Ocean Full of Money

February 1, 2008

Chris Mack, a Silver Association founder and former News Correspondent for the Free Market News Network has launched an investment Newsletter, entitled the Mack Report, which focuses on the energy, gold, silver, agriculture and emerging markets. Mack commented, “Given today’s challenging market conditions, it’s important for investors to consider both macro-economic trends and specific company research. My goal is to create value by enabling readers to find investment opportunities.” Mack sees enormous opportunities in commodities and emerging markets over the next decade even though he expects that they will succumb to some large corrections in a much larger bull market.

In 2005, Mack became a founding member of the grassroots Silver Association that fought for the launching of the first silver ETF in the US known as the iShares Silver Trust (SLV). More than 2000 investors signed a petition that was presented to the SEC, and the silver trust was later launched in 2006.

Early in his career, Mack worked with Nobel laureate Herbert Simon at Carnegie Mellon University, where he conducted research in artificial neural networks that predict time series of stock market patterns. He was greatly influenced by Mr. Simon’s views on behavioral economics and cognitive psychology in decision-making. Mack looks for the patterns that he studied in order to better understand economics, human behavior, technology and other fields.

After receiving a degree in economics and artificial intelligence at Carnegie Mellon University, Mack worked as a software engineer and consultant to a number of different organizations ranging from startup companies to large corporations such as IBM and Lockheed Martin. Mack joined FMNN as a news correspondent in 2004. Since then, he has also worked for several large investment banks such as Morgan Stanley, Goldman Sachs, and JP Morgan Chase.

Click here to read the February 1st Mack Report for Free.

Despite selling record levels, over 20 percent of its reserves, of gold during the months of March and April, spain continued selling more than 18 tons of gold during the month of May.  The Minister of the Economy Pedro Soldes has commented that the reason for the large amount of sales is to keep the reserves profitable. The latest Reserve Assets Report has reported that Spain has currently sold with over 25 percent and of its gold assets.

Last Wednesday, Partido Popular Sen. Javier Sánchez Simón queried Economy Minister Pedro Solbes regarding the regulatory body’s reasons for the March and April gold sales. Solbes’ response was that “the intention with selling gold, an unprofitable asset, is to convert it to fixed-income bonds, which are profitable.” Solbes added, “Based on this legal framework, the Bank of Spain has carried out a strengthening process of its equity situation, attempting to improve the profitability of its assets.”

“Gold is no longer profitable,” Solbes stated.

Many analysts believe that gold currently trading around $660 dollars an ounce could reach highs of over $2000 dollars per ounce.  Back in the 1980s gold traded up to $860 per ounce equivalent to $2000 dollars in 2006 dollars.  With the decoupeling of the majority of the worlds currency from gold and silver and inflation ever increasing investors are seeking the safety and security of the precious metals (gold and silver) to hedge against inflation.

Gold is a monetary asset and was in fact the foundation of national currencies, together with silver, until the central banks started decoupling the currencies from the metals. Nevertheless, gold still has a great deal of importance, as shown in 1980; at that time it managed to trade close to $860, which would equal about $2,000 in 2006 dollars.

A gold commodity report last year issued by Credit Agricole’s British bank Cheuvreux indeed pointed to the possibility of a $2,000/oz. price, given that gold serves as an “early crisis alert” and that currently “there is a 700-ton deficit of supply versus demand.” The report believes that actual central bank reserves could be around 10,000 to 15,000 tons less than the 31,000 acknowledged that year.

In 1999, 14 European central banks plus the European Central Bank signed the Central Bank Gold Agreement, in which they agreed to limit overall gold sales to 400 tons per year. When the agreement expired in 2004, the agreement was altered before it was renewed, allowing an increase of the yearly maximum sales amount from 400 to 500 tons among the 15 central banks.

Sales for 2006 have soared to over 390 tons, many believe that the central banks may once again increase their sales levels to the 500-ton maximum.

