World Money Analyst Update on Russia

By John Mauldin

In last week's special Thursday edition of Outside the Box, World Money Analyst Managing Editor Kevin Brekke interviewed WMA contributor Ankur Shah on emerging markets, but they didn't touch on one very important emerging market: Russia. So this week I have brought Kevin back to sound out the views of Alexei Medved, WMA's Russia and CIS contributing editor.

And right off the top, Alexei tells us two significant and surprising things about the Russian market:

One should look at investing in Russia from at least two time perspectives: long term, meaning 10 plus years, and a medium time horizon of 1-3 years.

Long term, Russia is still the best performing major stock market in the world for the period 2000–2013, when measured in U.S. dollars against the major market indexes. It is well ahead of not only all developed markets, but also the markets in China, Brazil, and several other emerging markets that were and are much more a centre of attention by Western media and investors. This long-term outperformance was achieved despite the fact that 2013 was not a good year for Russian equities, with the RTS Index down 5% in 2013.

Medium term, the Russian market remains the most undervalued. The average P/E is about 4.5, significantly below other emerging markets and way below the multiple on shares in the developed markets.

Needless to say, there are challenges with investing in Russia, too; and Alexei and Kevin cover them thoroughly. If you have wondered about Russia – or for that matter the markets of emerging and developed countries anywhere else in the world – you really should tune in to World Money Analyst.

John Mauldin, Editor

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World Money Analyst Update on Russia

 

World Money Analyst: I am very pleased to speak with Alexei Medved. Alexei is the Russia and CIS contributing editor at World Money Analyst, and I caught him at his office in London. Thank you for joining us today.

Alexei Medved: My pleasure, thank you for inviting me.

WMA: As you and I have discussed before, Russia remains a little understood market for many Western investors. Can you talk a little about the investment backdrop for Russia?

Alexei: One should look at investing in Russia from at least two time perspectives: long term, meaning 10 plus years, and a medium time horizon of 1-3 years.

Long term, Russia is still the best-performing major stock market in the world for the period 2000–2013, when measured in U.S. dollars against the major market indexes. It is well ahead of not only all developed markets, but also the markets in China, Brazil, and several other emerging markets that were and are much more a centre of attention by Western media and investors. This long term outperformance was achieved despite the fact that 2013 was not a good year for Russian equities, with the RTS Index down 5% in 2013.
Medium term, the Russian market remains the most undervalued. The average P/E is about 4.5, significantly below other emerging markets and way below the multiple on shares in the developed markets.

WMA: How has the Russian market held up so far this year, with emerging markets under pressure?

Alexei: Since the start of this year, the Russian market has underperformed other markets, down 8% in US dollar terms. This, to a large extent, could be explained by a noticeable decline of the ruble against the US dollar (-5.5%).

As you know, so far this year many emerging markets and emerging market currencies have been punished significantly, as Western institutional investors became worried about macroeconomic pressures in some of the emerging economies, like Turkey and Argentina. These countries have problems that are real and serious: too much external debt, a trade deficit, a budget deficit, declining foreign currency reserves, etc. So, it is understandable why foreign investors withdrew a lot of money from these markets recently.

What is hard to understand is why they also withdrew significant amounts of money from the Russian market. In my view, it is primarily because most investors continue to view emerging markets as a single class of investments. So, when they withdraw money they do it across the board, in all emerging markets. This is generally not the best approach. In contrast, investors do not approach developed markets as a single class, but differentiate between the countries.

WMA: Using your examples of Turkey and Argentina, how does Russia compare in terms of the macro picture?

Alexei: The macroeconomic position of Russia is vastly different from that of Argentina or Turkey. For starters, Russia has a positive trade balance and a balanced budget, unlike these and many other emerging and developed countries. Russia also has a very low debt load, with the ratio of external government debt-to-GDP around 10%, much lower then the roughly 95% in the US and even higher in some European countries. Further, the unemployment rate in Russia is around 5.5%, meaning the country is essentially running at full employment.

The unrefined "sell everything that's emerging" approach apparently in play by Western institutional investors has led to the Russian market being unjustifiably punished. The good news is that the punishment has created even better investment opportunities for investors who can avoid “heard mentality.” There are solid, profitable Russian companies that are trading today at very low valuations.

WMA: One of your areas of expertise is the use of short-dated, US-dollar-denominated Eurobonds to capture higher yield and manage risk. Can you explain this strategy a little for our readers?

