Investor Words

26 February 2008

Yen Carry Trade: (Def) A specific example of a currency carry trade, where an investor will exchange a specific amount of Japanese Yen for another currency with a higher interest rate, and then will invest the new currency in hopes of earning more interest than could have been earned with the yen.

Have you ever been dumbfounded by the plethora of terminology that accompanies our ever more innovative (and ever more distorted) global financial marketplace?

Are you just looking for a way to preserve and grow your savings for retirement without being punished for engaging in the activity of saving by the artificially-low trendsetting interest rate policies of the international central banks?

In that case, you need Investorwords.com!

This site will sort the meaning from the jargon, and guide you well in interpreting the ever-more confusing language of the increasingly leveraged, manipulated and dangerous international markets.

And, if the language still confuses you (not to mention the concepts!), just buy and hold gold or silver. You will always be OK if your investment time frame is two years or greater.

Thank You Richard in Bellingham

21 February 2008

Richard in Bellingham is a full-time investor. He authors a blog entitled "The Resourceful Bear Blog."

His bearish take on the broad markets, and his affinity for gold, are similar to my own perspective.

Richard collects and compiles several articles and links per day to illuminate the machinations of the bubble economy that we presently inhabit. He adds his own comments to spice things up.

He was sufficiently gracious to cite my article yesterday (Saville's Thesis Accords with Hunt's Thesis - Serendipitously) on my probably more than transient alliance with Steve Saville over the influence of inflation on precious metal markets.

As Richard was kind enough to refer to my work, I shall cite his also.

Visit the Resourceful Bear Blog here.

Saville's Thesis Accords with Hunt's Thesis - Serendipitously

19 February 2008

Serendipity occurs only when you're looking for something. Solely those who are seeking a particular objective will experience chance encounters with evidence which reinforces - or disconfirms - the ideas that drive their thinking.

As a present example, in today's reading, I note that Steve Saville has presented a thesis similar to my own, posted only yesterday.

At that time, on February 18, 2008, I postulated that a secular trend reversal in the 30-year "long bond" would signal a redirection of investor attention to inflation concerns, and that this in turn would drive renewed interest in precious metal mining companies.

Interestingly, Steve Saville, in a post of the same date, notes that as thirty-year treasury bond rates begin to exceed five-year treasury note rates (indicating increasing expectations of longer-term inflation), the HUI to gold ratio tends to climb - meaning that gold stocks begin to appreciate relative to the price of gold.

As you have heard me say here repeatedly, Canadian gold stocks have dramatically lagged the price of gold since 2002.

If Saville is right, that trend may now be changing.

Beginning in mid-2007, the thirty-year US treasury bond to five-year US treasury note spread began to widen dramatically. Saville asserts that the HUI to gold ratio tends to follow this trend with about a 6-month lag.

If he is right, increasing inflation expectations will be driving precious metal mining equities higher relative to the price of the commodities they produce, and possibly in the very near term.

Mr Saville's chart is below.

Be sure to read Mr. Saville's article in full here, on the Safehaven website.

Top in Long Bond Signals Shift of Investors’ Focus from Recession to Inflation

18 February 2008

I have been writing for over a year now about the weakness in Canadian gold stocks relative to gold, as signalled by the stalling S&P/TSX Global Gold Index.

This has been a paradox and source of frustration for Canadian gold stock investors, who have seen gold rise steadily (even in Canadian dollar terms) from 2001 through to the present, while Canadian gold stocks relative to the price of gold have fallen steadily since May 2002.

That is, we have now very nearly completed the sixth year in which Canadian gold stocks have dramatically underperformed the commodity that they produce.

What is taking place that can explain this paradoxical trend?

Well, there has been much talk about rising energy and production costs, and of course, the Canadian dollar has risen dramatically during this period, eroding the gains of gold in Canadian dollar terms.

But let me tell you, mining gold, even in Canada, is a more profitable proposition today, at over $900 gold, than it was in May 2002, when gold in Canada sold at $550 per ounce. While the cost of inputs has risen sharply, the ability of Canadians to purchase many of these inputs with appreciating Canadian dollars has risen as well.

Further, Canadian dollar gold was flat from late 2002 through late 2005. However, in the last quarter of 2005, the Canadian dollar price of gold lifted off, and it has not looked back since.

To keep it simple, let me put forward a single alternative idea to explain what might be going on.

The eyes of investors have been fixed for years, if not decades, on fears of economic slowdown or recession, rather than on fears of inflation, which was the bugbear of the 1970s, but which has not “officially” returned since then. (What happened to inflation? Paul Volcker struck it down with high interest rates in the early 1980s, and globalization has kept the prices of finished products low since that time.)

