Some Considerations on Precious Metals

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If you want to expand your portfolio to include precious metals, here are some considerations: a single ounce of gold stores more value than silver. If you need portability for a large amount of wealth gold coins and bars will be your primary precious metals investment. Currently an ounce of gold is about $1550. With less than a pound of coins in your purse or backpack you can conveniently move $25,000 in value.
   
What gold offers in portability it lacks in divisibility. This is where silver comes in. You may not be able to move $25,000 of silver conveniently (weighing around 50 pounds!). But because of it’s lower value per ounce silver is an excellent mechanism of exchange for things like food, gas, clean water, or tools if the dollar hyper-inflates or crashes.

You can purchase silver in bars (100 oz, 10 oz) or coins (1 ounce, or U.S. government issued pre-1965 halves, quarters and dimes). With the smaller denomination coins like US quarters you will have portability for a small amount of cash (40 quarters is about $150 dollars worth) and you’ll have coinage that should allow you the ability to purchase just about any item someone is willing to sell.
   
Silver allows you to make modest, weekly investments of anywhere from $5 to $50 dollars and still build a store of wealth.
   
If you are investing a large sum of money into precious metals, gather details about the types of coins you are buying, especially if you’re buying gold. Acquire a coin caliper and/or testing kit to ensure you’re getting what is being advertised. More...

Ten Stock-Market Myths That Just Won't Die

Image by Getty Images via @daylife

Brett Arends
The Dow Jones Industrial Average last week ended up pretty much where it had been a little more than a week earlier. A rousing 200-point rally on Wednesday mostly made up for the distressing 200-point selloff of the previous Friday.

The Dow plummeted nearly 800 points a few weeks ago — and then just as dramatically rocketed back up again. The widely watched market indicator is down 7% from where it stood in April and up 59% from where it was at its 2009 nadir.

These kinds of stomach-churning swings are testing investors' nerves once again. You may already feel shattered from the events of 2008-2009. Since the Greek debt crisis in the spring, turmoil has been back in the markets.

At times like this, your broker or financial adviser may offer words of wisdom or advice. There are standard calming phrases you will hear over and over again. But how true are they? Here are 10 that need extra scrutiny.

1 "This is a good time to invest in the stock market."

Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut. "Certainly, sir — step this way!"

2 "Stocks on average make you about 10% a year."

Stop right there. This is based on some past history — stretching back to the 1800s — and it's full of holes.

About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they're expensive, you do a lot worse.

3 "Our economists are forecasting..."

Hold it. Ask your broker if the firm's economist predicted the most recent recession — and if so, when.

The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict "a slowdown, but not a recession." That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.

4 "Investing in the stock market lets you participate in the growth of the economy."

Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren't as rare as you've been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.

5 "If you want to earn higher returns, you have to take more risk."

This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, "risky" Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows. As for "risk," your broker probably thinks that's "volatility," which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.

6 "The market's really cheap right now. The P/E is only about 13."

The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile — they're elevated in a boom, and depressed in a bust.

Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or "Tobin's q," which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market's pretty expensive, not cheap.

7 "You can't time the market."

This hoary old chestnut keeps the clients fully invested. Certainly it's a fool's errand to try to catch the market's twists and turns. But that doesn't mean you have to suspend judgment about overall valuations.

If you invest in shares when they're cheap compared to cash flows and assets — typically this happens when everyone else is gloomy — you will usually do very well.

If you invest when shares are very expensive — such as when everyone else is absurdly bullish — you will probably do badly.

8 "We recommend a diversified portfolio of mutual funds."

If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that's good advice.

But too many brokers mean mutual funds with different names and "styles" like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as "midcap blend." These funds are typically 100% invested all the time, and all in stocks. In this global economy even "international" offers less diversification than it did, because everything's getting tied together.

9 "This is a stock picker's market."

What? Every market seems to be defined as a "stock picker's market," yet for most people the lion's share of investment returns — for good or ill — has typically come from the asset classes (see No. 8, above) they've chosen rather than the individual investments. And even if this does turn out to be a stock picker's market, what makes you think your broker is the stock picker in question?

10 "Stocks outperform over the long term."

Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: "In the long run we are all dead."

Write to Brett Arends at brett.arends@wsj.com

Only buyers of the current rally are investment banks

Leigh Skene

The outperformance of risk assets over the past year suggests investors appear to believe that all credit problems have been solved – but nothing could be further from the truth, says Leigh Skene at Lombard Street Research.

“Rising stock markets and narrowing credit spreads depend on buyers being more anxious to buy than the sellers are to sell,” he says. “So who are the enthusiastic buyers of risk assets?”

