Tuesday, April 21, 2015

Russia's "Can't Lose" Financial Strategy

17 February 2014 - updated 22 August & 22 December 2014; 30 January 2015; 21 April 2015

This is a legacy article, dating back to February 2014. I have been adding updates as they come available:

Here's a strategy I've thought about for a while now. This is only possible because we have abandoned the gold standard (and with it, sound money - you can talk to Ben Bernanke and Janet Yellen about that). 

Let's just say a government decided to print money out of thin air and use it to buy gold. You start with something that is an entirely artificial construct (any national currency in today's world meets this criterion) and use it to buy something that is real, scarce and irreplaceable (gold still meets THOSE criteria!). Voila, you have a "can't-lose" strategy for getting leaps and bounds ahead of everyone else. 

And... I think one country may actually be doing this (I originally commented on this a couple of years ago). Check out these two Russian charts.... 

(1) They are buying-up gold hand over fist; and 

(2) They are printing funny money like crazy (it's virtually without cost for any nation to increase their "money supply" like this today, for as long as the current insanity lasts). 

Vladimir Putin is NOT a nice guy. We all know that. But is he a smart guy? Yeah. And a wise guy, too. Perhaps a few of the rest of us should clue in... and catch up. 

Russia's gold reserves are up 150% in 7 years:

Russia's money supply is up 33% in 2 years:

I have said earlier that the Federal Reserve should have just put $10,000 in the mailbox of every US citizen (yes, they HAVE spent that much "new" money to "rescue" the still-staggering economy). This would have done MUCH more for the economy than bailing out BOTH political parties, GM, Countrywide Financial and Bank of America. 

But a better scheme even that that would have been to take the $3 trillion printed dollars (yes, they did print $3 trillion to bail out the government and the banks) and to quietly, discreetly, buy gold with it. 

Well, have no fear. Ben Bernanke gave all his money to Citibank, Fannie Mae, General Motors, and the US Congress. It's gone. 

But Vlad Putin bought gold with his "printed money." In my world, Mr. Putin is BY FAR the wiser man.

22 August 2014: While some reports show slow periods and even temporary reversals in Russia's accumulation of gold, the most recent figures from the World Gold Council show that Russia has (again) reported an increase in its official reserves since February 2014, moving its place in global national gold rankings up two additional slots. What can I say? Print money, buy gold. It's legal. Just what I don't really get is why only the Russians are doing it.... (Believe me, some day, this will no longer be allowed!)

Russia (#5 globally):
Official gold holdings:
1,094.7 tonnes

Percent of foreign reserves in gold:

Russia has increased its gold holding since February 2014 and has eclipsed both Switzerland and China. In August 2014, Russia's central bank decided to buy up even more gold and diversify away from the dollar and the euro as a result of economic sanctions imposed by the West.

Russia's central bank gold holdings crossed the 1,000-tonne mark for the first time in Q3 2013.

Source: World Gold Council

22 December 2014: While I disagree with Mr. Putin on many points, in particular, the suppression of diversity at home and my belief that Ukraine should shape its own future, the Russians continue to be cleverer than we in many respects. Despite rumours that they have been selling gold, in fact, it is US dollars that they are unloading, while (wisely) buying ever more gold.

For more information, click here.

30 January 2015: Russia's gold purchases were up 123% during the first 11 months of 2014, including the period during which the Ruble began to collapse. The Financial Times reports:

"Russia’s central bank purchased 152 tonnes of gold worth $6.1bn at today’s prices, according to GFMS estimates. Analysts also said Russia’s purchases might have been due to the buying of domestically produced gold that could not be easily sold overseas due to sanctions.

“'This is a clear positive for the gold price,' said Matthew Turner, analyst at Macquarie. 'If central banks had not purchased that gold it would have been bought by private investors or jewellery consumers, and this would likely have required a lower gold price.'

"While Russia was a strong buyer this year, analysts say purchases could slow and the country could become a seller if it continues to liquidate its reserves to support the domestic currency."

For the full story, click here.

21 April 2015: Kitco News reports that Russia has resumed gold buying following a 2-month hiatus (click here):

"After a two-month hiatus the Central Bank of the Russian Federation jump back into the gold market, demonstrating that official demand remains strong, say analysts.

"According to media reports, the Russian central bank bought 28 tonnes of gold in March, the biggest one-month purchase since September. In January the central bank sold 0.5 tonnes of gold and didn’t purchase anything in February.

