Saturday, 4 August 2012

Corporate Welfare and the Makers of Kings

Lets start by me saying, I am no left-wing business-hating nut-case, I have been self-employed my whole life and never have taken an Unemployment cheque or even voted NDP. I am pro-business, but what I am taking about here is not business.  These firms are winning by having unfair political access and that's all the value/benefit they add. 

Any young person in this country can grow up to be a powerful MLA or even the Prime Minister. This is not a land where you must be from the right family or even go to the right schools to be a leader in this country. However if you want to be elected in Canada you must do one thing that is very unsavory -- you must sell your soul to one of the big Canadian Welfare Backed firms that have a financial strangle hold on every citizens life in this country. These are the firms that will give you the dollars to get your campaign advertising it needs. No bucks  -- no trip to Ottawa. But of course like the Mob, one day they will come calling to get a favor from you. That favour will be when you must screw over the electorate to pay back your masters. 

These are the major political contributors, and if you look at the voting record politicians consistently vote in favour of these companies at the expense of the Canadian citizens

Telcom: Telus, Shaw, Rogers, CBC and Bell
Transportation: CN, CP and Air Canada
Banking: TD, RBC, BMO, CIBC and BNS

By the way if you think “financial strangle hold on every citizen” is too extreme try this experiment, try and go 90days without putting a dollar in any of these firms pockets for fees or bills. Try and walk downtown in a Canadian major city for an hour and not see an advertisement from one of these firms. Perhaps you would rather look at the logos on any office building over 20 stories tall. You don’t see this concentration monopoly power in the major cities of other G7 countries. You don't see the same corporate logos on the towers of Atlanta and Chicago, or Madrid and Barcelona, or Hamburg and Berlin. But look who builds the towers in Toronto, Vancouver and Calgary. See? You are "in the Matrix" you just did not see it before.

We are loosing ground. The country’s banks are quick to issue a government-backed, mortgage or student loan – less so when it comes to a small-business loan where they must take a small risk. What that means is our younger citizens must work like slaves to pay back  huge debt on the worlds most overprice over price Real Estate and overpriced degrees that don't result in jobs. At the time of World War One less than 1% of Canadians had a University degree and it was the mark of the rich, the powerful and the leaders of our society. When Harvard University invented the MBA they thought the world might need 4000 of MBAs, today more than 4000 universities issue MBA degrees. Today in Canada we are awash in students with no hope of finding a job, English Lit grads, Art majors, business majors, elementary school teachers, physical education grads and what engineers and scientists we do graduate are off-shore students who return home to build products to help their economy and hurt ours.  The myth is still with us that a University education equals a good life. It is still true if you study Medicine -- not so true for most graduates -- unless they can find away in to our bloated civil service.  The biggest beneficiary of this high education myth is the banks issuing loans guaranteed by the tax-payers of Canada.   Now Canadian students want lower tuition and free interest loans so we can produce even more of them. Yet our small business, starved for capital, can't grow our economy to give those students a job.

Canada’s wireless penetration is dead last among the 34 countries that belong to the Organization for Economic Co-operation and Development, even though Canadian carriers are more profitable than their U.S. counterparts. A technology executive in Ottawa or Waterloo, Ont., will pay dramatically more to fly to the West Coast than will a rival in New York or Atlanta.

Less than three years after a host of new wireless players entered the Canadian marketplace, incumbents Bell, Rogers and Telus say competition is thriving and everyone is well served. It’s true that service, choice and prices have improved if you live in a city with over 500,000 population. Odd those are the same cities served by offshore rival Wind mobile.  Yet our government has been more than obvious in rigging spectrum auctions to push Wind out of business.  But compare what we pay for cell service to the other G7 countries and it is clear our rates are too high, roaming charges are obscene and the carriers don’t seem to have a plan that suits their needs. You cannot trust these firms, Telus once told Canadians if we dare break-up their long distance monopoly our home phones would cost triple – it did not happen. In fact after deregulated long distance home phone service got cheaper.  Because of hostile foreign carrier policies New competition, such as Wind Mobile, Mobilicity and Public Mobile make up just 1.2% of the market.