As I have already written, inflation is in fact much higher than acknowledged, but the combined polities of government, banking and investment management have tacitly agreed to ignore inflation by redefining it. Governments have continually massaged cost of living indices to make it appear that inflation has remained under control, though soaring commodity prices have certainly given the lie to this shared pretence. When the costs of food and energy rose too much, they were literally removed from the cost of living indices, rather than acknowledged as signalling the return of the figurative wolf at the door.

Let me suggest that at some point, the eyes of investors must inevitably shift from the fear of recession – which by most measures, now appears to be upon us – to the fear of inflation, which has been an escalating but ignored reality since the beginning of this decade.

It is perhaps incredible that our official decision-makers and policy-makers have been able to ignore the reality of inflation for almost the entirety of the present inflation-ravaged decade.

Let me submit to you that the era of the ignorance of inflation is now drawing to a close.

For evidence, let me submit the yield on the 30-year United States Treasury bond, which recorded a multi-decade low at 4.23% only last month. The 30-year bond yield is widely acknowledged as a barometer of inflation expectations.

My suggestion – in an environment of escalating inflation, the so-called “long bond” yield can no longer continue to fall, nor can it remain at today’s record low levels.

Why is that?

Inflation drastically devalues long-term investment products, and there are few investments requiring longer-term commitment than the 30-year bond.

Where then is the yield on the bond headed?

I wish to caution you now – much higher than today’s exceedingly modest levels, and certainly into the double digits as the years unfold.

Is there a “magic number” to watch for?

I can assure you, such knowledge is beyond my ken. But I defer to Pamela and Mary Anne Aden on this point, as they have computed leading indicators and other technical measures which signal a possible reversal in the long bond yield.

The Adens’ calculations result in a figure of 4.78% for the yield on the 30-year US Treasury Bond. A move of the long bond yield above this level, provided rates remain higher than 4.78% going forward, may signal a reversal in the 28-year downtrend that has defined the long bond yield since 1980.

In my view, this reversal, if it occurs in the near future, will signal a very dramatic psychological shift.

For 28 years – almost three decades – investors have concerned themselves primarily with rates of economic growth, and markets have risen and fallen mostly in accord with expectations of accelerating or decelerating economic growth.

I propose that this pattern is now readying itself for a secular (or very long-term) change. Underlying this shift is a continued dramatic increase in monetary inflation, as illustrated by the chart of estimated US "M3" money supply growth below.

Yes, you have read the chart correctly. In four short years, from 2004 through 2008, the number of circulating US dollars has risen from $9 trillion to $13 trillion - almost a 50% increase in a 4-year period - an unimaginable $4 trillion boost in US funds in circulation in little more than the blink of an eye.

I submit that for the next 28 years, we are more likely to focus our concern on rising levels of monetary and associated price inflation, a reality which erodes the value of all investments, save one – the price of precious metals, which reliably rise in an inflationary economic environment. (Collectibles in some cases are also a hedge in such conditions.)

Watch the 30-year United States Treasury Bond yield. If it moves and holds above 4.78%, the era of primary concern with economic growth – and recession – has perhaps come to an end.

With this shift in the long bond yield, from reaching a record low only last month to (possibly very soon) grinding relentlessly higher for years to come, another era of concern with rising inflation, and its manifold disruptive economic impacts, will likely begin. (Note that the inverse of the yield, the long bond price, reached a record high of 122.81 in a dramatic island reversal top on January 23, 2008, as recently noted by Clive Maund.)

I submit to you, the era of inflationary concern is with us now, making concerns about both economic growth and recession of secondary importance for years if not decades to come.

Along with this shift, I expect heightened interest in precious metal investing – and correspondingly amplified interest in the mining companies – which, at great cost over many years, and against nearly-insurmountable obstacles, produce the precious metals which represent financial security in an inflationary age.

If I am correct, a reversal in the almost three-decade downtrend in the 30-year US Treasury Bond yield at 4.78% will also signal a shift of focus of investment markets to the precious metals and the precious metal mining companies.

The implication of this shift is that the 6-year drift in the relative value of Canadian precious metal mining companies may also soon be nearing an end. That is, the Canadian precious metal miners may before long be accorded that value they deserve against a background of a long-term “mega” uptrend in the value of the precious metals (specifically gold and silver).

Time will of course tell if I am correct in this assertion.

