Inflation - updates

I raised the issue of inflation previously in December 2010 on my blog. Are you convinced? If not, the following arguments should firmly put you into the inflation camp.

Now it is getting more obvious. Inflation fear is getting onto to mainstream press. Gold and silver are at historic highs.  Oil hits >$110 although it fell back today after the IMF downgraded economic growth in US and Japan.

Bernanke of US Fed is the only one now that believes that there is no inflation.

Europe raises interest rates despite all the needs to bailout Portugal, Ireland, Greece and possibly Italy and Spain.  Canadian rates are strengthening.

Bill Gross announced that he sold off ALL treasuries. Today, I also read that Gross is net short on US treasuries.

In almost every part of the world, government are fighting inflation. 

- Singapore consumer inflation hit 5% in Feb. Food, fuel, commodity and property prices showed the fastest price increases.

- Inflation in Indonesia is 6.6%. That is taking consideration of government subsidy on food and fuel. Without it is a lot higher.

- South Korea's inflation is 4.7% - a 29 month high. It is announced that fighting inflation is first priority.

- Inflation in Vietnam is expected to reach 13.3%

- India experienced the high inflation rates of 8.3% in Feb 2011

- In China, the consumer price index rose by 4. Last week, the Peoples Bank of China

raised interest rates by 25 basis points, the fourth time in six months and second

time in 2011.

China’s imports in March rose 27.3% from a year earlier, up from February’s 19.4% rise.  For the quarter,  China registered adeficit of $1.02 billion. This is pretty big news.

 Looking at the private sectors,

o Walmart CEO came out and warned seriously about inflation

o Hershey announced that it will raise prices of its candy products by 9.7% to cover rising material cost, fuel and transportation.

o Starbuck raised the price of its package coffee products by 12%. Coffee price has nearly doubled in the last year.

o Nike announced that it will raise the price of its shoes by average of 5.2% 

o Kraft Food is serving smaller portions and reducing serving sizes to respond to rising costs. It is similar to increasing the price by 8.3%

The Consumer Price Index rose at an annualized rate of 2.1% in February (the most-recent statistics available), according to the Bureau of Labor Statistics.

Fresh vegetables and meats rose the fastest, and dairy products are at their highest level since 2008. Fruit is up 10.6%; pork up 9.9%; ground beef up 9.9%; and potatoes up 5.9%.

The short-term picture looks ever more worrisome. The annual rate of price change for the six months ended in February was 3.9%. Using the last three months, the annual rate of change is 5.6%.

Conditions will get even worse now that oil has crossed the $100 threshold and looks to stay high — if not move higher — because of Middle East unrest.

The national average for a gallon of gasoline hit $3.61, but it’s even higher in some parts of the United States, according to AAA. Gasoline prices in California, for example, hit an average of $4.04 last week.

Gas prices are roughly $1 a gallon higher than they were a year ago, and since the average American family uses about 1,200 gallons of gasoline a year, that’s an extra $1,200 a year out of their pockets and a major hit to household budgets.

One baffling event is that consumer stocks are still up. BBBY announced excellent results. Retails are surprisingly strong! Honestly, I cannot explain. Possible reason is that people are making money from the stock market and start spending again!

One thing that is not rising is housing price. On the whole, people are poorer in assets and they have to pay more for necessities like food and gas. Despite low interest rates, both new and existing home sales continue to fall.  This is for a number of reasons.  The market is well aware of the foreclosure overhang in the market and recent reports suggest that 27% of homes in the US are now underwater (the homeowner owes more on their home than it is worth).  Banks are holding onto significant foreclosure reserves, and either are unwilling to sell them as they look for better market conditions, or else they cannot sell them because the paperwork is not in order.

So it is a double whammy. People are poorer because of lower housing price and have to pay more for their daily necessity.

Still not convinced? Inflation rate is actually around 10% if you the methodology used during former Fed Chairman, Paul Volcker.  Read this in CNBC yesterday.,

Gold and Silver

I had given various updates and analysis of the stocks I trade relating to gold and silver.

The last update was given on Dec 2010. It was a rather comprehensive essay on why I am bullish on gold and silver. Also given in this blog was two of the favorite stock for gold and silver.  Both Goldcorp and Silver Wheaton have done extremely well.

With gold and silver rising to historic level, are we hitting a bubble? Am I still bullish?

Lets examine some of the the macro perspective:

1. Inflation

Inflation is becoming more obvious now. I will be writing an extensive update on inflation in my next post. Inflation is good for the precious metal. It is a fantastic hedge against inflation.