Cable companies are perhaps the worst monopolies of all. How does it work?? Well you put up an antenna in the USA and get their major networks for free, you then get free feeds via satellite from the Canadian cable channels like Food Network and TSN etc. Finally you do a few revenue share deals with MovieCentral and BBC and toss in some very profitable pay for view. In each case you pay zero for the inventory you sell, that inventory is the raw TV signal. Now you run some wire to each house and poof the rest is all about sitting back and counting your money. Shaw cable provided service in Edmonton for just $7 a month in 1982, now the average bill is over $100 and guess what? The cost to wire your house has DROPPED since then thanks to the lower cost of technology and the already sunk cost to wire Canada. Can you imagine how rich these guys are getting? Don’t you think something is up, when the power company can run wires to your house for free, to sell you power which cost a bundle to make, but the cable company need these fees to sell you a signal they get for free? Our Canadian broadcasters put up HD towers in major cities and charge you nothing for the service or the shows how can they do that? When a commodity (like water) is free and the pipes are cheep, don’t you think the bill should be too?

Want more proof not to trust big telcom? Check this out for crazy:
Or your cable company

Air Canada has been living off handout and using monopoly power to tax Canadians for years. Back in the 70's and 80's legendary Canadian entrepreneur Max Ward, who’s struggling Airline “Ward Air” used to have to form his passengers into phoney “clubs” with $1 membership fees so that the bureaucrats in Ottawa would let him pioneer the market of $500 airfare to Hawaii. This sneaky business was because only Air Canada, with it heavy tax payer subsidies, was allowed to be a scheduled airline and Western Canada based Ward Air could only be a charter. It is only though gutsy innovation over bureaucracy that we are blessed today with low fares from AirTransat and WestJet on certain select routes.  

Last year, there were a record 4.8 million one-way trips made by Canadians to U.S. airports, up 15 per cent from 2010, a new study shows. U.S. air terminals handled more Canadians in 2011 than the total number of passengers who went through Ottawa International Airport. The chief executive officers of major Canadian airports met During March 2012 in Toronto to sound the alarm about the cross-border trend. In Toronto and Vancouver, an average of 22 per cent of U.S.-bound passengers chose to drive to an American airport for their trips last year instead of flying from their hometowns, the council’s study shows. In other cities, a much larger percentage of traffic is being siphoned, including from Thunder Bay, where an estimated 55 per cent of U.S.-bound fliers opt for flights at Minnesota airports, including Canadians who drive six hours to Minneapolis. For consumers in Toronto and Vancouver, flying from the United States has become a no-brainer for leisure trips. The airfare savings are huge for trips to places such as Florida, Nevada, Arizona, California and even Hawaii, Mexico and the Caribbean. There isn’t hesitation to book from U.S. terminals, even after factoring in gasoline for the drive across the border and, in some cases, a night’s hotel stay near the American airport.

Fundamental industries remain protected from international competition. The policy results in strong companies, such as Rogers Communications Inc. and Air Canada. But it also results in an environment that stifles innovation and boost prices.

The mega banks always have the same argument, big is safe and good. If that were true why was it the biggest banks in the world that caused the sub-prime crises? Small banks “stick to their knitting” issuing mortgages, car loans and business loans. Big banks look outward to the world of high finance. Issuing loans to third world dictators who don’t pay back, risky re-insurance deals, making risky stock market bets through proprietary trading desks and building mind boggling hard to understand finance instruments like derivatives and credit default swaps. The list of victims of too much greed in high finance is a very long list but it seldom comes from little credit unions or little banks like Canadian Western or Laurentian Bank. It was big banks that changed the game from making money on loan interest to shafting the client with endless fees.