"The report noted, as of April 1, Russia’s official gold reserves stood at 1,128.3 tonnes, compared to the previous level of 1,207.7 tonnes. According to data from the World Gold Council, Russia has the fifth largest gold reserves in the world (not including reserves held by the International Monetary Fund).:

Monday, January 12, 2015

Fed Bubble #3 Will Hit Canada Harder Than Bubbles #1 and #2

22 & 23 December 2014, 12 & 13 January 2015

This post refers to a well-researched article published yesterday by Sober LookIf energy prices remain near current levels, Canada's economy is in trouble.

Collapsing energy prices will be the story of the year for Canada, due to our high costs of production in the oil sands sector. In the US, the primary impact of low oil prices will be on the over-leveraged, capital-intensive and high-turnover shale fracking sector. In Canada, the oil sands operations are much better-funded, but they're not economic at these prices, and we have fracking going on here, too. 

But the real Canadian story is that we have so far entirely missed the US real estate correction (due to riding the commodity boom), but the turndown in oil prices is going to hit Canada's real estate market very hard. 

While our energy sector is much less leveraged than in the US, our housing sector is clearly vulnerable. Our household debt load has doubled as a percentage of income since 1990. 

Canadians are now also borrowing more than Americans, which would not be a good sign at the best of times:

The collapsing oil price is thus emerging as Canada's biggest economic setback in decades (and the natural gas business is no better).

By the way, one statistic really caught my eye. I have been commenting for as long as I can remember that we keep our local construction workers busy full-time without building any new houses. In fact, I have been on the mark. Canada has been involved in a renovation boom for years (see story and chart). Falling energy prices will impact that, too, and it's likely that real estate prices have already peaked, given how fast the rig count is dropping in the oil patch. 

Now... will this be the crisis that triggers a resurgence in gold? Well, Mr. al-Naimi just announced that the Saudis don't care if oil falls to $20/barrel. They are obviously wishing to preserve market share, and they are fighting a battle they can win. 

Note that the Asians have been playing years ahead of us in stockpiling gold, as a hedge against bad debt and economic volatility. This trend has not reversed since 2011, when the chart below was created. 

Despite being embroiled in their own crisis situation, the Russians haven't stopped buying gold either. 

In fact, they are selling US dollars to enable their gold purchases (I would, too). 

The gold price will be leveraged if there is a credit crunch, and that appears to be what is shaping up. Once again, the crazy Americans have started another boom/bubble with the only real economic and employment growth of the past 7 years having occurred in only 5 shale fracking states. (A map of US shale-energy sites is presented below.)

And of course, everybody will pay for the Federal Reserve's latest experiment in bubble-blowing. 

What is the moral of this story? You can't print $4 trillion of funny money and not have consequences. The Fed brought on the so-called Great Recession in 2008 --- arguably a depression, which has so far been masked by moneyprinting and borrowing, but it has not gone away. 

The chart below shows that the Federal Reserve has recently accumulated $4 trillion in assets, purchased with printed money, that it cannot sell without creating irreparable market dislocations.

Booms are not the same thing as economic growth. Rather, they are temporary and unsustainable events caused by economic central planners who believe that moneyprinting stimulates the economy. However, moneyprinting always results in malinvestment, which results in transient booms that ALWAYS go bust with real capital loss. 

Only saving, combined with capital investment for the long-term, produces growth, whereas stimulating borrowing and debt (the strategy used by economic central planners since 1987) always fails. 

As evidence of the current "boom" dynamics, Peter Schiff points out that the number of energy workers in the US has doubled in the past decade.... Let's call this the "stealth bubble," because most of us don't see its direct evidence. Mr. Schiff believes that other bubbles will be unmasked by the collapse of the US energy bubble: Could An Energy Bust Trigger QE4?

In the chart below, we see how decades of Federal Reserve bubble-blowing has decimated US breadwinner jobs.

If you want to know more about how Fed bubble #3 is unfolding (with the usual dire consequences), David Stockman has summarized it here: The Fracturing Energy Bubble Is the New Housing Crash

Here, we see that Federal reserve intervention has added to jobs only in the least stable and lowest wage sectors.

And for a little more digging into risky energy finance, have a look at John Mauldin's recent review, here (though I disagree with his speculation that we've outgrown our need for jobs --- rather, Fed-induced malinvestment keeps killing them): Oil, Employment, and Growth

Combined with the above charts, it is evident that the latest boom has led to the creation of only low wage jobs (above) and speculatively-financed carbon energy sector jobs in only 5 states (below).