Alexei: Of course. I think Russia and the CIS also present a good opportunity for fixed income investors. Given my serious worries about a possibility of rising inflation and yields in developed markets, we recommend investing only in relatively short-term bonds (under 4 years). Our [Alexei's independent business] weighted portfolio maturity is now under 2 years. One can either invest in Russian sovereign debt or the safest corporate bonds and receive somewhat higher yields than in comparable developed economy bonds. Investing in bonds that do not have an investment grade rating from one of the major rating agencies is another option.

Based on our local knowledge, we particularly like some high-yield bonds where we have a decent understanding of the company and believe that the bonds will be repaid, despite fairly low ratings from the credit agencies. This way, we invest in bonds that offer 10%-12% yields.

WMA: Switching to issues of politics and governance, many observers are concerned about issues of corruption in Russia, making it difficult for an investor to navigate the market. Has the current government embraced reforms on this?

Alexei: Obviously, one has to be very careful when considering investing in Russian equities or bonds. For investors that lack knowledge about the country, I do not recommend they attempt a do-it-yourself approach to selecting Russian shares. A better approach is to either invest through an index fund or to seek share selection advice from people who specialize in the Russian market on a day-to-day basis. This is in spite of the fact that over the last decade, Russia to some extent became much more investable.

Back to your question, corporate governance has generally improved, although perhaps not as much as some investors would like. The government is taking steps in this direction, yet a lot remains to be done. As Russia recently became a full member of the World Trade Organization (WTO), and its market is opening up to external competition, Russian companies will have to become more efficient to compete, and thus more profitable for investors wake up to the reality that Russia is a serious global player that's here to stay. This opens up even more opportunities for investors.

WMA: The January issue of World Money Analyst highlighted the importance of taking a longer view on markets and investments, something that you and I agree on. You've made some great recommendations at WMA, and recently advised to take profits on two stocks that were held for a year or longer. Can you briefly go over these trades?

Alexei: Yes, as I said earlier, one has to look at these opportunities on a medium- to long-term investment timeline and not attempt to trade these markets, as one’s investments can get unjustifiably punished, as is happening now. We have been active in the Russian market for over 20 years and certainly maintain such an approach when we look at investments to recommend to our clients. Once the investment is made, we monitor it on a constant basis, as one cannot just “salt it away.” Once the shares reach our target price, we sell them and move on to the next opportunity.

In the January 2014 issue of WMA, I recommended taking profits on two positions. The first was the shares of Russian airline Aeroflot, recommended in the January 2013 issue. By January 2014, its shares had moved up nicely on the back of stellar company operating results. We advised to sell the shares and realized an 84% gain, including the dividend, in 12 months.

The second was the shares of AFK Sistema, a large cap (US$18 billion) company that restructured itself from a conglomerate into essentially a private equity fund. I recommended its GDRs in the July 2012 issue. By January 2014 the shares had moved up significantly, and I advised to sell in that month's issue of WMA. We pocketed a total return of 63% in 18 months.

These returns are particularly remarkable against a negative 5.6% return of the Russian RTS Index in 2013.

While we still like both of these shares, their significant appreciation had reached our price targets, so it was time to cash in some chips. And seeing that these shares are now trading lower, we got out at the right time and preserved the investors’ profits.

WMA: We can't talk about Russia and not mention the ruble. Investing in certain currencies – like the Canadian dollar and Norwegian krone – has been in vogue for several years on the premise that these are "resource currencies" supported by the natural resource wealth of the issuing country. With Russia's vast mineral and commodity wealth, should we consider the ruble a commodity currency?

Alexei: Given that Russia is a large producer of oil, gas, and some other commodities, to some extent the ruble should be seen as a commodity currency, perhaps even a petrocurrency. So, if one believes that the oil price is likely to decline significantly and stay low for years to come, one should not buy Russia. However, if one believes that the oil price trend is flat to up in the medium and long term, Russia will do well macroeconomically.

WMA: Next to the emerging markets, another big issue is developments in Ukraine. You have covered Ukraine for World Money Analyst subscribers. The country seems to be caught in a conflict about alliances: to enter into a closer economic alignment with Moscow, or shift to stronger ties with the EU. What are your thoughts on this and the investment implications for Ukraine?