About the only time the politicians turned on their well-healed masters was in 1998, when four of Canada's biggest banks proposed to merge. At the time the fear was the deals would have meant the loss of thousands of Canadian jobs and the closure of hundreds of local branches across the country. However, what even our politicians did not know was the real nightmare. These banks were tying to build was a machine powerful enough to do the same super dangerous, super profitable, sub-prime-mortgage deals and toxic credit default swaps as America’s Citibank and Goldman Sachs or the UKs Lloyds and Barclays. In short they were jealously trying to destroy Canada with too big to fail banks and bad lending practices like the rest of the western world did. 
In fact the truth then and now is Canada would be better served by breaking up the existing big five banks into a big 10. 

What needs doing:
  1. Canada must have a better way to issue bank charters, right now it takes a majority in parliament, a sure fire barrier to entry
  2. Break up its largest banks we already have the authority in out anti monopoly laws. Banks should be broken up so that they cannot exceed ½ trillion in assets. (About the size of Bank of Nova Scotia).
  3. Level the playing field for WestJet and AirTransat to become full airlines with all the landing rights of Air Canada. Airport fees in Canada must decrease. Air Canada must stop predatory pricing when new carriers emerge. Like the current battle over Toronto’s city airport. We must open routes in Canada to international carriers. Right now if British Airways flys to Toronto it cannot pick up passengers and take them to Vancouver.
  4. Cellular service should have required tower sharing and frequency sharing to make a level playing field for new entrants. A cap on data roaming and international calling charges without prior voice warning at the $5 per call level.
  5. We forced Telcos to share their wires for phone service -- the same model would work for cable TV. 
  6. Change the Mandate of the Business Development Bank of Canada. Make it more like the U.S. SBA, End the fancy field offices and the useless consulting divisions and start funding loans to entrepreneurs. Sure most will fail, but fancy offices and bad advise is no better way to waste money.
  7. Eliminate the EDC, they have not done anything useful in years. 

it is your turn

What can you do? You can meet your MP, they come out from under the rug during elections and some even accept visitors at their constituency office. If not that at least write to them. You can use mail, phone or email, just click here: Send your MP this article and tell him/her that this is too good a country to let big firms buy them off politically. It is time to open competition, break up big monopolies and kill subsidising policies that come at the expense of everyday Canadians or as I call them -- voters. 

Thursday, 12 July 2012

Seven Wonders of CBC Decision Making

You gotta love this, in semi-socialist Canada we have a government run TV network – the CBC. Think PBS with poor content and a way bigger budget. They decided to run a contest to select the “7 Wonders of Canada”. The results are typical of what a CBC committee would do and it shows why crown corporations have no business competing in the entertainment business. Here is the web page:

Talk about the Seven Wonders of CBC decision making: Can you believe that through the power of politically correct committee-think -- a canoe and an igloo are "wonders" in Canada -- but the CN Tower, Cathedral Grove and the Bay of Fundy are not? A wonder is a place you can visit and feel awed by; what tourist would travel to Canada to see a canoe? I assure you I did not go to Egypt to see a felucca, I wanted to see Pyramids that touch the sky.
The CBC decision-making process is typical of New Age thinking, where the overriding concern seems to be not to offend. The committee was careful to find a wonder in every geopolitical zone so it is nice and fair to people who live on the edge of nowhere.
It seems everywhere I go, we are constructing beautiful office towers (i.e. CBC headquarters *), full of neat, clean people with perfect hair, executive MBA degrees (or Arts majors) and bottles of hand sanitizer who live, at least in part, off tax dollars. (See example to the right here: Hubert Lacroix CBC president) We pay them six figure salaries and they have never done a day of real work in their lives. Some are in government, some in charities and some in Crown corporations. These people have real power, they spend huge tax budgets and worse they even skew the immigration policies to bring more of their kind into the country. They meet, they talk, they build consensus, they emote and, most of all, they compromise until they reach the worst of all possible half-baked outcomes.

* Fun Fact from the Wikipedia: The Canadian Broadcasting Centre opened in 1993. Typical of committee-think, the building required over 12 years of planning and another four years of construction. Constructed at a cost of $350 million, almost 7 times its initial budget - nothing is too good for my tax dollars!