Surprisingly, says Mr Skene, surveys show that the usual investors in major rallies – pension funds, hedge funds and retail investors – have not been net buyers of equities. And he says the most likely explanation for this anomaly in the biggest stock market rally since the 1930s is that major investment banks are the anxious buyers. More...

Govt wants to protect you by making annuities mandatory for 401(k)s

Sara Hansard
Should annuities be mandatory for 401(k)s? Fund companies go on the offensive
Participants in 401(k) plans do not want the government to require them to convert a portion of their 401(k) assets to annuities, according to the results of a survey of about 3,000 households released today by the Investment Company Institute.

The results of the survey aren't surprising, given that the IC I represents mutual fund companies. Some $7.5 trillion is invested in 401(k) plans and individual retirement accounts, about half of which is invested in mutual funds.

The release of the research indicates that the mutual fund industry intends to resist proposals discussed in Washington to reduce tax breaks for 401(k)s and to impose more government controls on the plans, such as mandating investment options.

“Government should not be making those decisions for them,” ICI president and chief executive Paul Schott Stevens said in summarizing the ICI survey of 401(k) participants, which was conducted in November and December. “They really value the independent control that they have over the way they invest and manage those accounts. They don't like mandates. They don't like government micromanagement.”

Mr. Stevens, speaking at a press conference in Washington on Friday, also opposed a plan being considered by the Treasury and Labor departments to require that a portion of 401(k) balances be converted to annuities to guarantee lifetime income for retiring workers. About 96% of the respondents in the ICI survey said retirees should make their own decisions about managing retirement assets and income, while more than 70% disagreed that the government should require retirees to trade a portion of their retirement plan accounts for a contract that promises to pay them income for life.

“They want the maximum amount of choice, so if you want to take an annuity, great,” said Jack Brennan, chairman emeritus of The Vanguard Group Inc., who also spoke at the press conference. “But don't force it, because it's not for everyone.”

J. Mark Iwry, senior adviser to Treasury Secretary Timothy Geithner and deputy assistant secretary for retirement and health policy, co-authored a paper before joining the Obama administration that recommended having a portion of a retiring worker's 401(k) assets automatically invested in an annuity — unless the employee opts out of the program.

The Treasury and Labor departments are likely to issue regulations this year to make it easier for companies to offer “automatic annuities” in 401(k) plans, Mr. Iwry said last September. More...

Silver: An Investment Opportunity of a Lifetime

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Saefong, MarketWatch
Silver's not so much a poor man's gold anymore and investors may soon realize that the white metal's the real treasure.

"Silver is unique in terms of being both a monetary and an industrial metal," the Bullion Services Team at GoldCore said in a recent report, pointing out that it's severely undervalued. "Silver remains the investment opportunity of a lifetime."

Gold's prices have climbed nearly 11% in the last two months. In that same time span, silver's up by only 3.1%.

And "investors looking for returns continue to wager on higher gold prices, whether it be on concerns over equity or currency markets ... or to make quick short-term profits," according to CPM Group's latest Precious Metals Advisory.

But investors would be better served to turn their eye toward silver.

"Silver is highly correlated to the safe haven of gold and is, in effect, a leveraged sister of the precious yellow metal," according to GoldCore, an international bullion dealer. "Thus, informed investors use gold more for wealth preservation purposes and silver in order to make a return."

That's particularly important to keep in mind as investors change the way they perceive the paper-asset markets.

As stocks, currencies, bonds and other paper assets have begun to disappoint investors, investor attitudes have been shifting, said Mark Leibovit, chief market strategist for VRTrader.com.

"What begins as a trickle ends as a tidal wave when the panic peaks [and] when public revulsion at the U.S. dollar begins, the tidal wave will become a tsunami," he said.

Under that scenario, "silver, far more volatile than gold, will benefit most," he said.

A split personality

Forced to pick just one, Chris Mayer, editor of Agora Financial's Capital and Crisis said he'd rather own gold. Others disagree.

"Silver does not have the same appeal as gold," said Mayer.

"What did India's central bank buy in record amounts ... [and] what did China double its reserves of this year? Gold," he said. "They aren't buying silver."

"It's not like comparing oil with [natural] gas, where you are comparing the energy equivalent of the two and there is some economic incentive when the gaps get very wide to switch to one or the other at the margin," said Mayer. "That doesn't exist with silver and gold."

And when the global industry remains mired in a slow growth pattern, the market's not going to see sky-high prices for a metal whose "lion share of demand comes from its industrial applications," said Jon Nadler, a senior analyst at Kitco Metals.