While many central banks continue to sell off the hard assets that support thier paper currency Russia the 5th largest producer of gold in the world purchased its entire 2006 production to store in its nation’s central bank this was a 66% increase year over year. 

Many insiders report that China is also purchasing its own production of gold and silver to store inside its central bank.

Kuwait unpegged its currency from the US dollar this Sunday switching to currency basket mechanism.  This act staves off plans for a currency union with other Gulf Arab oil producers.  Kuwait’s central bank, which always quickly defended the dollar peg, said the dollar’s decline against other currencies forced the bank to take action to control the cost of imports from inflation. 

Saudia Arabia, Oman, and Bahrain have said that they would stand by their pegs. 

“The massive decline in the dollar’s exchange rate against main currencies … has contributed to the increase in local inflation rates and this step is part of the central bank’s efforts to curb inflationary pressure,” Sheikh Salem Abdul-Aziz al-Sabah said in a statement carried by state news agency KUNA.

“At the Central Bank of Oman we did not know about this,” the bank’s Executive President Hamood Sangour al-Zadjali told Reuters by telephone from Muscat.

“There was a position by the leaders of all Gulf countries to remain pegged to the dollar and we have abided by that decision,” he said.

Kuwait’s central bank governor said his country was still committed to monetary union and was only acting in the “national interest” to contain inflation.

“Until the completion of all the requirements to achieve the currency union and the launch of the Gulf currency, the Central Bank of Kuwait will continue to adopt the basket system.”

As the dollar declined the Kuwait inflation continued to rise until it reached 5.15 percent at the end of the first quarter.

This week China’s economic policy has undergone a very large change. Interestingly, western media outlets didn’t pick up on this story. It appears that China is getting serious about reining in the excessive stock market speculation that has plagued the country for the last five years. On Friday afternoon after the markets had closed for the week the China banking Regulatory commission announced that mainland investors would be allowed to purchase overseas equities for the first time. Many believe that this excess investment liquidity will now pour into the Hong Kong listed shares. According to Beijing’s recently modified qualified domestic institutional investors program (QDII), large Chinese commercial banks are now able to invest as much as 50% of funds in overseas stock markets where as previously they could only invest in Shanghai and Shenzhen exchanges.

The amount of money that is now free to invest outside the country is huge — literally billions of dollars. I believe that these dollars will back into China. Why not these investors understand the language and the economy already and with an economy expanding at 11% last quarter and corporate profits around 80% per year why not?

Before the lift of this ban only the wealthiest and most politically connected individuals could invest outside the country. This was defined as any other market besides Shanghai and Shenzhen exchanges. Due to the fact that Chinese citizens and corporations could not invest outside the country there existed a two-tiered market system. In fact many of the blue chip companies in China’s Mainland are also listed in Hong Kong. The reason: before the lift of this ban that was the only way for the companies to recruit foreign capital. This has created huge market inefficiencies. For example, Share prices of some companies in Shanghai are quoted at prices 50% higher and even twice the price of the exact same company listed in Hong Kong.

The Banco de Espana’s holdings of foreign currencies and gold have fallen to €13.2bn (£9.02bn), equivalent to 12 days of imports.  Over the last two months banco De Espana has sold of over 80 tonnes of gold.  This massive sell off has flooded the world markets with enough bullion to stop the usual spring rally and contribute to the current fall in gold prices.

The bank has reduced its holdings of other foreign Treasuries and investments at a similiar rate as well.  The total reserves for the bank are now at two-thirds thier level of €41.5bn in early 2002.

Banco de Espana refused to comment on its assest sell-off or its future plans for financial holdings.

Alberto Mattelan, an economist at Inverseguros in Madrid believes that the sell-off could be due to the bank trying to finance the current account deficit with over 9.6% of GDP.

“Where this gets serious is if there is a property collapse in Spain and the banks get into trouble,” said Prof Tim Congdon, an expert on monetary policy.  Housing is running hot in Spain with over 17% of the GDP from construction alone.