It's also worth noting that there is presently $173 billion in US energy junk ("high yield") debt presently outstanding, and that it is dragging other debt markets down with it. This is the part of retrenchment with the greatest implications for the economy as a whole. Read more here: U.S. shale junk debt tumbles amid oil crunch.

As would be expected, the Canadian energy sector is under severe pressure as well, as summarized here: Canadian energy firms hit the alarm bells.

The article linked at the start of this post is brief, full of charts, easy to read, and sobering. If I'm right, the energy sector will remain weak until the vulnerable players get taken out of the game. It is bad debt that will eventually force interest rates higher, whether our central planners wish for rates to go that way or not. 

On the upside for Canada, which has more mining companies than all other countries in the world combined, the fallout in bad debt from the collapse in the carbon energy sector could be counterbalanced to some degree by a resurgence in the gold mining sector, which will certainly benefit the region where I live (Northwest Ontario). 

Keep watching, and look out! The oil price collapse seems quickly to be unmasking Fed bubble #3, as far as I can tell from here. 

When do the bubbles and booms stop? When the central planners stop intervening by printing money and "stimulating" borrowing and debt in the absence of viable targets for investment. 

Where should the investment be coming from? 

Savings, not borrowing. 

What should we be investing in, instead of booms and bubbles?

Let the market decide --- without intervention by central planners.


23 December 2014: Here are some US oil statistics from Wikipedia. 

Oil products constitute 7.6% of exports and 14% of imports. The U.S. is the world's largest producer of oil and natural gas. It is the second-largest trading nation in the world as well as the world's second largest manufacturer, representing a fifth of the global manufacturing output. 

The United States is the second largest energy consumer in total use. The U.S. ranks seventh in energy consumption per-capita after Canada and a number of other countries. The majority of this energy is derived from fossil fuels: in 2005, it was estimated that 40% of the nation's energy came from petroleum, 23% from coal, and 23% from natural gas. Nuclear power supplied 8.4% and renewable energy supplied 6.8%, which was mainly from hydroelectric dams although other renewables are included.

American dependence on oil imports grew from 24% in 1970 to 65% by the end of 2005. Transportation has the highest consumption rates, accounting for approximately 68.9% of the oil used in the United States in 2006, and 55% of oil use worldwide as documented in the Hirsch report.

In 2013, the United States imported 2,808 million barrels of crude oil, compared to 3,377 million barrels in 2010. While the U.S. is the largest importer of fuel, the Wall Street Journal reported in 2011 that the country was about to become a net fuel exporter for the first time in 62 years. The paper reported expectations that this would continue until 2020. In fact, petroleum was the major export from the country by 2011.

For some Canadian petroleum statistics, please click here

12-13 January 2015: Arthur Berman offers an insider's view on the economics of shale oil. He clarifies that the real breakeven cost in shale oil is $85, and that a $90 crude oil price is needed to make shale investable. A very strong argument can be made that shale investment "happened too soon" due to central bank intervention and bubble creation. Mr. Berman's article is here

Mohamed El-Erian explains why "this time is different" here. To be honest, central bank intervention always makes everything different... and worse. Remember: a boom is not growth. It's that simple. Booms are driven by debt and speculation, whereas growth is driven by redeployment of savings and long-term consideration of investment returns under all circumstances.

Jeff Gundlach reiterates the warning hereGundlach, who correctly predicted government bond yields would plunge in 2014, said on his annual outlook webcast that 35 percent of Standard & Poor's capital expenditures comes from the energy sector and if oil remains around the $45-plus level or drops further, growth in capital expenditures could likely "fall to zero." Gundlach, the co-founder of Los Angeles-based DoubleLine, which oversees $64 billion in assets, noted that "all of the job growth in the (economic) recovery can be attributed to the shale renaissance." He added that if low oil prices remain, the U.S. could see a wave of bankruptcies from some leveraged energy companies.

Wednesday, December 10, 2014

A Three Stage Gold Bull Market?

27 December 2005, 16 April & 9 May 2010; 10 December 2014

This is a legacy article from 2005 which I though might be interesting to update and republish. Here, for your interest, is the original text, followed by today's update at the end:

I was reading the most recent issue of Fortune Magazine last night, and what should be on the cover but bars of gold bullion? As you might imagine, Gold is now on Fortune’s top 25 list of recommended investments for 2006.

There is presently much discussion among precious metals analysts as to whether we have entered “stage two” of gold’s bull market, which is expected to be marked by increased mainstream interest in gold investment. I will attempt to show here, in accord with one of my mentors, Ed Bugos (http://www.goldenbar.com/
), that despite increasing public interest, we remain in “stage one” of the gold bull market, though I believe stage two is fast approaching.