It's really silver's "precious side that is holding it up right now," said Ed Bugos, director of mining finance at Strategic Metals Research and Capital. "Its industrial side would be over valued" with the ratio of silver to other commodities having made new highs.

The investment figures for silver show this loud and clear.

"Silver's allure as an investment is evermore appealing as a hedge against fading fiat currencies that are getting inflated into oblivion," said Scott Wright, an analyst at financial-services company Zeal LLC.

This is "measurable via skyrocketing investment demand" for physical bullion and exchange-traded funds, he said, pointing out that the iShares Silver Trust /quotes/comstock/13*!slv/quotes/nls/slv (SLV 17.15, +0.23, +1.36%) has already increased its holdings by 29% in 2009.

From the start of this year through the end of October, total silver holdings in exchange-traded funds were up 36.3%, according to data from CPM Group.

The sale of silver coins and minted bars also offers a good gauge of demand.

Over at The Perth Mint, total silver ounces sold as coins and minted bars is five times higher in the 2008-2009 year compared with 2005-2006, according to data from the Mint, which is owned by the Government of Western Australia. During the same period, gold ounces sold as coins and minted bars have more than doubled.

U.S. Silver Eagle coin sales were up 72.6% in October from a month ago -- up 106.2% from October 2008, CPM Group data showed.

"Although fabrication demand is important, it is investment demand that tends to have a more dynamic effect on silver prices," said Chintan Parikh, a commodity analyst at CPM Group in New York.

"This is because of the larger dollar volumes of money that can be involved with investment demand, the speed and intensity with which investment demand trends can rise, fall and reverse course, and the ultimately total discretion that investors have over whether they wish to be involved in silver at all," he said.
Fame and fortune

But while some agree that benefits for silver's precious metal characteristics have outweighed the pluses from its industrial uses, that industrial label may soon turn out to be of lesser hardship.

"The industrial uses for silver are numerous and generate substantial additional demand for silver outside its precious metal usage," said Patrick Kerr, managing director at Amerifutures Commodities & Options.

True, silver's suffering from a falloff in demand from the photography world as consumers turn to the digital age, but industries are finding other uses for the versatile metal, including medical applications, and actually consuming supplies as they use them.

"Silver is consumed and gone forever in most applications," said Julian Phillips, an editor at SilverForecaster.com. On the other hand, "huge efforts are made to recover gold, so essentially it is not consumed."

Gold's much higher value prompts great efforts to recycle it. In fact, "all the gold mined in the world ever is still with us, but a huge amount of silver has been used in photography, mirrors and other industrial uses in the last 200 years," according to the GoldCore report. "The low price of silver makes recovery and recycling uneconomic."

So "industrial demand has been outstripping mining supply for most of the last 20 years, driving above-ground supply to historically low levels" and silver production has been flat in recent years, while demand has been increasing, the report said.

As a result, refined silver stocks are near an all-time low, with stocks dropping from around 2.2 billion ounces in 1990 to around 300 million ounces today, it said.

"At one time, silver was more expensive than gold, but that was in the days of Egypt's Pharaohs," said Phillips.

And while no one wants to say that will ever happen again, most analysts expect that silver prices will soon react to gold's recent gains.

Prices for silver could spike to $18.25 or even $20 between now and December, according to CPM Group.

GoldCore expects to see prices at well over the nominal high of $50 an ounce and, eventually, surpass the inflation-adjusted high of some $130 per ounce in the coming years.

"Ultimately, silver tends to exhibit its largest spurts in the latter stages of a major gold up legs," said Zeal's Wright. "Once speculators and investors start to get excited about this metal, it can really fly -- and fast."

CNBC: A New Global Currency and a New World Order

The dollar will get "utterly destroyed" and become "virtually worthless", said Damon Vickers, chief investment officer of Nine Points Capital Partners. Due to the huge wage disparities between the United States and emerging markets like China, Vickers said that may resolve itself in some type of a global currency crisis.

"If the global currency crisis unfolds, then inevitably you get an alignment of a global world government. A new global currency and a new world order, so we may be moving towards that," he said.

Documents reveal SEC complicity in Madoff Ponzi scheme

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Andre Damon
Documents relating to the investigation of Bernard Madoff released last Friday by the Securities and Exchange Commission (SEC) highlight the complicity of the US regulatory agencies in one of the biggest financial frauds in history.