In the interim, I shall proceed to act as though the shifts in trend which I have described here are already in motion.

My First Compliment from Fleck

9 February 2008

Bill Fleckenstein is the perhaps soon to be bestselling author of the recent book on the follies of Alan Greenspan during his tenure as Chairman of the US Federal Reserve Board: Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve.

Mr. Fleckenstein is known to his followers as "Fleck." I have subscribed to his site for years. As far as I can tell, Fleck is a contrarian by nature - in fact, down to his sinew and bone. He simply thinks for himself, and he is very rarely impressed.

Fleck invites questions and comments from his readers, but he does not hesitate to let us know when we are simply annoying him with foolish questions and statements which should first have been considered more thoughtfully, and perhaps then never stated.

So why am I mentioning this today?

Well, after over 5 years of reading Mr. Fleckenstein, and perhaps e-mailing several dozen missives to him - perhaps more - I have just received my first compliment.

Let me tell you, when Fleck recognizes you, you will feel worthy. It is not that easy to win his favour (just consider the plight of Mr. Greenspan, who has certainly garnered Fleck's vituperation!).

So, without further ado, please allow me to announce to you my first compliment from Fleck.

My statement, which closely parallels my previous blog entry, is followed by Fleck's reply:

Fleck,

Re: Canadian dollars. I'm not a currency trader, but I am a Canadian. I think the present currency trends are pretty clear.

The commodity currencies are down on the recession trade.

The (low interest) carry trade currencies are up, more or less for the same reason (unwinding of the carry trade).

A look at XJY and XSF pretty well sums it up. I'm happy to hold my recently appreciated Canadian dollars (though the SPTGD has been horrible due in part to the currency trend), but if I were Swiss or Japanese now, I wouldn't buy Canadian dollars so long as recession fears are driving the market.

Once the focus is (finally) on inflation, Canadian dollars and the other resource currencies should have their next leg up, along with the precious metals. But inflation has been raging for years and nobody has noticed. So how long does that take? Might be a while....

• (Fleck replies:) "Excellent points-- I hadn't thought of that... may explain Thursday's weird action in those currencies..."

Fleck has spoken. I am humbled to have gained his recognition.

For more Fleck for yourself, subscribe here.

And beware, Helicopter Ben may be the next to incur Mr. Fleckenstein's wrath!

Here is a list of my blog entries concerning the Swiss Franc:

1. Canadians, Buy the Swiss Franc Now!

2. The Swiss Franc Continues To Climb in Canadian Dollars.

3. My first compliment from Fleck.

4. Currencies 101.

5. Another Swiss Franc Buying Opportunity for Canadians.

6. All You Need To Know About Global Money Supply in One Place.

7. The Swiss Franc Is Still Strong.

8. Use "FXF" (CurrencyShares Swiss Franc Trust) To Buy the Swiss Franc.

9. Gold is Better Than the Swiss Franc.

10. Swiss Franc Alert.

11. Gold Isn't Gaining All That Much... In Canadian Dollars!

Addendum: Many visitors to this site have enquired about how to purchase the Swiss Franc. The most direct method is simply to purchase Swiss Francs from a currency dealer. In Canada, Custom House Currency Exchange offers competitive rates. You may also wish to contact your broker about an exchange-traded fund or a Swiss Franc government bond (which would pay interest on your investment, but could be subject to decline in value even if the currency itself rises relative to other currencies). Additionally, some banks permit investors to maintain foreign currency accounts. Sophisticated investors may wish to enter this trade through purchasing futures contracts or other types of options, such as calls. Many brokers specialize in foreign currency purchases, so I suggest that you start with a broker familiar to you. As I understand it, Pamela and Mary Anne Aden at Aden Research, for example, will execute foreign currency trades for their customers. But for those who don't know how, simply purchasing the currency from a competitive currency trader (possibly your local bank, or a trader recommended by your bank) will be a good place to get started. Ideally the "spread" between the buy and ask price for the currency should be less than 4 cents on the dollar (roughly 4%). That is, you should not pay a premium of greater than 2% to purchase the currency. This being said, my own experience with currency dealers is that it is very difficult to exchange currencies in this idealized range. Our local broker's rates are much higher, for example. Never exchange currencies in large amounts at airports, hotels and other locations that are charging large premiums to provide a convenience service to travellers. Look for the best rates any time you exchange currencies!

August 5, 2008: As currency purchases at fair exchange rates are extremely difficult to obtain, I am now recommending that mainstream investors simply purchase the FXF exchange traded notes, "CurrencyShares Swiss Franc Trust" (denominated in US dollars) through their broker. This exchange traded note uses the interest on its deposits to cover the management fees of the fund, with the result that you will receive modest interest income via this method.