Debts are piling up in the private sector as well. Corporate borrowing is 100% of GDP.  And total private sector foreign debts have now reached $600bn (£300bn).

The Spanish economy has grown over 4% in the first quarter of the year and the budget surplus is 1.8% of GDP providing some relief from the precarious situation the country has put itself.

China intends to provide about $20 billion in infrastructure and trade financing to Africa during the next three years.  This pledge is more in one bid than most of Africa’s biggest donor provide.  China has recently hosted the AfDb meeting in Shanghai.  The effort of the meeting is to further strengthen ties with Africa in order for the country to continue its pursuit of oil and mineral resources to fuel its booming economy. 

While grants, loans, and gifts to Africa from Europe, the US, and Japan are still more than China’s pledge are usually based on requirements and don’t often the requirements on Africa are failed to be met and then the money tends to disappear.

 According to Mr. Kaberuka, China’s willing to lend money on demand, when it suits China’s interest particularly to nations that have little to no credit.  These deals usually go through China’s Exim bank that provides funding in various forms for direct commodity export deals.  Recently Exim bank provided funding to Angola for oil export directly to China.

Other nations that provide financial resources to China are concerned about the possibility of further debt pileup leading to massive write-offs.  Most recently AfDB wrote off $50 billion in African debt. 

Most recently the Chairman of Exim Bank said: ‘Yes, debt sustainability is important but development sustainability is what we are after.’

Two of my close friends are generous and giving people, but one of them is rich and one of them is relatively poor.  The first friend went to a state college, and the second friend went to an Ivy League college.  They both have the same career, but the second friend earns more from his job. The first friend has a family to spend money on, while the second friend is single.  Can you guess which friend is rich?

The first friend that went to a state college and has a family is a multimillionaire.  He didn’t inherit any money, win the lottery, or discover his house sits on an oil well.  He simply has the right mindset to invest his money successfully.

The second friend tries to get a confirmation that a stock is rising by waiting to buy it after it has already risen.  The rich friend buys stocks when they are headed down and when no one wants them.  His biggest investment was made in a company in bankruptcy court.  Instead of diversifying his portfolio into 30 stocks and mutual funds, he invests in 2 to 5 stocks at a time.

The rich friend has two key winning traits that make his investments consistently outperform.  First of all, he always does his thorough research and focuses on what ever he owns, creating a high level of confidence in his decisions.  Second of all, he is fearful when others are greedy and greedy when others are fearful.  In other words, when he buys a stock he knows that he is right, and he allocates a large portion of his net worth into it.

In 2001, he bought a stock called USG Corp (USG) after it had fallen from $300 a share to $16 a share.  USG Corp was in bankruptcy court and defending itself against a set of class action asbestos related lawsuits.  Shortly after he bought, the stock fell to less than $4 a share, a paper loss of 75 percent of his initial investment.  But he had done his research and knew he was right.  Instead of selling USG, he doubled down on his investment and bought many more shares near $4.  This year, USG traded as high as $121 a share, yielding him a return of over 1000 percent in 5 years.  He was able to do it because he knew what he was doing and wasn’t afraid when others were.

In the past few months, oil, gold and silver have suffered from a dramatic sell off.  Just as in the case of USG, analysts are calling for the death of energy and precious metals.  My poor friend has sold his commodity investments at a loss, and my rich friend is buying oil and precious metal investments like there is no tomorrow.

If you’ve decided to get serious about investing or speculating on commodities, you must consider trading commodities futures. Derivative trading strategies vary greatly from being safe and stable to highly leveraged and ultra-risky. Inexperienced traders can easily lose everything overnight if they aren’t careful. Nevertheless, there are several advantages to the futures markets that make them irresistible to many traders.

- Except for precious metals, futures are the only way to directly control commodities. You can buy an oil stock or mutual fund, but you are really speculating that corporate earnings will increase. Oil could rise and an oil producer could easily fall in value if for example a hurricane wipes out oil rigs.
- Futures provide the ability to use extreme amounts of leverage. You can leverage your money by 10 to 1, 20 to 1, or even more.