Alexei: It is very sad that the situation in Ukraine has deteriorated as far as it has. Some lives have been lost. Ukraine is torn between the current government that is leaning towards the Customs Union with Russia, and a large proportion of the population, perhaps a majority, which would support a closer cooperation with the EU.

Ukrainians are also fed up with perceived government corruption and diminishing civil liberties in the country. In December, Russia provided a US$15 billion rescue package to Ukraine and immediately disbursed US$3 billion. It remains to be seen which way the current situation will be resolved.

However, there are some corporate bonds in Ukraine that should be relatively immune to this political turmoil. One of the companies we like in Ukraine is MHP, the largest chicken meat producer in Europe. The company is fairly insulated against possible further depreciation of the local currency, as it sells 37% of its products abroad. After the recent sell off in Ukrainian bonds, one can buy the Eurobond of MHP priced in US$ with a maturity in April 2015 and a yield-to-maturity of 10.6%. Such a high yield on short-dated paper is very hard to find elsewhere.

WMA: Any final thoughts for investors about the opportunities in Russia?

Alexei: The latest sell off of Russian shares represents an opportunity to buy quality companies at discount prices. Today, we can see compelling value in world class companies with assets not just in Russia but globally (including the USA), good corporate governance, and nice dividends. In short, I agree with Warren Buffet: “Buy when others are fearful.”

WMA: Alexei, thank you for sharing your valuable insights into the dynamic Russian market.

Alexei: You are welcome. My pleasure.

Learn more about World Money Analyst here.

The article Outside the Box: World Money Analyst Update on Russia was originally published at mauldineconomics.com.

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Weekly Coffee Futures Recap for Friday February 21st

It's time to check in with our trading partner Mike Seery for his take on where coffee ended the week.


Coffee futures in the May contract rallied 3000 points this week closing right near contract highs at 170 a pound all due to the fact of a major drought in central Brazil which is the largest grower of coffee in the world sending prices up about 60% in the year 2014 and I’m still recommending if your long this market to continue to stay long as I think 2.00 is coming relatively soon and could happen on Monday especially if no rain happens over the weekend. Volatility is very high in this market currently so if that scares you look at the July bull call option spreads limiting your risk to what the premium costs allowing you to live through these daily fluctuations as this volatility should continue for months to come.

Coffee futures are trading far above their 20 & 100 day moving average with awful chart structure currently, however if you are long a futures contract I would place my stop below the 10 day low which is around 135 a pound which is quite a distance away, however this stop will be raised on a daily basis and will become relatively tight in the next 5 days. When you trade the commodity markets you want to let your winners run and get out of your losers relatively quickly and this is the perfect example of one market like coffee that can make your entire year

Trend: Higher
Chart structure: Awful

Don't miss this weeks free trading webinar....Being the Architect of your next "Big Trade"

Being the Architect of your next "Big Trade"....This weeks FREE webinar!

This has been a BIG week for us and our trading partners. Last Tuesday John Carter of Simpler Trading treated us to a free webinar, "The Insiders Guide to the Big Trade", and once again he brought us another game changer.

This weeks webinar was over prescribed as 16,000+ investors and traders vied for a seat at this extremely popular class. And honestly, we got a lot of complaints as some traders logged on late only to find their seat had been taken.

John has heard you loud and clear so he added another webinar so don't wait. Sign up now, then make sure you get logged on 10 minutes before we get started.

It all starts this Tuesday, February 25th at 8:00 p.m. EST 

Get your seat now!

In this free online class we will share with you:

   *     The common thread these companies share

   *     How you can minimize your risk on these trades

   *     What time frames you should watch

   *     When to avoid the markets like the plague

   *     The best stocks to use – and why you need to trade options on them

          And much more…...

If you haven't seen it make sure to catch John's video from last week. He showed us some live trades in his actual account that puts some of these methods to work. One of these trades he shows us from January 14th is a definite must see!

John has also created another video this week that shows how he "puts" [pun intended] these methods to work. Tesla [ticker $TSLA] has been in the news. Let's see how John worked this trade, watch "Trading Tesla Puts" right now.

Just visit John's registration page and mark your calendar. 

See you on Tuesday, 
Ray @ The Crude Oil Trader


Register for "The Insiders Guide to the Big Trade"

99 Problems… And Crude Oil Ain’t One of Them

By Marin Katusa, Chief Energy Investment Strategist

America has some serious problems.


Despite the fact that the United States spends $15,171 per student—more than any other country in the world—American students consistently trail their foreign counterparts, ranking 23^rd in science and 31^st in math.

