will take one force of selling in gold out of the market. For disclosure purposes I have a position in GLD. We have seen several similar periods of consolidation in this secular gold bull market that have lasted well over a year. This one will come to an end the same way they did – with gold prices reigniting and leaving those that doubt the power of gold behind.

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Investor Gold Buying to Resume & Fed Doubling Their Balance Sheet AGAIN!

A leading precious metals consultancy, Thomson Reuters GFMS, has forecast that investors will buy record amounts of gold in the remainder of 2012. GFMS produces the benchmark supply and demand statistics for the gold market. GFMS forecasts that investors will purchase 973 tons of gold in the second half of 2012, more than during the wild gold market of the summer of 2011. This surge in demand for the yellow metal, GFMS says, will move gold above the $1850 an ounce level, not far from the record high of $1920 hit in September 2011.

GFMS may be right. This past week, gold hit its high for this year at $1790 an ounce on the back of the various global stimulus plans launched by a number of countries around the globe. Primary among the recently announced stimulus plans was the Federal Reserve’s QE3 or as some in the market have called it, QE infinity. Philip Klapwijk of GFMS said that, for the gold market, “QE3 has become talismanic”.

The Federal Reserve said it would purchase $40 billion a month in mortgage-backed securities indefinitely. In addition, the Fed will continue Operation Twist – the buying of longer-dated U.S. treasury notes and bonds. When all is totaled, the market is looking at about $85 billion a month in government bond purchases for an unlimited period of time.

The main characteristic of QE3 that drives the gold market is the fact that the open-ended purchases of all of these Treasuries will be financed by money that does not yet exist! And it’s not just about a fear of future inflation being ignited by all this money creation. It’s a very logical move higher by gold based on recent history of Fed actions and gold prices.

Even ignoring Operation Twist, the Fed will add $40 billion a month, or $480 billion a year, to its balance sheet. If one looks at the Fed’s own website, you will see that it shows current assets of $2.8 trillion. Add $480 billion annually to that and in about five years the Fed’s assets (the foundation of the money supply) will have nearly doubled.

That is exactly what happened in the last five years too…the Fed’s assets doubled. And in what should not be a surprise to gold investors, the price of gold also doubled! For the past decade or so, gold has tracked the increase in Federal Reserve’s assets. Do not be shocked if that pattern continues over the next five or ten years too.

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Chris Vermeulen

Arab Spring and Oil Prices

Crude oil prices hit a four-month high this week on the back of rising tensions in the Middle East and North Africa and the unfortunate murder of the U.S. ambassador to Libya. Added impetus on the upside was given to oil by the announcement of more money printing (QE3) by the Federal Reserve which said it would launch an open-ended  commitment to purchase $40 billion of mortgage-backed securities monthly.

The global benchmark for oil, Brent crude oil, jumped to about $117 a barrel. It maintained its roughly $18 premium to U.S.-based WTI crude oil which was trading at $100 a barrel on a couple days ago. Non-futures investors can easily participate in the oil market through the use of exchange traded funds. The ETF which tracks Brent crude oil futures is the United States Brent Oil Fund (NYSE: BNO) and the ETF which tracks WTI crude oil futures is the United States Oil Fund (NYSE: USO).

The real story behind the story in the oil market, however, is the ongoing Arab Spring which is sweeping throughout the Middle East and North Africa, pushing aside some regimes and threatening others. The countries whose governments, such as Saudi Arabia and the other Gulf states, feel threatened by popular uprisings are where investors should put their focus.

Saudi Arabia in particular is key because it accounts for more three-quarters of the world’s spare oil production capacity. So it is very important to note that the kingdom is no longer a price ‘dove’ in OPEC as it has been for decades. It has joined Iran, Venezuela and others in being a price ‘hawk’.

The reason behind the change in attitude is simple…Arab Spring.

Like its neighbors in the Gulf region, Saudi Arabia has gone on a public spending spree to appease its restless citizens. It has sharply increased outlays on subsidies for items like food, fuel and housing in an attempt to appease its citizens. In 2011, the kingdom raised its domestic spending by $129 billion – the equivalent of more than half its oil revenues.

Much of this increased spending will go toward upgrading the country’s infrastructure. Take electricity, for example. Saudi Arabia has revealed plans to spend more than $100 billion dollars on power plants and distribution networks by 2020. The kingdom has also set a goal to electrify 500,000 new homes that are being built in an attempt to mollify political unrest among its population of 27 million people.