Here are just some of the futures brokerages that provide online trading:

Lind Waldock

XpressTrade

Ethco

Anco Futures

Once you have your account open and funded you can begin trading. Each commodity has different futures contract specifications. The specifications detail how much of the commodity is traded per contract, when the contract expires, what the margin requirements are, along with delivery details. You can find all of this information at NYMEX

A futures contract is an agreement to buy something at a future date. A margin requirement is the equivalent of paying a down payment on what you are buying. For example, instead of buying 5000 ounces of silver today you could agree to buy the silver one year in the future. You would pay a down payment on what you are buying and your price is locked in today. If the price rises by next year, you would make the difference between what you paid and what the current price is at the time. However, if the price falls, you must pay the difference.

Although contracts represent an underlying commodity, traders rarely ever actually take delivery of the commodity. 95 percent of time, traders simply close out their positions in cash before contracts expire or a delivery is made. Investors that wish to hold a long-term position either buy futures dated far into the future or they continuously roll over their positions by selling contracts for the current month and buying contracts for the next month. Open interest refers to the amount of outstanding contracts at a particular time. For silver, there are currently about 63,000 December 2006 contracts, 13,000 March 2007 contracts, and 4,500 December 2007 contracts in open interest. This means that most people are placing bets on where silver will be in December 2006.

Today, the margin requirement for buying one contract of silver is $5,400. Each contract controls 5000 ounces with a value of about $55,000. This means you get about 10 to 1 leverage. Futures contracts are listed by their expiring month and year. For example, you could buy a contract for December 2006, or March 2007, or December 2007.

Futures accounts are marked to market. Essentially that means that every day the current price of the contracts you own are compared against what you paid, and equity is either added or subtracted to your account. If the equity falls below your margin requirements, you must pay the difference. For this reason, traders must have a certain amount of cash set aside to cover any volatility in the markets.

If you don’t overextend your leverage too far and are able to cover your margin requirements, then you will likely benefit greatly from a bull market. In above example, if you bought a silver contract with 10 to 1 leverage, a single dollar move in the price of silver would nearly double your investment.

Warning: Futures can be extremely dangerous, and are not suitable for everyone. You should only trade futures with risk capital and understand that you could lose everything. The recent $6 billion dollar loss of the hedge fund Amaranth in the natural gas derivatives market is just one example of professionals losing massive amounts of risk capital. Nothing contained in the Web Site is intended to constitute investment, legal, tax, accounting or other professional advice and you should not rely on the reports, data or other information provided on or accessible through the use of the Web Site for making financial decisions. You should consult with an appropriate professional for specific advice tailored to your situation and/or to verify the accuracy of the information provided herein prior to making any investment decisions.

The recent severe correction in commodities caught many people off guard. Seasonally, September has been a positive month for most commodities, and many charts looked as if they were about to break out to the upside just before a collapse.

Prominent Wall Street analysts are calling for the end of the commodity bull market, although many were reluctant to admit that there ever was one. The heart of the argument is that an economic slowdown in the US and Asia will reduce demand for commodities. This argument has been repeatedly used to scare traders out of commodities over the last five years, yet a slowdown in demand has never materialized.

Investors must ask themselves what underlying fundamentals have changed in the last month.

Did one billion Chinese people decide they no longer want cars, refrigerators, electricity, and all the other modern technologies that we take for granted?

Did the wars in Iraq in Afghanistan suddenly end? Did North Korea and Iran decide to give up their nuclear technologies? Is the world now in an era of peace?

Did the US resolve its budget deficits and trade deficits? Will the $60 to $80 trillion of unfunded liabilities suddenly disappear?

Did the Federal Reserve stop printing more money? Is the dollar now backed by something of intrinsic value?