Bull markets are generally presumed to evolve through three stages. In the first stage, astute individuals who are alert to emerging trends often experience considerable gains while their area of investment interest remains "under the radar."

In stage two, the general public and the professional investment community develop increasing interest in the emerging opportunities in a particular field of investment. In my understanding, stage two is typically characterized by increased risk, as a later stage pullback can erase the gains of new investors, and restore investment values to levels somewhere between the peak and the (typically lower) close of stage one. This is significant, as some early investors may sell out to new investors at or near the stage two peak, and new investors tend to become discouraged with the new bull market after a dramatic pullback has erased their gains.

Strikingly, just at the point where the general public and the broader investment community (including the majority of professional advisors) become most disillusioned with the now maturing bull market, stage three typically begins. Once again, the early investors, who have a clearly thought-through rationale for their investment preferences, are those most likely to benefit by the third, and most dramatic bull market stage, which is one of parabolic growth over a relatively short period of time.

I can think of two excellent illustrations of these three bull market stages. The first is the gold bull market of the 1970’s, which ended in a dramatic 1980 peak with gold values over $800 per ounce.

NOTE: All three charts originated by Mary Ann and Pamela Aden (http://www.adenforecast.com/). Readers are advised to visit their excellent website for fuller understanding.

In stage one, gold values began drifting up from $35 per ounce, where they had been fixed by international accord through 1968. In 1971, President Nixon removed the US dollar from the gold standard, thereby fully opening up the value of gold to market pricing, which saw gold’s advance to about $120 per ounce in 1973. Stage one closed when gold pulled back modestly to about $100 later that year.

Stage two of the gold bull market was associated with the return of private ownership of gold to US citizens in 1974. The gold price moved up rapidly, almost to $200 by 1975, drawing in increasing public interest. But, as is characteristic of bull markets in their second stage, gold’s price then pulled back to the $100 per ounce range, thereby erasing the gains of new investors, but preserving the gains of the early investors.

As is typically the case in bull markets, this second stage collapse actually set the stage for the stage three parabolic move upwards in gold’s value to over $800 per ounce.

By 1980, with gold nearing its peak values, market fundamentals changed, and the wisest of investors sold their holdings of gold in recognition of the changed fundamental situation. (The best known of these is Jim Sinclair: http://www.jsmineset.com/).

The particular development in 1980 was that Paul Volcker was appointed to chair the US Federal Reserve Board. Volcker steadily raised interest rates to wrestle inflation to the floor, ushering in a 21-year secular bear market in gold. Oblivious to these fundamental changes, many members of the public were by this point anticipating near-infinite gains in the value of gold, and steadily lost their gains (or their invested capital) due to holding their investments as the gold bull market at first precipitously, and then gradually, unwound in a 21-year downtrend, ending in 2001.

My second example of a three stage bull market is the recently concluded “technology bubble.” The three stages are well-illustrated in a study of the shares of Dell Computer. Dell’s stage one accumulative phase continued through the end of 1992, at which point the price (in contemporary post-split terms) had risen from mere pennies to 78 cents a share, creating dramatic gains for early holders. However, stage one concluded with a pullback to 22 cents per share in 1993.

This laid the foundation for the stage two rise to $1.54 per share in late 1995, essentially doubling the gains of early stage one investors, and increasing the holdings of early stage two investors sixfold.

However, Dell’s share value then collapsed dramatically by over 50% to 72 cents per share that same year, essentially erasing all of the share value gains from the 1992 peak through to 1995 – a discouraging three-year period of non-performance.

This wrenching late stage two pullback, once again, set the stage for a dramatic stage three bull market move for Dell. From its 1995 low of 72 cents, Dell never looked back until 2000, at which point it had attained a value of $59.69 per share, confirming the wisdom of the longer term investors who had correctly perceived (or luckily discovered) that Dell had entered its stage three bull market phase.

Note that the shares of Dell are now unwinding, as did the value of gold after 1980, and that, in my opinion, Dell’s shares have much more to lose before its “secular” bear market is done. Dell had collapsed to the $16 range shortly after its 2000 bull market peak. It since recovered to a $42.57 high in late 2004, but in my view will be facing a long downward slope for many years to come as the investment community gradually recognizes that computer hardware has become a “commodity” in an emerging globalized economy (that is, fundamental factors have again brought an end to a dramatic and exciting bull market).