This spending spree led the International Monetary Fund and other analysts to estimate that the kingdom and other Gulf countries need oil to be selling between $80 and $85 a barrel in order for the governments to balance their budgets. This is up, in Saudi Arabia’s case, from a mere $25 a barrel a few short years ago!

Unfortunately for oil consumers, this trend looks set to continue in years ahead. According to the Institute of International Finance, by 2015 the Saudi government will only be able to balance its budget if oil prices are at $115 a barrel if current spending trends remain in place.

So in effect, with the Arab Spring forcing governments to spend more on their citizens, it has put a floor under the price of oil. OPEC will do everything in its power to keep the price above the budget breakeven points for governments in the Gulf region.

Keep up to speed on the oil and precious metals markets with my free newsletter: www.GoldAndOilGuy.com

Chris Vermeulen

CORN-ETF

Is the WEAT Correction Here?

Despite a good harvest, the exchange traded fund for wheat, Teucrium Wheat (NYSE: WEAT) has been rising due to the drought in the Midwest Farm belt of the United States and now the initiation of Quantiative Easing Two.

The drought did the most damage to the corn crop.  But as the chart below shows, both the WEAT and the CORN, Teucrium Corn (NYSE: CORN),the exchange traded fund for corn, rose.  However, it was not a steady rise as there were many dips.  These pullbacks were obviously from speculators cashing in and taking short term profits.

This could be the beginning of the correction for each.  There have been pullbacks since the rise in early June, but the speculative forces from the drought and now Quantitative Easing 3 have sent the prices higher.   The recent downturn could signal the correction.

What is significant about the most recent downturn is that it appears as if all speculative forces have been committed.  The impact of Quantitative Easing 3 appears to be wearing off very early.  Judging by the dip in late August for each, the effects of the drought were starting to decline about a month ago.

Wheat contracts have been falling.  Eventually the fundamental forces of basic supply and demand will be felt.  That has certainly happened any number of times along the way since early June.

Both the CORN and the WEAT reached record highs.  Each has fallen since.  Now at around $48.60, the CORN reached a year high of $52.69.  Now at $24.34, the WEAT reached the peak for the last 52 weeks at $25.35.

Like the saying goes, take the stairs up with grains and ride the elevator down.  With the effects of the drought wearing off and Quantitative Easing 3 accounted for in the price, it should react more to the fundamentals of supply and demand rather than speculative forces.

 

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USO

Will Oil Fall Again?

Due to Quantitative Easing 3, oil is now around $100 with United States Oil, (NYSE: USO), the exchange traded fund, up 16.47% for the quarter .

This is what happened over the course of Quantitative Easing 2, which was announced in August 2010 by Federal Reserve Chairman Ben Bernanke at the Jackson Hole economic policy summit and took place from November 2010 to June 2011.  Quantitative Easing 2 consisted of the Federal Reserve inflating its balance sheet to purchase $700 billion in US Treasury Bonds to finance the American budget deficit as no other buyers were willing to purchase the securities at such low interest rates.  Oil rose, but then fell due to a lack of basic economic demand.

There is much pointing to oil staying higher, except for the power of market forces in action.   Middle East OPEC nations are committed to oil at $100 a barrel to be able to pay for the domestic programs that e have been instituted to prevent an “Arab Spring” uprising in these countries.  Quantitative Easing 3 has traders selling fiat currencies and buying oil as the printing presses are running at full bore, devaluing paper assets.  The Federal Reserve’s commitment to a low interest rate policy has those oil companies with healthy dividend yields very attractive.

But the fundamental economic demanding is missing.  Economic growth is falling in the United States and China, the two biggest consumers of oil.  Europe is in a recession.  Fracking has resulted in natural gas becoming much cheaper, motivating many to focus on utilizing this fossil fuel as much as possible.  The same is also happening with coal.

Oil fell after Quantitative Easing 2.  There were strong speculative forces at play at that time, too.   At the present, the short float for United States Oil is.  A short float of 5% is considered to be troubling.  Obviously, many are betting that the fundamentals of supply and demand will triumph over speculators, as has always happened in the past; and will always take place.


 

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QE Forever Announced

What one analyst terms “Quantitative Easing Forever” was announced by the Federal Reserve today. For traders, expect the sugar high to recede as this is an admission that the United States economy is very, very weak. In addition to economic stimulus programs that will continue, a low interest rate environment will be maintained well into 2015.

The effects of quantitative easing have been less and less pronounced in the stock market. In previous Federal Reserve Open Market Committee action, it lowered its target interest rate to zero in December 2008. Quantitative Easing 1 and Quantitative Easing 2 inflated the Federal Reserve balance sheet from around $700 billion in mid-2007 to around $3 trillion now.