Thursday, 28 June 2012

Canadian Super Recession?

June 28 2012 -- Canadians so far have slipped by the global slow down and the economy has remained robust. Canadian dollars are considered a bit of a safe haven and Canada brags to the world about out lowering of government debt before it was popular or necessary along with a continued boom in commodities. But before we get too smug, we should look at some very troubling signs on the horizon:

The graph below shows the 5 year price of commodities:

  1. The economist pointed out that in some ways Canada has the highest real estate prices in the world -- that can’t stay out of balance long. We laughed at America's boom bust market but it is happening here too.
  2. The Toronto Stock Exchange is a proxy for China and China is not doing well    . It is even obvious in the USA that Canada would be the worst hit in China mealtdown  The TSX is increasingly a “banana republic” stock exchange with some 25% of stock related to oil and 20% in mining and a big part of the rest in banking that makes all it income based on the health of mining and oil. With the death of Nortel and the impending death of RIM, technology companies are only 1% of Canadian publicly listed companies. 
  3. The commodity super cycle is ending,
  4. Even gold is dropping.  and
  5. Canada is balancing its books the wrong way, with too much tax,
I just don't see a healthy economy in Canada in the next 3 years. I think this is a great time to buy some US dollars.

Tuesday, 12 June 2012

After the Gold Rush.

June 2012 -- I first wrote on this subject back at the end of 2010. At the time I knew I was right, but often you can see the market through a telescope, and react too soon, and that was certainly my concern back then. Gold was overvalued but the famous axiom says that markets can stay irrational longer than you can remain solvent.

However I believe the turn is here and it is real. My new concern is based on this graph of weekly prices. Here are the 10 and 50-week EMA lines for GLD. For the first time in 11 years (not counting the sub-prime crises) there has been a serious crossing of the lines.

I have included a graph of Gold vs the stock market (gold is on the bottom) but you don’t need a graph to know the price is way too high already.

The gold market works much like any other, with supply and demand eventually equalizing, and runaway prices returning to long-term averages. Since 1980, the price of gold has averaged about $440 an ounce in U.S. dollars. But much like U.S. home prices over this decade, it can take some time for prices to return to normal.

Barclays Wealth in London predicts gold will fall to a fair value of $800 an ounce, as investors eventually dump it for riskier trades; Societe Generale, the French bank, in April 2009 predicted $800 gold. Analyst John Nadler of gold dealer Kitco predicts gold will fall to $900. Their reasoning is simple: investors are keeping prices high even as demand from non-investors is cratering. These men are economists, I am a speculator -- I know that things could be much worse than $800 an oz. $800 might be a fair number but we always overshoot fair numbers. Even the floor number of $500 an ounce (the cost of production) may be possible. After all Gold traded for years at its old production cost of $350 an oz.

Supply and demand dictates gold prices go up when demand for gold goes up, so someone is buying gold, but who is it? Could it be gold jewellery, which accounts for more than half of the world's gold market? Just the opposite, increased prices have curbed demand. Here is table of demand from the World Gold Council:

Demand of jewellery gold fell 6% in the first quarter of 2012 and is likely to continue to fall amid high prices that turn off shoppers. For example, in India, the largest gold buying country, high gold prices kept Indians from purchasing metal for the gold-buying festival of Akshaya Tritiya, which in turn drove down prices.

To find the answer of where the gold is going you must ask who is the world’s single largest buyer of gold? Are the Americans putting it in Ft. Knox? Is it China the new economic powerhouse? Perhaps tax evaders in Switzerland are putting it in vaults under the streets of Geneva?  No it is headed someplace new, it is an invention of Wall Street, an EFT (Exchange Traded Fund) better known by its ticker symbol, GLD. The GLD SPDR Gold Trust is an investment trust (started in 2004 -- note the change in the price of gold starting in 2005). Think of that, it only took 6 years to be the world’s biggest gold buyer! The Trust holds gold and issues SPDR Gold Shares in blocks of 100,000 Shares (Baskets) in exchange for deposits of gold and distributes gold in connection with redemptions of Baskets. The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion. Originally, the details of buying, storing and insuring gold have made it difficult for most investors to enter the gold market on their own. SPDR Gold Trust solves this issue by creating securities that follow the gold market.