Looking back to the 1970’s gold bull market, and its subsequent 1980-2001 bear market decline, it strikes me that bear markets may be characterized by three stages as well. The bear market pullback may appear less dramatic in terms of the currency value of shares, due to the persistent eroding background interference of monetary inflation, which, by matter of government policy, steadily undermines the purchasing power of all money.

In my view, the 1980-82 gold market decline would constitute stage one of the bear market, pulling the price back inside the long-term channel of gold’s appreciating value in terms of a steadily inflating currency; then 1982-93 constituted stage two, returning the price to the middle of the channel defining gold’s value in terms of an inflating currency; and 1993-2001 constitutes stage three of the bear market, bringing the price of gold to a 21 year channel bottom, and preparing the stage for the present gold bull market.

Given that the length of gold’s recent (1980-2001) bear market was almost twice as long as its 12-year 1968-1980 bull market, I now suspect that we may be seeing a much longer and more gradual, but ultimately more powerful gold bull market than in the 1970’s.

Chart analysis shows that we have not yet attained even gold’s long-term mid-channel values (presently in the $600 per ounce range), and there is still the move to the top of the channel to anticipate (stage two), as well as a possible parabolic move above the channel to culminate stage three of the present gold bull market.

The background to my speculation that the present gold bull market will be lengthier and more powerful than the 1970’s bull market is due in large part to the fact that the value of gold mining company shares steadily weakened against the value of gold from the date of the initial free market trading of gold (1968) through 1980.

In the present gold bull market, gold mining company shares have appreciated strongly relative to the value of gold, obviously due to the fact that their relative value remains, even now, in a 36-year downtrend.

I find it difficult to countenance that the value of gold shares relative to gold will not break out of their present 36-year downtrend channel during the present gold bull market

Any breakout in share values above this channel top (we are now very near this point) will almost certainly see an end-of-stage-one pullback to the upper line of the (gold share relative value) downtrend channel, possibly on a strong move in gold, though possibly also due to short-term renewed weakness in the gold mining shares due to a range of very real fundamental issues, including inflating production costs, political risk, and questions about demand for gold at higher prices (by the way, don't worry about this latter issue – if any currency were climbing in value, would people wish to own more or less of it?).

On the upside, resistance to gold shares’ continued upward movement will be set by their 1993, 1973 and 1969 highs, respectively.) The time to sell gold shares and diversify into other investments would be at the time that the 1969 ratio high is reattained, very likely a decade or two in the future, if not longer. By then, equities, bonds or some other class of investment (perhaps real estate) would likely have returned to attractive values.

As I am working with a conceptual model which indicates that the present bull market in gold and gold shares could last much longer than the 1970’s “flash in the pan” gold bull market, I suggest that we could anticipate 20 or even 30 more years of strength in gold mining shares relative to gold. Bear in mind that only 4 years have been logged so far. Of course, there will be many surges up and down along the way. But a 20 to 30-year buy and hold strategy in gold mining shares would seem to be a workable choice in this market, even allowing for the likelihood that there will be a substantial correction at the end of stage one (if it has not already concluded), and an even greater, perhaps 50% correction, at the close of stage two.

So if we are not yet in stage two in this bull market, where are we? I suggest that we probably are moving quite near to the end of stage one, which I expect to conclude with gold values in the $600 per ounce range.

However, stage one is also likely to conclude with a greater correction in the price of gold than we have seen so far (that is, closer to a 20% - or greater - correction than to a 10% correction). The associated correction in gold shares may be more modest, and is more likely to follow the gold shares’ breakout from their 36-year downtrend than to precede that breakout move.

Psychologically, while Fortune Magazine’s cover certainly signals awakening public interest in the gold market, there remain several missing pieces to that puzzle as well. To begin, while gold itself has qualified as a recommended investment for 2006, no gold or precious metal mining companies have yet been named. Secondly, the analysis offered by Andy Serwer really neglects the primary driver of gold’s appreciation, which is ongoing inflation in the quantity of money in all of the world’s major currencies. I believe that a fundamental grasp of gold’s role as a hedge against deterioration in the value of money will need to be more clearly understood during stage two of the gold bull market.

I invite readers to share their thoughts and comments about gold’s three-stage bull market with me.

10 August 2008: Also - be sure to read my more recent posts on the topics of precious metals and secular trends, starting here: "Gold's 1980 High – Think $5000 - No $6000 - per Ounce."