Note (9 August 2008): Most global currencies happen to be weak against the US dollar right now, as the US market is presently driven by the fantasy that the US government's now $800 billion rescue of the financial system by "nationalizing" the government sponsored enterprises (Fannie Mae and Freddie Mac) and using taxpayer money to guarantee worthless bank assets will make everything "all right again." That fantasy will persist for a season, and then it will fade, as all fantasies do.

In the meantime, the Swiss Franc may not have bottomed for US investors. However, I note that the Franc is holding up fine against the Canadian dollar, as both are under pressure versus the US dollar, which is presently enjoying a transient upward move due primarily to concerns about the stability of the Euro. Pamela and Mary Ann Aden advise that the market value of the Euro is presently stronger than that of the Swiss Franc. My own take is that the Swiss Franc clearly possesses superior fundamentals compared to the Euro, which relies upon the historically unproven concept of international cooperation (don't expect the cooperation of the European countries to be maintained in hard times or in crisis!).

October 11, 2008: If you're interested in Swiss Franc Government Bonds, here is a recommendation from WikiAnswers. This brief note recommends EuroPacific Capital. Its C.E.O. and Chief Global Strategist, Peter Schiff, is a long-term US dollar bear who saw the present economic meltdown coming years ago. EuroPacific Capital is a secure and well-managed company, and I can certainly vouch for the reputation of Mr. Schiff, whose articles on the mismanaged US economy I have been reading for years on Safehaven.

While I am currently recommending gold as a superior store of value to the Swiss Franc, gold trades as both a commodity and a currency, with the result that its market price is much more volatile. If you are a long-term buy-and-hold investor, gold will certainly outperform the Swiss Franc as a long-term store of value. But if you don't like $100 price moves in a day (gold has had two such moves in the past month - including only yesterday!), then holding the Swiss Franc may prove less unsettling.
_

Currencies 101

7 February 2008

I'm not a currency trader, but I am a Canadian. I think the present currency trends are pretty clear.

The commodity currencies (such as the Canadian dollar) are down on the recession trade.

The (low interest) carry trade currencies (the Swiss Franc and the Japanese Yen) are up, more or less for the same reason (the unwinding of the carry trade).

A look at the charts for the Swiss Franc (XSF) and Japanese Yen (XJY) pretty well sums it up. I'm happy to hold my recently appreciated Canadian dollars (though the Toronto Gold Index has been horrible due in part to the currency trend), but if I were Swiss or Japanese now, I wouldn't buy Canadian dollars so long as recession fears are driving the market.

Once the focus returns to inflation (no one has paid attention to inflation since Paul Volcker temporarily resolved the problem in the early 1980s), Canadian dollars and the other resource currencies should have their next leg up, along with the precious metals. But inflation has been raging for years and nobody has paid much attention so far.

So how long will it take citizens, politicians, central bankers and investors to notice that inflation is a very big problem?

If we can live surrounded by inflation for as long as we already have without recognizing it for what it is, it strikes me as entirely possible that we will be able to continue ignoring it for some additional time to come. At some point, however, it will no longer be possible to live with inflation day in and day out without discerning that it is not benign. When that time comes, I predict that our thinking will change dramatically....

For those interested in the Swiss Franc specifically, here are links for all my entries concerning the Swiss Franc:

1. Canadians, Buy the Swiss Franc Now!

2. The Swiss Franc Continues To Climb in Canadian Dollars.

3. My first compliment from Fleck.

4. Currencies 101.

5. Another Swiss Franc Buying Opportunity for Canadians.

6. All You Need To Know About Global Money Supply in One Place.

7. The Swiss Franc Is Still Strong.

8. Use "FXF" (CurrencyShares Swiss Franc Trust) To Buy the Swiss Franc.

9. Gold is Better Than the Swiss Franc.

10. Swiss Franc Alert.

11. Gold Isn't Gaining All That Much... In Canadian Dollars!

Addendum: Many visitors to this site have enquired about how to purchase the Swiss Franc. The most direct method is simply to purchase Swiss Francs from a currency dealer. In Canada, Custom House Currency Exchange offers competitive rates. You may also wish to contact your broker about an exchange-traded fund or a Swiss Franc government bond (which would pay interest on your investment, but could be subject to decline in value even if the currency itself rises relative to other currencies). Additionally, some banks permit investors to maintain foreign currency accounts. Sophisticated investors may wish to enter this trade through purchasing futures contracts or other types of options, such as calls. Many brokers specialize in foreign currency purchases, so I suggest that you start with a broker familiar to you. As I understand it, Pamela and Mary Anne Aden at Aden Research, for example, will execute foreign currency trades for their customers. But for those who don't know how, simply purchasing the currency from a competitive currency trader (possibly your local bank, or a trader recommended by your bank) will be a good place to get started. Ideally the "spread" between the buy and ask price for the currency should be less than 4 cents on the dollar (roughly 4%). That is, you should not pay a premium of greater than 2% to purchase the currency. This being said, my own experience with currency dealers is that it is very difficult to exchange currencies in this idealized range. Our local broker's rates are much higher, for example. Never exchange currencies in large amounts at airports, hotels and other locations that are charging large premiums to provide a convenience service to travellers. Look for the best rates any time you exchange currencies!

August 5, 2008: As currency purchases at fair exchange rates are extremely difficult to obtain, I am now recommending that mainstream investors simply purchase the FXF exchange traded notes, "CurrencyShares Swiss Franc Trust" (denominated in US dollars) through their broker. This exchange traded note uses the interest on its deposits to cover the management fees of the fund, with the result that you will receive modest interest income via this method.

Note (9 August 2008): Most global currencies happen to be weak against the US dollar right now, as the US market is presently driven by the fantasy that the US government's now $800 billion rescue of the financial system by "nationalizing" the government sponsored enterprises (Fannie Mae and Freddie Mac) and using taxpayer money to guarantee worthless bank assets will make everything "all right again." That fantasy will persist for a season, and then it will fade, as all fantasies do.

In the meantime, the Swiss Franc may not have bottomed for US investors. However, I note that the Franc is holding up fine against the Canadian dollar, as both are under pressure versus the US dollar, which is presently enjoying a transient upward move due primarily to concerns about the stability of the Euro. Pamela and Mary Ann Aden advise that the market value of the Euro is presently stronger than that of the Swiss Franc. My own take is that the Swiss Franc clearly possesses superior fundamentals compared to the Euro, which relies upon the historically unproven concept of international cooperation (don't expect the cooperation of the European countries to be maintained in hard times or in crisis!).

October 11, 2008: If you're interested in Swiss Franc Government Bonds, here is a recommendation from WikiAnswers. This brief note recommends EuroPacific Capital. Its C.E.O. and Chief Global Strategist, Peter Schiff, is a long-term US dollar bear who saw the present economic meltdown coming years ago. EuroPacific Capital is a secure and well-managed company, and I can certainly vouch for the reputation of Mr. Schiff, whose articles on the mismanaged US economy I have been reading for years on Safehaven.

While I am currently recommending gold as a superior store of value to the Swiss Franc, gold trades as both a commodity and a currency, with the result that its market price is much more volatile. If you are a long-term buy-and-hold investor, gold will certainly outperform the Swiss Franc as a long-term store of value. But if you don't like $100 price moves in a day (gold has had two such moves in the past month - including only yesterday!), then holding the Swiss Franc may prove less unsettling.
_

Gold Charts from 1980 to the Present – and Everything Else

3 February 2008, updated 29 July 2008

I have learned from Sitemeter that many visitors to my site are looking for specific financial charts - most commonly, gold price charts from 1980 through the present.

For those searching out such information, let me recommend the gold standard of charting services, if you will, Stockcharts.com.

Many charts are free, and you can create more detailed and larger charts of your own design by joining and paying a reasonable annual membership fee.

Stockcharts.com doesn't do everything. For example, inflation-adjusted charts are not available. But Financial Sense Online has much of this information. In particular, look for the work of John Williams on this site. Mr. Williams also operates his own site (Shadow Government Statistics), where you will find alternative analyses for economic data of all kinds.

For gold, silver and precious metals charts in particular, Kitco.com is clearly the definitive place to go.

For hard commodities, you won't go wrong with Mineweb, as this Uranium chart page illustrates.

For current futures price quotations, including currencies, metals, energy products and the agricultural commodities, be sure to visit TradingCharts.com.

By the way, an old favourite "everything at a glance" site for energy price trends is WTRG Economics.

If you are looking for innovative analytical charts (as illustrated above), then be sure to visit Adam Hamilton's site, at Zeal Speculation and Investment.

And, last but not least, don't miss Michael Hodges' "America's Total Debt Report" for one-of-a-kind charts on the incredibly indebted condition of the United States relative to virtually all of the world's other leading nations.

Happy charting!
_