Madoff pleaded guilty on March to 11 felonies, for which he was sentenced to 150 years in jail. From the late 1980s or early 1990s, Madoff turned his well-connected investment firm into the largest pyramid scheme in history. When the fraud collapsed in December 2008, it wiped out $61 billion in investments. Prominent and wealthy investors, induced to invest with Madoff because of his stature as a major figure on Wall Street and his phenomenal record of providing healthy returns of 12 percent of more in good times and bad, lost millions.

Banks and hedge funds around the world lost hundreds of millions and even billions. University endowments, charities and other institutions that entrusted their money to Madoff or to hedge funds that invested in Madoff’s firm suffered massive losses. Numerous charities were forced to close. Thousands of retirees of modest means whose life savings were tied to Madoff’s operations lost everything.

The first chairman of the NASDAQ Stock Exchange and a member of the board of governors of the National Association of Securities Dealers, Madoff was something of a Wall Street legend. In 2000, he was appointed by then-SEC Chairman Arthur Levitt to a committee of academics, regulators and executives formed to advise the SEC on new stock market rules in response to the growth of electronic trading.

The documents released last week show that Madoff’s firm was investigated at least five times by the SEC, but that each time the commission failed to take rudimentary steps that would have revealed his Ponzi scheme. The SEC repeatedly gave Madoff’s firm a clean bill of health, which he used to reassure his clients that his operation was legitimate.

Had regulators made an even minimal effort, they would have found that Madoff made no trades with his clients’ money over a period of decades. Rather, in a classic Ponzi scheme, he used money from new investors to pay dividends to his previous clients.

SEC investigators relied solely on Madoff’s own records, and did not check either with Madoff’s counterparties or with Wall Street’s major clearing house, which kept records of his transactions, or lack thereof.

In one of the documents, a jailhouse interview between Madoff and David Kotz, inspector-general of the SEC, Madoff said that finding a Ponzi scheme of his type is “very easy if you want. You must do a third-party check. It’s absolutely a must.” He added, “It’s Accounting 101.”

Madoff told Kotz that after being interviewed by SEC investigators, he fully expected to be arrested within days, and was “amazed” when nothing happened.

The regulators merely went through the motions, despite suspicions about Madoff’s operation among professional investors and dealers. In 1999, Harry Markopolos, a securities industry executive, wrote to the SEC, saying, “Madoff Securities is the world’s largest Ponzi Scheme.” Markopolos repeatedly pressed the SEC to expose Madoff, but to no avail.

Internal records show that Madoff lied to the SEC about whether he gave investment advice to clients. Even though lying to investigators is a prosecutable offense, the SEC took no action. As one SEC investigator wrote in a 2006 e-mail, “I don’t think we should worry about Bernie finding out to whom we speak…. [W]e are not telling anybody that we have found anything improper (except for his lies to us, of course).”

These documents confirm that the SEC instigations were merely pro-forma operations that did not aim to find or prosecute any wrongdoing. “When potential investors expressed hesitation about investing with Madoff, he cited the prior SEC examinations to establish credibility and allay suspicions on investor doubts,” Kotz told the Senate Banking Committee two months ago.

During his interview with Kotz, Madoff said that Mary Shapiro, the current head of the SEC, is his “dear friend.” Madoff also said that he knew Arthur Levitt, head of the SEC from 1993 to 2001, “very well” and had lunched with him.

Madoff on a number of occasions prior to the collapse of his scam boasted of his influence in regulatory circles. He told Kotz that he “wrote good portions of the rules when it comes to trading.”

The entire episode is an example of the corruption that pervades Wall Street and the relations between major Wall Street players and the government. In his interview, Madoff admitted that he did not know how to properly record a credit default swap. He said he called a number of major banks, and none of them knew either. They had just been keeping their transactions off their official records. Madoff said that “today, lots of trades are done off the books because people don’t know what to do with them.”

Such practices are common and are protected by the government agencies that supposedly regulate the banks and financial institutions.

In an op-ed piece published Tuesday, Washington Post columnist Richard Cohen sets out to whitewash the role of the government in the Madoff fraud by attributing the complicity of financial regulators to the incompetence of individual investigators. He writes: “It would be reassuring if the IG [inspector-general] discovered that some of the investigators were on the take or that Madoff had offered them Wall Street jobs when they grew up. But this was not the case. The investigators were honest—just blazingly incompetent.”

This is an example of damage control by the media, including liberal pundits such as Cohen. The attempt to reduce the government’s role in the Madoff fraud to the mistakes of low-level operatives is absurd.