16 April 2010: I thought this topic was important enough to revisit 5 years later. Though some details may be off to some degree (particularly my prediction that stage one would run no higher than $600 or so), the scenario I painted in 2005 has more or less come to pass. In my view, the 34% pullback in the gold price in October 2008 (from $1033.90 to $681.00) constituted the end of stage one in the present 3-stage gold bull market. The recovery in the gold price from this level since that time appears to constitute the early era of stage two, and that is where we are now.

Where then will stage two end? Pamela and Mary Anne Aden have recently proposed that the gold price is likely to see a level over $2000, perhaps as high as $3000, by February 2012 or so.

This prediction is based on a pattern of gold prices reaching peaks 11 years following major lows. The assumption is that a large pullback would follow that interim high - and then the fabled stage three would launch from the second primary pullback low.

Gold analysts generally expect stage three to be a "bubble" stage, during which the gold price will rise to unprecedented levels in an atmosphere of general panic. I have blogged earlier that the gold price can easily run to a level of $6000 or higher, depending on what happens with inflation, which of course now appears to be picking up steam.

As the chart above shows (comparing gold to previous well-established investment bubbles), there is no detectable "bubble" action in the price of gold at all so far, so it is not difficult to envision how the gold bull market could easily extend for an additional decade or so from here.

Speaking in broad brush terms, if stage two wraps up with a primary correction (that is, a major pullback) in say 2012 or 2013, then the stage three bubble high will occur some years after that. We are now of course speaking very speculatively. But if the Adens are correct in describing an 11-year pattern in gold price highs, then the bubble peak might possibly occur 11 years following the October 2008 low, that is, somewhere near the year 2019. This speculation thus projects that the present gold bull market will run approximately 18 years from 2001 through 2019 or so.

Interestingly, drawing on a separate source, Jim Rogers has recently reminded his followers that "previous commodity bull markets averaged about 17 to 18 years in length and experienced very large percentage increases." That is, the speculation that stage three of the present gold bull market might run approximately to the year 2019 is well-grounded in history.

If I have been wrong anywhere so far in my original 2005 speculations about the 3-stage gold bull market, it has been in my original assumption that gold stocks would begin to leverage the gold price early in the process.

In fact, gold stocks well outperformed gold from 2001-2003, and since that time (now almost 7 years), have dramatically underperformed gold itself, as can be seen in the chart above (and the HUI index is the best-performing of the alternative gold stock indices!).

If gold stock investors (I am one) can take any solace, then it is in the current positive trend in the price of gold stocks relative to gold since October 2008, as can be seen in the same chart. Should gold stocks continue their more recent pattern, then it is possible that we could see a new high in the HUI:Gold ratio by February 2012 or so. Given that gold exploration and mining companies (1) own gold in the ground at a substantial discount to the market price of gold itself, and (2) have established their ability to get it out of the ground efficiently, that would in fact be a rational outcome, though as all investors know, markets are under no requirement whatsoever to perform in a rational manner at any time!

(The photo above is of the new headframe at the Goldcorp Red Lake Gold Mine, in which my wife and I are investors.)

10 December 2014: I thought it might be worth commenting, this article has basically been proven correct, though the winding down of the stage two phase of the gold bull market has emerged as far more brutal and extended than I had imagined, even in my most recent previous post, in 2010. As it turns out, gold peaked at stage two in September 2011 at about $1930 per ounce, and there have since been four apparent bottoms, the most recent in the $1130 range in early November 2014. 

The recent bottom can be seen here (Stockcharts' daily closing gold prices are approximate):

Referring to the above article, a more extended and brutal downturn presages a stronger and longer rally back the other way (and higher) --- whenever it starts. (Timing is the most unknowable factor in the investing world, or "everybody" would win.) 

As has often been discussed here, gold mining stocks amplify the movements of gold in both directions, and the present downturn has been no exception. As you can see, gold mining stocks, as represented by the now "old hat" HUI Gold Bugs Index, have been slammed for over three years, and we're still searching for the bottom. I will just comment that this kind of (primary) correction cleans out ALL the nonbelievers, and even quite a few of the "faithful!" It has been horribly ugly and longlasting --- though, of course, that is what downturns are supposed to be, especially "primary corrections," as their function in the market is to clear out "weak hands," and thus to position holders for longer-term gains at very low entry prices. 

Even worse is the HUI:Gold ratio (the value of gold mining stocks relative to gold), as we have now revisited (and fallen slightly under) the absurdly low levels of the year 2000, prior to the beginning of the present 13-14 year gold bull market. It's as though the price of gold had not changed since the year 2000 (when it was in the $250/ounce range), though, more precisely, it's as though gold mining is no better a business at $1200 gold than it was at $250 gold 13 years ago, which is a little bit of a ludicrous concept (though mining costs have certainly sustained severe inflation during that period). 