The US also spends more than twice as much on health care per capita than the average developed country, yet underperforms most of the developed world in infant mortality and life expectancy. The U.S. rate of premature births, for example, resembles that of sub-Saharan Africa, rather than a First World country. And if you think Obamacare is going to change that… I have a bridge to sell you.

K Street has a bigger influence on American politics now than Main Street, and economic key players like the TBTF banks, the insurance industry, etc., have nearly carte blanche to act in whichever way they see fit, with no negative consequences.

The US government is spending more money to spy on Americans and foreigners than ever before. Since August 2011, the NSA has recorded 1.8 billion phone calls per day (!)—with the goal of creating a metadata repository capable of taking in 20 billion "record events" daily.

More than one in seven Americans are on the Supplemental Nutrition Assistance Program (SNAP)—better known as "food stamps."

The list goes on and on.

But there is one problem that America doesn't have......getting oil out of the ground.

After decades of declining domestic production, U.S. producers finally figured out how to extract oil from difficult locations, whether that's the shale formations or deposits under thousands of feet of water… and they've kept going ever since.

Today, the U.S. is one of the few countries in the world that have seen double digit growth in oil production over the past five years.

This presents some great investment opportunities for the discerning investor.

The oil industry's new treasure trove, the legendary Bakken formation, has turned formerly sleepy North Dakota into one of the hottest places in the United States. According to the Minneapolis Fed, "the Bakken oil boom is five times larger than the oil boom in the 1980s."

Unemployment in the state with 2.7% is the lowest in the nation; in Dickinson, ND, even the local McDonald's offers a $300 signing bonus to new hires, on top of an hourly wage of $15.
Here are some more fun facts, courtesy of the Fiscal Times:

• There are now an estimated 40,856 oil industry jobs in North Dakota, plus an additional 18,000 jobs supporting the industry. Between 2010 and 2012, Williston, ND, a town with a population of only 16,000, produced 14,000 new jobs.

• While other US states are struggling, some even being close to bankruptcy, North Dakota now has a billion-dollar budget surplus.

• The number of ND taxpayers reporting income of more than $1 million nearly tripled between 2005 and 2011—and that in a state with a total population of 700,000.

• The low population numbers will soon be a thing of the past, though: the population in the oil-producing region is expected to climb over 50% in the next 20 years.

• 2,000-3,000 new housing units are built every year in Williston, ND, but it's still not enough to fill the need. Rents have gone from a pre-boom $350 per month for a two-bedroom apartment to over $2,000 today… the equivalent of a studio apartment in New York's rich Upper East Side.

The entire "energy map" of the United States has been altered by the Bakken: the Midwest, rather than the Gulf, is now the go-to area.

And who profits the most? The pipeline companies that can quickly adapt to this new situation and the refinery companies that can use this readily available domestic oil.

Though the rest of the world is trying to catch up, the United States has a huge head start over everyone else. The advancements it holds in hydraulic fracturing and horizontal drilling had been built on the back of one and a half centuries of oil and gas exploration and the thousands of firms that service the drillers and producers.

So far, other countries simply lack the experience and the infrastructure to even compete.

In fact, American companies have spent 50% more money on energy research and development (R&D) than companies anywhere else in the world. What's more, they are exporting this technology across the globe, enabling other countries to unlock their own hydrocarbon reserves.

Obviously, they're not doing this out of philanthropy; there is a lot of money to be made by licensing out their technology and "lending a helping hand."

The biggest winners, hands down, are the energy-service companies that already know how to get oil out of US fields… and that apply these methods to other fields worldwide to boost production and reduce decline rates.

As the easy-to-extract oil depletes in the U.S. and abroad, oil companies and governments are beginning to look at past-producing oil fields. As it turns out, the producing wells drilled in the 1970s and '80s weren't very good at getting every drop of oil out of the ground. With modern technology, however, it is now possible to access previously out-of-reach deposits. Even a mere 5% or 10% improvement in oil recovery rates means billions, if not trillions, more in revenues.

Rediscovering previously overlooked fields was what started the boom in the Bakken as well as the Eagle Ford formations… and other countries are beginning to catch on.

We believe that this new trend of applying new technologies to old oil fields is not a fad but here to stay. That's why our energy portfolios are stocked with companies doing just that in Europe, Oceania, and even South America.