Even at its much lower Dec. 2007 levels, the GLD fund held more physical gold than China, the Netherlands, and the European Central Bank. It has more gold than Russia, the Bank of England, and Saudi Arabia. In fact, the difference between the gold reserves of the Bank of Japan and GLD in December was a measly 130 tons.

Let's do the math: GLD purchased 79 tons of gold between Dec. 2007 and July 2008. That corresponds to the total gold reserves of Australia or Kuwait. When gold approached the $1000 mark it retraced for a few months. Gold prices dropped briefly before they went on to gain it all back and more, however in the first two short months of the 2008 pullback the GLD fund liquidated 74.7 tons of gold... the equivalent of Egypt's total reserves.

Well GLD sure has a lot of gold, but do these gold ETFs really buy all that gold “one for one”? They are suppose to, but if they don’t the potential crash could be even worse because its one thing to rush to sell real gold -- but to try and sell paper that pretends to be gold is another matter. Rick Santelli is a pit trader from the CBOT commodities exchange and CNBC reporter who says there is not enough gold in these ETFs:

Warren Buffet’s has a ‘folksy’ comment he made in regards to speculators who take dangerous risks during economic bubbles. His point is that during the bubble it is hard to see these people as risk takers, until after the bubble pops. What he said was “You only know who is swimming naked when the tide goes out”. Certainly that comment is coming to mind right about now. In hindsight many institutions were swimming naked in the credit crisis and it appears many gold bugs are wearing less than they think in the present time.

Pierre Lassonde, former president of Newmont Mining and past chairman of the World Gold Council, made a couple of interesting disclosures about GLD's gold. First, most of it was then stored in HSBC's London vault, but HSBC was in the process of constructing a new vault just outside London expressly to accommodate GLD's expected growth. Second, he had actually visited the vault and saw the gold. However, the reason he said that is many people are wondering if GLD really has been buying all the physical gold it is suppose to. Well the answer is, no, not really. GLD is unable to buy real gold fast enough these days, and so it also is trading swaps on gold, it buys those in the form of warrants from the gold miners. In effect these are like guaranteed sales of gold into the future for mining companies, as fast as they can pull it out of the ground. In short the world is hording gold faster than it can be mined. That gold is already bought and paid for, but the store of wealth GLD is suppose to have, it does not really hold, it really does not yet have delivery of the gold they are suppose to have.

Gold Warrants are one thing -- at least eventually the miners must deliver real gold in exchange for them, but GLD is also allowed to lease gold from gold holders such as nations with gold reserves. Leasing gold means that in effect it is counted twice. If China leases gold to the GLD ETF they still hold it as part of their national reserves. GLD also counts the same gold as part of their holdings. What’s more if push come to shove and the world wants to pick up the physical gold -- is China likely to just hand it over, or even play fair and pay the unit holders for the gold? Nope China will not give up any gold on loan, they will just tear up the lease and stop returning phone calls. In fact, since it is ‘leased’, China has no obligation anyway. Short of declaring war (not a good idea), how do you make a major sovereign nation do anything?

GLD has never being willing to say how much gold is not real but in fact leased, however, one good clue comes from their sister fund that does the same thing with silver. For months this fund claims to be stockpiling more than the world’s production. Hmm how do they do that?

As long as we are pushing the limits of financial reality, try this one: GLD also has the right to “lease out” the gold it holds in the vaults. So central banks “lease out” the GLD gold and make their reserves look bigger. The fraud is made up of central bank gold reserves leasing the same small nucleus of gold over and over to each other.  In banking this is called leveraging up and there are laws to prevent over leveraging, most banks cannot leverage up over 18:1 but for a Gold ETF there is not a thing stopping it. In fact the prospectus specifically says they are doing it. Clearly someone is swimming naked, waiting for the tide to go out.