2. Debt and deficit. 

Listed top reason for the rise of gold  in my previous update is the devaluation of the dollar, increasing debt and widening deficit.

Debt to GDP is now 3.8 times GDP. This is equal $180,000 in debt for every man. There is no way US can repay the debt. 

The only way to get out of this debt is the devaluation of the dollar. Gold price will rise as the dollar decline. 

Recently, Bill Gross of PIMCO - manager of the world biggest bond fund sold all treasury and went short against it. 

He is even more pessimistic. He said recently that the US true debt is $75T, which is 500% of GDP ( includes unfunded liability medicare, pension etc ). Interest alone is equal to the full budget of the country. It is like a man has so much debt that his entire salary cannot service even service the interest payment. Technically, US is bankrupt.

o Technical picture

Technically, gold and silver had broken out last week after a period of consolidation and multiple tops for the last 3 months. Today, we witnessed some profit taking. But gold should meet support at 1440 and silver at 39. If held at this level, I plan to add to my positions. I see gold above 1500 and silver above 50 in a short term if the supports hold verifying that it is not a fake breakout.

o Dollar is breaking down

The dollar is at a very dangerous level now. If broken down below 75, it will accelerate down quickly to 72. Gold will continue to rise exponentially.  

o Investing public and funds holding gold still small.

The big question is whether gold is a bubble. Yes, there is more public awareness now but it is far from being a bubble.

Gold as a percent of financial asset is increasing but still far from historical levels.

Despite rising from under $1,000 an ounce to over $1,420 over the past six months, that represents only a 0.7 standard deviation move for gold prices, according to Credit Suisse (CS). The average standard deviation move of other bubbles—Japanese equities in 1986, the tech boom in 1999, the GSCI in 2005 and gold in 1979—is 5.3. Gold’s 180 percent move in 1979 represented a 10.3 standard deviation move, more than 14 times the magnitude we see today.

Eric Sprott recently did a fascinating presentation explaining how underowned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent. That’s a big increase from the 0.2 percent level in 2002, but Sprott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.

Also reported by Dr Marc Faber is that percent of gold to pension fund is still minimal.

Silver was down today mainly because one trader made a huge bet of $1m on options that it will drop 37%. Thus no reason to panic for the drop today.

In closing, I like to add a quote from Alan Greenspan. He is the father of the bubble in the US. But there was an interesting quote from him:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value... The financial policy of the welfare state requires there be no way for the owners of wealth to protect themselves.

Gold is a good hedge for inflation and devaluation of paper currency

Fundamentals has not changed. It has actually got stronger by the month.

April Updates

I have taken a break in the month of March from writing on the blog. I went for a spring break on a cruise to West Caribbean. It was a wonderful time with the family but that is no excuse for not writing. I was away only for 10 days.

I alluded to some expectations on the market before I left. I awaited a correction of 10%. I waited in Jan, Feb and March, and it did not come again! I had accumulated more than 50% cash. I hedge all my positions before I left for my holidays.

The market continued to go climb the wall of worry and goes up. Despite all the negative events in Libya, Egypt, Middle East tension and unrest, earthquake in Japan, escalating risk of debt situation in Europe and high price of oil, the market continues its ascension with no fear.

I am now leaning to the direction that the market will continue to be bullish for a while. There is so much liquidity. Merger and acquisition happens on a weekly basis.

On the other hand, the dollar has hit its very important support level at 75. It continues to exhibit weakness. If this support is broken, it can go down quickly to 72.  The weakness of the dollars is also positive for stock and commodities. As the dollar is being destroyed, assets price goes up ( except housing ). The winners are gold, commodities and stocks that has good exposure outside US.

Gold and silver broke all time historic highs. It was a surprise to me. I expected it to continue to go up but not at this pace without a meaningful correction.

Thus, I am again leaning bullish again. I want a confirmation from the earnings the start of the earnings week. If it is positive, I can expect the market to continue to climb for the next 4-6 weeks. I can delay the expectation for a correction. 

My portfolio is still positive but it was a slight disappointment for me.  Upon reflection, it is prudent for me to hedge in view of all the negative events that happened in March. The market has proven to be very resilient.

With such a rise in the precious metals, I should  have been riding happily on the trend. I did not although I enjoyed some gains.

Also, as most of my positions are in USD and my account is based on Canadian dollars, I suffer some losses. These losses are higher than the gains on my stocks in USD.

Anyway, the opportunities will be there again. Just need to stay on my system and continue to trade with discipline and risk control.