As it's becoming clear that the era of cheap, light, sweet crude is nearing its end, the industry is adapting to this new reality of oil becoming more difficult to access. And if investors want to make profits in today's energy markets, they, too, must learn to adapt.

Read our 2014 Energy Forecast for more details on what's hot and what's not in this year's energy markets. This free special report tells you about the 3 sectors we are most bullish on for this year, and which sectors to avoid in 2014. Read it now.


Don't miss this weeks free webinar "How to Architect the Trade"

The Energy Sectors You Should Invest in This Year

Top energy analyst Marin Katusa, frequently featured in the financial media such as Forbes, Business News, Financial Sense News Hour, and the Al Korelin Show, says two undervalued energy sectors will provide windfalls for smart investors this year.

The bullish side: The report details the most bullish energy sectors for 2014 and beyond.

In one of those bullish sectors, there is a country that boasts one of the lowest taxation rates for oil and gas plus has the benefit of a $12.00 per barrel difference in price.

The second one is an energy sector that is extremely undervalued right now, but is slated for major growth this year.

Another is poised to make big gains from the Putinization of Europe—and the resulting push for European countries to produce their own oil and gas.

See which companies are ready to make the biggest gains in the oil and gas industry this year (and it’s not the actual oil and gas producers).

The right time to get into these sectors is now, before the big gains are being made. Investors who get positioned early on can reap big rewards.

The bearish side: There are also three other energy investments that Marin recommends not to touch this year—not because these energy resources don’t have merit (Casey subscribers have invested in them before), but because the risk of losing your money is just too great right now.

Read his assessment, including which energy investments you should be bullish on for 2014 and which you’d only lose money on.

Click here for Marin’s free report, The 2014 Energy Forecast.



Don't miss this weeks free webinar "How to Architect the Trade"

The Insiders Guide to the Big Trade....this weeks free webinar

It's time for another wildly popular "game changing" free webinar, "The Insiders Guide to the Big Trade", from our trading partner John Carter at Simpler Trading.

It all starts this Tuesday, February 25th at 8:00 p.m. EST 

Get your seat now!

In this free online class we will share with you:

   *     The common thread these companies share

   *     How you can minimize your risk on these trades

   *     What time frames you should watch

   *     When to avoid the markets like the plague

   *     The best stocks to use – and why you need to trade options on them

          And much more…...

If you haven't seen it make sure to catch John's video from earlier this week. He showed us some live trades in his actual account that puts some of these methods to work. One of these trades he shows us from January 14th is a definite must see!

Just visit John's registration page and mark your calendar. 

See you on Tuesday, 
Ray @ The Crude Oil Trader


Register for "The Insiders Guide to the Big Trade"

Erosion of Trust Will Drive Gold Higher

By Casey Research

A Q&A with Casey Research


James Turk, founder of precious metals accumulation pioneer GoldMoney, has over 40 years' experience in international banking, finance, and investments. He began his career at the Chase Manhattan Bank and in 1983 was appointed manager of the commodity department of the Abu Dhabi Investment Authority. 

In his new book The Money Bubble: What to Do Before It Pops, [click here to order on Amazon.com]James and coauthor John Rubino warn that history is about to repeat. Instead of addressing the causes of the 2008 financial crisis, the world's governments have continued along the same path. Another—even bigger—crisis is coming, and this one, say the authors, will change everything. 

One central tenet of your book is that the dollar's international importance has peaked and is now declining. What will the implications be if the dollar loses its reserve status?

In a word, momentous. Although the dollar's role in world trade has been declining in recent years while the euro and more recently the Chinese yuan have been gaining share, the dollar remains the world's dominant currency. So crude oil and many other goods and services are priced in dollars. If goods and services begin being priced in other currencies, the demand for the dollar falls.

Supply and demand determine the value of everything, including money. So a declining demand for the dollar means its purchasing power will fall, assuming its supply remains unchanged. But a constant supply of dollars is an implausible assumption given that the Federal Reserve is constantly expanding the quantity of dollars through various forms of "money printing." So as the dollar's reserve status erodes, its purchasing power will decline too, adding to the inflationary pressures already building up within the system from the Federal Reserve's quantitative easing program that began after the 2008 financial collapse.

Most governments of the world are fighting a currency war, trying to devalue their currencies to gain a competitive advantage over one another. You predict that China will "win" this currency war (to the extent there is a winner). What is China doing right that other countries aren't? How would the investment world change if China did "win"?