Given how lengthy the stages of the current gold bull market have proven to be (the previous one in the 70s lasted only 8-11 years), I am now rethinking whether 2018-19 (that date is speculative guesswork, by the way) is likely to be "the top," or just another way station. For example, bonds have remained in a multi-decade bull market (which is now likely to end reasonably soon), and my present guess is that we're going to see something more like that in gold now... that is, continuing gains for decades to come, though of course, as in all markets, with surprises (both ways) and ample volatility to keep shaking out the uncommitted. 

Bear in mind, the gold price rises when real interest rates are negative, and when the global macroeconomic picture is unfavourable, due to such issues as excessive debt, monetary inflation, poor government leadership, and so on. I honestly don't see how that problem gets fixed by 2018-19. It's probably going to take much, much longer than that... and gold should sustain its appreciating trend throughout that period!

So, what can I say, but "hold on for the ride!"


Saturday, October 18, 2014

HOW TO EXERCISE: Five (Necessary) Exercise Strategies

5 April & 18 October 2014

It can be harder than it might seem to know “how to exercise,” particularly as ongoing research keeps adding new facts to our accumulating knowledge. Clearly NOT exercising is bad... very bad, especially for those of us who have sitting jobs, because just sitting through the day shortens your life by several years (even if you exercise) There are TOO MANY facts about exercise, and it can get confusing. Here is the simplest summary I can come up with (and yes, you must do all 5 to get the full benefits of exercise):

1. Aerobics or "cardio." Run, swim, bike, walk, hike, climb, skate, ski, etc. This is endurance training. It's good for "type I" (slow twitch) muscle fibres, which require only 24 hours to recover. Aerobic fitness involves breaking down stored fuel 16 times more efficiently in the presence of oxygen, and it confers endurance and long life. You have to move enough to breathe hard and deeply, and keep at it for an extended period, for substantial portions of an hour, or more. It charges you up on endorphins as an added benefit, and prevents or heals a host of inflammatory illnesses (though not "all" of them). .

2. Strength training. This is good for type II (fast twitch) muscle fibres, which require 48 hours to recover (so take breaks in-between). Strength training enhances muscle bulk and length, and of course, strength. This is the form of exercise that produces the most myokines (protein signalling molecules secreted by contracting muscles) – 400 of them have been identified, and we're only starting to understand what they do. We know that substances secreted from contracting muscles repair tissue damage and injuries; prevent and reverse inflammatory and metabolic illnesses; melt off interstitial (visceral) and subcutaneous (pinchable) fat; grow new blood vessels, new (and stronger) bone cells, new muscle fibres and new brain cells; kill cancer cells, bacteria and viruses; and even reverse cellular aging by preserving the length of telomeres – the molecular shoelace tips at the ends of our DNA! And that’s just for a start!

3. Core/functional training. Here, we're talking about rotation around all of our joints, especially around the waist, off-balance movement and recovery (which improves balance), flexibility, functionality, fall and accident prevention, reaction time, stability, small-muscle strength, the ability to handle complex and unexpected movements, etc. While just pumping iron is fine for strength training (above), a totally different exercise strategy is needed for the twisting, bending, stretching and gyrations of (complex and integrated) core movement. The Pilates method emphasizes training the core of the body, and is a good starting point for exploring this type of training.

4. Lifestyle fitness. You can't just lock exercise into a scheduled time slot each day. You will STILL die years earlier than necessary. You have to incorporate exercise into your daily routines. There are 1-minute and 4-minute workouts you can do at almost any point throughout the day. You can park your car and walk, invent excuses to get out of your chair, take the stairs – not the elevator, walk for pleasure, change your position, get involved in physical recreational activities, etc. Fitness has to be part of your lifestyle, or you're not getting it!

5. Short-burst training. Also known as high intensity interval training, this is a new and hotly-researched area with some very convincing scientific evidence behind it. You go “all-out and whole-body” as much as possible in "bursting" movements (e.g., jumping, squatting, lunging, sprinting, throwing, kicking, punching and more) for intervals of only 20–60 seconds (depending on the intensity level and the equipment/apparatus used for training) before entering the recovery phase, using a series of high-intensity, short-duration exercises interspersed with brief periods of lower-intensity movement. (Self-injury is not necessary to achieve the “short-burst” effect -- never push hard enough to hurt yourself!)