There's even more price pressure from the supply side. Unlike most commodities like Oil, Gold is relatively easy to find. We know the location of thousands of marginal mines that shut down when gold was at its low but could easily spring to life as demand ramps up. Those mines are opening up everyday and world gold production is skyrocketing. Higher gold prices mean miners work overtime. The supply of mine gold around the world jumped 7% last year to 2,572 tons-the second largest increase in history. Places like China and Russia will help boost the amount of gold from mining by 4% to 6% a year through 2014. Because it costs miners about $480 on average to extract an ounce of gold, they plough ahead when prices are high, eventually leading to an oversupply situation. Imagine a world full of miners working triple overtime – working in thousands of recently reopened -- mines dumping record gold inventories into the world

Gold at $1,600 also brings out the sellers and resellers. In 2012, scrap supply-all those gold pendants, necklaces and coins people have lying around-hit an all-time high of 1,800 tons. What of all those "we buy gold" signs, Internet advertisements and late night television commercials? Well, they're starting to work. That scrap supply is getting very high – in just one year (2008 vs 2009) scrap gold purchased jumped 27%. So long as prices remain above $1,000-$1,100 we will continue to see a river of secondary reclaimed gold actually starting to compete with mine production.

Yet investors continue to pile in to gold as a hedge against a “race to the bottom” for the worlds currencies, each trying to out do the other in devaluing the currency. But in 2011 things began to change and the world returned not to Gold but the US dollar as a safe haven.  

If the US $ looks a lot like a an upside down graph of the price of gold there is a good reason -- gold is priced in US dollars and moves 60% correlated to the value of the US dollar. A strengthening dollar equals a falling price of gold – and the opposite is true too.

Certainly there are lots and lots of arguments why gold will keep climbing, and this may not be the bottom yet. The US is printing money and creating inflation, US manufacturing went offshore to China, US unemployment is too high, US home prices are very low. Yup, I hear that. But the other side of the story is also compelling. How many speculators are piling into gold in pure trust that it is going to go to $3,000 an ounce?

How many people believe in things like this man who says $15,000 an once:

or Peter Schift predicting gold prices at $10,000 an ounce:

How many speculators have bought that gold on margin? Will that hold up if the economy does recover fully? The reality is today US firms are posting record profits, and are flush with cash. How long before that triggers M and A, IPOs and hiring? How long before US stock rise to compelling levels and investors want back into equities.

There is a basic reason why Gold did so well from 2008 to 2011, and it all kicked off with an email. On January 30, 2007, Jamie Mai wrote an email to his partners Charlie Ledley and Ben Hockett. "If a broad range of CDO spreads starts to widen," he said, "it means that a material global financial clusterfuck is likely occurring." This was the "subprime crisis" they had been waiting for. On January 31, 2007, a broad range of CDO spreads started to widen, dramatically. In other words, the banks had realized that for years they were selling cheep insurance against mortgage default and now they could smell trouble coming. The long-feared meltdown was upon us all -- not that most of us knew it, at the time -- and a very small number of investors were about to get paid out on the trade of their lifetimes.

Of course with this kind of foresight there comes great rewards. But they had also told many others on Wall Street about this and John Paulson had been listening, he to had been shorting the housing market by snapping up credit default swaps against the US mortgage industry. However Paulson was a whale running a huge fund. On Wall Street his bet was very very large and when he realized that the other side of his bet was held by Lehman brothers, Goldman Sachs and AIG and that these firm could never pay him. Within inches of victory on the edge of the housing collapse he realized he was “too smart by half”. Further it became obvious the US financial system could never hold together if he even got a good part of his massive bet paid out. But there was a saving grace, these same firms he bet against want desperately to hedge. They too want CDOs of there own to cover the risk of their bad bets, and as the crises unfolded there was Paulson and the rest ready to sell potential useless CDO right back to the stupid banks that never should have issued them in the first place. But still there was a nagging concern that the USA might not survive this, Paulson astutely placed his money not in to US funds or in US banks, he bought Gold lots of it. Two home runs in a row.