The issue is not whether individual SEC investigators were directly bribed by Madoff. They were carrying out a long-established policy emanating from the highest echelons of the regulatory system, at the direction of both Republican and Democratic administrations and Congress, to shield major players on Wall Street from prosecution for dubious and outright illegal practices that are standard operating procedure within the financial establishment. Madoff’s fraud was only a particularly crude form of the type of financial speculation and swindling that plays a major role in generating huge profits by banks and finance houses and sustaining the eight-digit bonuses awarded to top executives and traders.

Investigators and regulatory officials who “play ball” with the likes of Madoff are routinely rewarded with jobs on Wall Street that make them overnight multimillionaires.

One example of the direct role of the government in running interference for Wall Street was documented last month in an episode of the PBS series “Frontline.” Entitled “The Warning,” the program dealt with the brief career of Brooksley Born as head of the Commodities Futures Trading Commission during the Clinton administration. Born was forced out by then-Federal Reserve Chairman Alan Greenspan and top Clinton financial officials Robert Rubin and Lawrence Summers when she pressed for regulation of the derivatives market.

In the documentary, sources around Born describe her first meeting with Greenspan, during which the Fed chairman was said to have announced that the two of them were destined to disagree, particularly on the need to make rules against fraud. He was reported to tell Born “you feel that there need to be rules against it and I feel that the market will sort it out.”

In December 2008, after Madoff turned himself in, the World Socialist Web Site wrote, “Madoff’s scam could not have been carried out without the complicity of the highest echelons of the financial elite and the government…. The role of the SEC epitomizes the transformation of government regulatory agencies into the facilitators of financial fraud on a colossal scale. Its job has become running interference for the skullduggery of brokerage houses, hedge funds and banks.

“The removal of any regulatory restraint on the operations of the banks and finance houses over the past three decades is itself an expression of the crisis and decay of American capitalism. The hallmark of this process is the growth of financial parasitism. It is the other side of the coin of the systematic dismantling of large sections of industry and the relentless attack on the jobs and wages of the working class. This assault, in tandem with the unfolding economic crisis, is entering a new and even more brutal stage.”

The presence of figures such as SEC head Mary Shapiro, National Economic Council Director Lawrence Summers and former New York Federal Reserve Bank President Timothy Geithner at the summit of the Obama administration’s financial and regulatory apparatus makes clear that the government’s role in shielding Wall Street remains intact.

Gold Fever Is Heating Up

Money Week

Not surprisingly, given the dollar's weakness, commodity action has been very positive. Two weeks ago we said that, on the CRB exceeding 271, commodities would become a buy opportunity. As you can see from the latest chart, that occurred. This is a signal of considerable importance and suggests that a long term commodity bull market is now secure. If that turns out to be true, it may be implying an even steeper collapse of the dollar.

The crude oil chart also featured in the previous issue. Here we said that a break above $74 would signal a buy - it has happened. We have, accordingly, invested 7.5% in the Investec Global Energy Fund. This fund, which is positioned in high quality energy equities, should benefit considerably from a higher oil price. It is thought that globally the oil majors are valued based upon oil at $55 pb, in our view a long term outlook which is too conservative.

We also noted the buy signal for the CRB index, and acquired a 7.5% position in a grain ETF, which is invested approximately 29% in corn, 44% in soybean and 26% in wheat. We still hold the natural gas ETF which was purchased on 11 September; it is now ahead by 11.25%. We expect prices to be volatile but there should be a sharp recovery next year driven by considerable cuts in drilling activity.

Our longstanding gold positions are set to deliver very significantly over the next year or so. A weak dollar will add considerable impetus to the gold price, as will the policy of money creation and devaluation pursued by many of the major economies of the world. The investment case for gold as the ultimate currency is very comprehensible:

• Deflation and inflation both bullish for gold.
• Gold is the only currency whose production is going down not up.
• Negative real rates are bullish for gold.
• Potential increased investor and central bank buying as a store of value in order to diversify US dollar exposure.

Since gold exceeded $1,000/oz the price has been extremely resilient with no meaningful pullback. Although there has been some large profit taking, there is plenty of demand on any weakness. In September, the Russian Central Bank added 400,000 ounces to their gold reserves; they now total 19 million ounces. This year to date they have bought a huge 2.3 million ounces.

Cheng Siwei said that China is incrementally diversifying out of dollars and gold is one of their choices. China is the world's largest producer of gold, but holds only 1,054 tonnes of gold reserves, amounting to less than 2% of total foreign reserves. Extraordinarily, the Chinese government has also been advertising gold on Chinese television, encouraging citizens to acquire it.

Good old "gold fever" is heating up. There is a huge market in scrap gold with advertisements everywhere and Harrods is now selling it.

Over the next few months we would expect the commodity sector to deliver significant returns, led by gold bullion.