The intent of short-burst training is to utilize the anaerobic energy system. The primary fuel used is carbohydrate (which gets exhausted quickly), with stored fat kicking in later (in fact, for up to the next 24-48 hours -- this strategy is perhaps the ultimate "fat burner"). The conversion of white-fat "storage" cells to beige-fat "energy burning" cells is believed to be triggered by signalling molecules that muscles release during contraction (one of them is called irisin or FNDC5 -- though the function of this particular molecule remains a topic of scientific controversy at present).

The process of burning more oxygen for many hours after intense exercise is called "EPOC" (excess post-exercise oxygen consumption). A minute is the maximum "magic number" for a human to go “all-out,” and 20 seconds is sufficient when you are exercising continuously and varying your rate of exercise to achieve high intensity interval training. Research has shown that exercise intensity has a 13.3 times greater effect on systolic blood pressure, a 2.8 times greater effect on diastolic blood pressure, and a 4.7 times greater effect on waist circumference in men when compared to exercise duration.

In brief, to benefit by exercise, you need to incorporate all five of the above strategies in your exercise plan.

Here is the good news: Strength, core and short-burst training are EASILY combined, so we can beneficially treat these three as one group (by planning our workouts thoughtfully). Bursts are also easily incorporated in aerobic and lifestyle activities, so short-burst fitness can be fit into many places throughout the day. And yes, the research confirms... as few as three 20-60 second bursts of higher-intensity exercise within a workout session of only 4 to 30 minutes in total can have measurable long-term benefits. Similarly, on the other side of the coin, 15 minutes a day is sufficient to win the endurance benefits of aerobic (cardiovascular) exercise. So you ARE NOT wasting your time to be trying out workouts even of just a few minutes in length.

My conclusion: There aren't many excuses left. Being fit is TOO EASY!


Monday, September 08, 2014

How Long Can the Amazon.com Business Model Last?

8 September 2014

Jillian D'Onfro at Business Insider has just written a thoughtful analysis of the Amazon.com business model. If you follow e-commerce at all, then you know that Amazon plays to maximize market share, slash margins, and make customers happy.

I read this article and the reader comments carefully, because I am a core Amazon customer. I'm not into streaming media, etc., but I live in a small town in Canada where I would have to travel hundreds – or thousands – of miles to find even slightly specialized items. 30-40 years ago, I was ordering odds and ends at the local small-town Sears outlet (we still have one). But Amazon is for sure the new Sears if you live in a small town.

Now I honestly don't see how Amazon can stay a going concern based on its present policies, but everything they do is by all means customer friendly. I have the Amazon card, etc. (No need for Prime, however, which isn't so great in Canada, anyway).

Let me share just one example of a surely non-sustainable business practice. I basically outfitted my home gym at Amazon (though I bought my weight sets years ago, in Winnipeg, about 150 miles away). So, I order a Ringside 100-pound heavy bag from Amazon.ca for maybe $139, and the shipping is listed at maybe $270, but it's eligible for free super saver shipping. I mean, the delivery guys had to haul it to my house and bring it up the stairs to my door (something I would have had to do if I'd made the purchase at a store). So for no shipping charge, I have this 100-pound bag waiting for me at my door.

Logic insists that this cannot last. But yes, I am trying to buy everything I could possibly ever need now, because I can't see Amazon still delivering hundred-pound packages for free, 5 or 10 years down the road! But for consumers, there has been nothing better.

And, to do a business analysis, Amazon clearly has one competitive advantage, which is the massive number of partners. (The local competitor is Indigo.com, which is a home-grown Canadian former bookstore chain turned e-tailer, but, “no competition.”)

In recent years, it has indeed gotten easier to search Amazon than Google, if the intention is to make a purchase. Given that AMZN has a massive market cap, and Sears is on death's door, it has crossed my mind that Amazon might want to buy up Sears just to get their distribution system, and the Kenmore brand name may or may not help --- not that important. But if I had to drive the one-mile trip to the Sears distribution centre to pick up my Amazon order (still with free shipping), I would not be complaining. 

This advantage really shows up in Canada, where, historically, no retailer has ever given any customer anything for free. Canadians are used to paying top dollar for services in most categories, and that included shipping, until Amazon.ca showed up. (Sears usually had the best delivery deal, before Amazon arrived on the scene – but they would not deliver a 100-pound item to your door for free --- you still had to go to the outlet yourself, and pick up the new washer and dryer, snowblower, or what have you, possibly with the van you had borrowed from your neighbour!)

So, I certainly wish Amazon well, but I'm buying all the heavy stuff now!