That was 2008, four years have past and disaster was avoided. The astute Dennis Gartman had been counselling long gold for some time, and so had George Soros. But the tide is changing. Paulson & Co, cut its stake in the SPDR Gold Trust for the second straight quarter.

Paulson held 17.3 million shares in the exchange-traded fund backed by bullion as of Dec. 31, 15 percent less than the 20.3 million on Sept. 30, Securities and Exchange Commission filings showed. His holdings fell 45 percent from end-June, the first reduction in more than two years. He is still the biggest stakeholder.

Dennis Gartman, investor and publisher of The Gartman Letter, says gold is just another "entity of trade" that rises and falls. "Save havens do not fall 7% in two weeks as gold in dollar terms has done. Save havens do not fall 3.6% in two weeks as gold in EUR terms has done. Safe havens are safe. Safe havens are stable; gold is not safe and certainly it is not stable and to think otherwise is to learn a very serious lesson in the course of the past two weeks."

If the tide goes out even a little, how much gold will GLD dump on the markets? Fund managers already got burned in 2007 for having long equity positions. Would not those same funds now be nervous about a super gold bubble? If gold drops 20% will mutual funds, and national banks along with ordinary people run for the exits?  Before the GLD most of the world’s gold was managed by countries and used as a hedge. Managers of these hedges can ride out panics and simply co-ordinate with other nations and agree not to sell. But that is over, they are no longer in control, and no one has asked what effect that might have on price stability. Don’t forget GLD is not a Mutual fund -- it is an ETF. It is not “managed” it simply buys and sells physical gold as needed, it is not allowed to “think”. There is no manager who says “Let’s hold out for better prices”, if the GLD units are traded in by the clients the ETF has only a few days to liquidate the underlying physical gold or their gold warrants. In a panic, what price will that gold get when it hits the markets? Worse what if after the physical gold is sold and more people want out of GLD, all that is left in the funds is worthless lease documents?

EFTs like the GLD do not move like a stock, they are very liquid. They keep the price they have by using arbitrage, there is always a computer market maker buyer of GLD units just pennies away from the current price, so that means in a panic, the ETF can not “bar the gates” or even drop in price, they must trade, and the cash flows right now.

Unlike a stock, all the holders of the ETF could get out in moments and the computers would sell to them at the price of gold as quoted, but then the GLD ETF would need to actually start selling physical gold a few days later. The price difference could be huge. The people that run the ETF say that gold can not move too far in a day, but there could be a run on gold this time of size and scale like never seen before.

Here where the panic will come from, when you sell your GLD ETF units you get market price that second. This is only possible because they hedge your sale with comex gold futures -- until they can sell the physical gold later. BUT in a panic, futures can go "limit down" in other words stop trading -- but the GLD ETF can't stop trading, they must sell your ETF for market price, (if the futures are limit down that means there is no hedge, or in wall street parlance, selling nakid) the day that happens GLD will need to sell real bars of Gold in a huge hurry, but they have WAY too much Gold, no one can buy that much. They have 2,000 metric tons of Gold. The US reserves in Ft. Knox are only twice that big, and it took 100 years to build that up.  No one has ever in history sold 100 tons of gold in a week, let alone 20 times that.  There just is no place to sell that much gold in 10 years, let alone a few days. Game over another crash much worse than in housing. 

It’s a perfect storm: As gold is pilling up in vaults in London and people are not consuming gold for jewellery, Mines are producing more gold than ever in human history, mines are even selling “to be found gold”, more gold than it is even possible to pull from the ground. Compound this further as some of the gold of these funds is double counted “leased gold”. Mean while as America recovers, equity risk is gaining momentum, the US dollar is strengthening. In a panic, Wall Street can’t stop the sale of the ETF units and the price will not adjust fast enough. Don’t forget the price of any stock or commodity goes down far faster than it goes up. Gold’s first panic “flash crash” could be in 2013.  