Did someone discover a way to print or manufacture an unlimited supply of gold, silver, copper, oil and natural gas?

Even if the US economy slows, what are the odds that it will reduce demand for commodities? Do people stop driving to work, heating their homes, and go shopping for food because the economy slows down? The truth is that commodity demand in the US is largely inelastic. And if most people aren’t buying food because they can’t afford it, you have more to worry about than the markets.

Just as two months ago, global demand for commodities continues to increase. However, prices have fallen sharply to deeply oversold conditions. The Federal Reserve is attempting to create the image that deflation is imminent, and prod traders into buying US treasuries so it can lower interest rates. And they are doing it just at the time when the risk of run away inflation is the worst it has ever been. If the housing market does indeed roll over, it will require a massive amount of monetary stimulus to keep the US economy afloat.

Every time gold has fallen through its 200 dma, with RSI near 30 it has been a great buying opportunity.

Every time silver has fallen through its 200 dma, with RSI near 30 it has been a great buying opportunity.

Oil is deeply oversold, yet still remains in its long-term upward trend.

Also Notice the RSI and Open Interest have fallen off a cliff as speculators close out their long positions and commercial firms close out their profitable short positions.

I’ve been trading stocks for a long time, but it wasn’t until after I lost an enormous amount of money that I became able to free my mind enough to relearn everything that I thought I knew. Like many others, I became a very aggressive speculator in technology stocks between 1996 and 2001 - riding them both up and down. I had very little savings at the time, yet I was able to turn about $5000 in capital to over $350,000, before I was completely wiped out in 2002.

What happened after that changed my life forever. I met another investor who was very successful. He had a modest paying job, and was in his early thirties, yet he had already accumulated a net worth of over $2 million. And most importantly, he never took the types of risks that I thought were necessary to be so successful and never bought a single technology stock. So how did he do it?

Every student in finance school across the nation is taught the efficient market theory - the theory that since everyone in the market has access to the same information a random portfolio of stocks will return just as well as any other. They are also taught that risk has a one to one relationship with reward. This implies that the more risks you take, the bigger the reward, but taking more risks isn’t profitable in the long run because stock performances will return to their mean. Essentially, if this were true anyone with outstanding returns would simply be lucky. But does this theory stand up to reality?

Warren Buffett, considered the greatest investor in the world, has compounded his investment return by an annual rate of 22 percent a year for the last 40 years, compared to an annual rate of return of about 7 percent for the Dow Jones Index. In order to learn how he did it I read How to Pick Stocks Like Warren Buffett. A $10,000 investment with Warren Buffett in 1965 would be worth $50 million today, compared to $500,000 in the S&P 500. The fact that he outperformed the markets by such a large margin for so long clearly shows that he was more than just lucky. To be that lucky would be like winning the lottery every year over and over. My friend realized this, and told me that the best way to become in expert in something is to seek out the very best experts in the world and learn from them.

Before he became the greatest, Buffett did the same thing. He sought out to study under a professor at Colombia University name Benjamin Graham, who is known to be the founding father of value investing. Graham’s book, Security Analysis sparked modern investing by showing that investments could be analyzed and compared. But his later book, The Intelligent Investor introduced Buffett along with several other students to the art of deep value investing.

When I read these books I learned that by doing research and analysis it is possible to find investment opportunities that have little risk but great rewards. Graham argued that if you buy a stock for less than its intrinsic value, you give yourself a margin of safety that greatly reduces your risk. He also explained that there is a difference between speculation and investment. When you invest, your primary goal is preserve your capital and your secondary goal is to achieve a return on that capital. Speculation puts initial capital at risk and focuses primary on trying to achieve a return. The subtle difference is that a true investor knows that he is taking little risk of loss.

Sometimes taking calculated risks makes sense, but it is crucial to know when you are speculating versus investing. In 2000, when I was trading technology companies, I made the mistake of thinking I was investing when I was really speculating. However, now I have learned that highly successful investors are able to lower their risk while they raise their returns.