It is only going to get bigger. Unlike the first second rounds of quantitative easing, Quantitative Easing 3 has no ending date and few other details. Quantitative Easing 2 lasted from November 2010 through June 2011 and consisted of the Federal Reserve inflation is balance sheet to buy about $700 billion in US Treasury bonds. Like the analyst stated, it is “QE Forever.”

Traders should look to oil stocks that pay dividends as these securities are favored for a variety of factors. Quantitative easing drives up the price of oil as speculators flee fiat currencies. The low interest rate environment puts a premium on dividend paying stocks, which applies to many oil companies. Heavy spending by OPEC Nations has resulted in a target price of $100 a barrel for oil. Growth will eventually return to China, India and other major economies. All these will contribute to oil stocks with healthy dividends being very appealing.

The Australian Dollar and Brazilian Real could return to prominence. Australia needs for China to grown again for its economy to recover. Brazil was popular for the carry trade due to the high interest rates in the country.

 

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AAPL - Apple Stock Shares

Ride the iPhone 5 Wave with Sprint-Nextel

Up 2% today with the introduction of the iPhone 5 from Apple (NASDAQ: AAPL), Sprint-Nextel(NYSE: S) has more than doubled for 2012. Of great importance is that Sprint-Nextel is now over the $5 mark, which makes the stock much more attractive for a variety of factors. It was only last October that Sprint-Nextel plunged due to a disastrous press conference. Since that, the stock has soared.
Sprint-Nextel still has a lot of problems, but hooking up with Apple and the iPhones is covering many of the mistakes. This year, earnings-per-share growth has increased by 16.79%. For the next year, earnings-per-share growth for Sprint-Nextel is projected to soar by 43%.

Sprint-Nextel should continue rising thanks to the iPhone 5 wave from Apple. In addition to the strength of the Apple marketing machine with a new production introduction, the peak season for high tech stocks is approaching. Due to holiday shopping for consumer electronics, the fourth quarter is also robust. You can bet that the iPhone 5 will on the shopping list of many for this season.

While soaring in price, Sprint-Nextel is still not profitable. Even with the stock surge, the price-to-sales ratio is a very attractive 0.44. There is also plenty of cash on the balance sheet. Another bonus for the Sprint-Nextel is its attractiveness as a takeover target.

As the third largest carrier, it is the most viable as an acquisition candidate. Last year, AT&T made a run at T-Mobile USA for $39 billion. The present market capitalization for Sprint-Nextel is $15 billion, so it is cheaper and offers better service. The $15 billion would be pocket change for an Apple, Google or Samsung looking to expand its business operations.

As demonstrated by the share price rise for 2012, Sprint-Nextel has a great deal of value for individuals or companies looking for an attractive buy.

AAPL - Apple Stock Shares

AAPL – Apple Stock Shares

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Federal Reserve Ben

Federal Reserve Open Market Committee Meeting to be a Non-Event

Federal Reserve Ben

Commodity prices have risen in recent trading as speculators are banking on the Federal Reserve to announce more quantitative easing at the September 13 Federal Open Market Committee meeting.

The exchange traded fund gold, SPDR Gold Shares (NYSE: GLD), and oil, United States Oil (NYSE:  USO), have both surged since early July.  This is noteworthy as the major economies in the world, the United States and China, have declining economic growth.  Based on that, oil should be declining in price due to basic supply and demand issues.

It is likely that there will not be any major announcements or initiatives so close to the November elections.  Federal Reserve Chairman cannot be accused of doing anything to influence the election.   Every action of Bernanke can be interpreted politically as it influences the markets, and thus the American votes.

The United States economy definitely needs help.  Economic growth is falling and unemployment is rising.  Last August, for the first time in history, the United States was downgraded.  Nothing that resulted in that downgrade by Standard & Poor’s has been rectified.

That the United States needs more quantitative easing should be a bearish indictor for the markets.  But the stock market rallies upon weak economic data under the assumption that more quantitative easing will be forthcoming.   When that happened with Quantitative Easing 1 and Quantitative Easing 2, the Dow Jones Industrial Average rallied.  Due to that factor, it is doubtful is the Federal Open Market Committee meeting will result in any actions that could move the markets, and thus tilt the elections towards one party of another in November.

After the Federal Open Market Committee gathering in November,  it is likely to be a different story.

Gold and Oil ETFs

Gold and Oil ETFs

 

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