What I am not saying:
  • I am not saying the price of gold will drop in half today, but it could be as soon as now. In the past wild run ups have always gone on longer than I thought possible but this run does look out of steam.
  • I am not saying that gold might not drop a bit and run up some more, there are always some “head fakes” and bottom timing is not easy – catching a falling knife.

What I am saying:
  • There is far too much gold being mined and sold for the world’s needs and the price is clearly being manipulated by speculation. Speculation after a bubble always ends badly. Ask anyone who bought Internet stocks in 1999 or “nifty fifty” stocks in the 1960’s or tulips during the Holland tulip bubble.
  • Look at the graph of the rapid rise of gold prices. It is straight up since 2005. The crash down will be harder and faster than the rise up was. Most of the past 5 years of rapidly rising gold prices will be unwound in less than 8 months -- when the panic hits.
To everything there is a season, and
a time to every purpose under heaven:

A time to be born, and
a time to die;
a time to plant, and
a time to pluck up
that which is planted;

A time to kill, and
a time to heal;
a time to break down, and
a time to build up;

A time to get, and
a time to lose;
a time to keep, and
a time to cast away;

From The Bible
Attributed to King Solomon

  •  I think even if you went short gold today, that any near term future rise up, if any, will be less than the fall to come, so it might be time to look at heading against gold already. At least be like me and have your “finger on the sell short button”.

More to read:

Friday, 25 May 2012

Where can Canadians find a broker

As for brokers for Canadians, the most honest and stable brokers in the world are the Canadian major banks
TD waterhouse (better platform than the two below)
BMO investorline (well run good service)
Scotia iTrade  (cheep – limited abaility)

However that said, Canadian brokers are not great for day trading, they don’t do futures, very limited ability to short stocks or buy US options and no real currency trading.

Some safe US brokers do take Canadian accounts:
If you want to trade Options and Futures with a very small account look into "TD Think or Swim" also I love the interface, what great charts and analytics. ToS option decay graphs are the best in the world, they can track Theta burn better than you can on a Bloomberg terminal.
If you have a major account and trade size frequently like I do, you can use Interactive Brokers -- but they don't do accounts under $100,000.   or

Why do I love Interactive Brokers?
-        Lightning fast execution with smart routing, my fills are way faster than any other broker can get me.
-        Crazy cool order types, like MOC, vwap, iceberg and one cancels all.
-        Flexible instruments, stocks, futures options bonds currency all from one account.
-        No front running my market orders. All Canadian banks do this, penny here a penny there.

Why I don’t like IB
-        Support stinks, it is like they really hate their customers
-        No phone orders, if you have no internet you cannot cancel a trade, too bad you just lost your account while you were in a storm.
-        The front end blows. IB graphs look like a high school kid wrote it in his basement. Use Tradestation or Ninjatrader as your front end. 

Saturday, 19 May 2012

It is not Greece its China

Is it really news that Greece is an economic basket case? No nothing new there.
But the real story is that commodities are falling like a stone. Even Gold is less attractive these days.

I turned more Bearish on May 2, when the price of oil dropped, I was expecting some stocks to sell off
but I was not expecting oil to sell off. So I began to nibble on HDGE, SH & HIX -- Inverse ETFs.

Notice how commodities did not rebound in 2012 like the market did. You could think people were just moving from commodities into equities
but now the market is in retreat commodities are falling further.

Of course the cause is demand, not from Europe but from China.

I began to think of this when a realtor from Vancouver said they have not seen a buyer from China for months

Here are some talking heads talking about China,

The Chinese inflate their numbers. Chinese GDP is about as reliable as US inflation figures.
Here is a great video I beg you please watch it -- well worth the 14min it runs and probably the most important vidoe about your future you will see this year:

so even the 6% growth they talk of is mostly based on bad projects and political needs
If growth is so good in China why are their banks treading water?

and this just in . . .

Even worse . . .