As you say, nobody really wins a currency war. All currencies are debased when the war ends. What's important is what happens then. Countries reestablish their currency in a sound way, and that means rebuilding on a base of gold. So the winner of a currency war is the country that ends up with the most gold.

For the past decade, gold has been flowing to China—both newly mined gold as well as from existing stocks. But that flow from West to East has accelerated over the past year, and there are unofficial estimates that China now has the world's third-largest gold reserve.

The implications for the investment world as well as the global monetary system are profound. Why should China use dollars to pay for its imports of crude oil from the Middle East? What if Saudi Arabia and other exporters are willing to price their product and get paid in Chinese yuan? Venezuela is already doing that, so it is not a far-fetched notion that other oil exporters will too. China is a huge importer of crude oil, and its energy needs are likely to grow. So it is becoming a dominant player in global oil trading as the US imports less oil because of the surge in its own domestic fossil fuel production.

Changes in the way oil is traded represent only one potential impact on the investment world, but it indicates what may lie ahead as the value of the dollar continues to erode and gold flows from West to East. So if China ends up with the most gold, it could emerge as the dominant player in global investments and markets. It already has become the dominant player in the market for physical gold.

You draw a distinction between "financial" and "tangible" assets, noting that we go through a recurring cycle where each falls in and out of favor. Where are we in that cycle? With US stocks at all-time highs and gold down over 30% since the summer of 2011, is it possible that the cycle is rolling over?

Our monetary system suffers recurring booms and busts because of the fractional reserve practice of banks, which allows them to create money "out of thin air," as the saying goes. During booms—all of which are caused by too much money that banks have created by expanding credit—financial assets outperform, but they eventually become overvalued relative to tangible assets. The cycle then reverses. The fractional reserve system goes into reverse and credit contracts, causing a lot of promises made during the good times to be broken. Loans don't get repaid, unnerving bankers and investors alike. So money flees out of financial assets and the counterparty risk these assets entail, and into the safety of tangible assets, until eventually tangible assets become overvalued, and the cycle reverses again.

So for example, the boom in financial assets that ended in 1967 led to a reversal in the cycle until tangible assets became overvalued in 1981. The cycle reversed again, and financial assets boomed until the popping of the dot-com bubble in 2000. We are still in the cycle favoring tangible assets, but there is no way to predict when it will end. We know it will end when tangible assets become overvalued, but as John and I explain in The Money Bubble, we are not even close to that moment yet.

You cite the "shrinking trust horizon" as one of the long-term factors that will drive gold higher. Can you explain?

Yes, this is an important point that we make. Our economy, and indeed, our society, is based on trust. We expect the bread we buy from a baker or the gasoline we buy for our car to be reliable. We expect our money on deposit in a bank to be safe. But if we find the baker is putting sawdust in our bread and governments are using depositor money to bail out banks, as happened in Cyprus last year, trust begins to erode.

An erosion of trust means that people are less willing to accept the counterparty risk that comes with financial assets, so the erosion of trust occurs during financial busts. People as a consequence move their wealth into tangible assets, be it investments in tangible things like farmland, oil wells, or mines, or in tangible forms of money, which of course means gold.

Obviously, gold has been in a painful slump since the summer of 2011. What near-term catalysts—let's say in 2014—could wake it from its slumber?

We have to put 2013 into perspective, because portfolio management is a marathon, not a 100-meter sprint. Gold had risen 12 years in a row prior to last year's price decline. And even after last year, gold has appreciated 13% per annum on average, making it one of the world's best performing asset classes since the current financial bust began with the popping of the dot com bubble.

Looking to the year ahead, there are many potential catalysts, but it is impossible to predict which event will be the trigger. The derivatives time bomb? Failure of a big bank? The sovereign debt crisis returns to the boil? The Japanese yen collapses? It could be any of these or something we can't even imagine. But one thing is certain: as long as central banks continue their present money-printing ways, the price of gold will rise over time to reflect the debasement of national currencies. The gold price might not jump to its fair value immediately because of government intervention, but it will rise eventually and inevitably.

So the most important thing to keep in mind is the money printing that pretty much every central bank around the world is doing. The central bankers have given it a fancy name—"quantitative easing." But regardless of what it is called, it is still creating money out of thin air, which debases the currency that central bankers are supposed to be prudently managing to preserve the currency's purchasing power.

Money printing does the exact opposite; it destroys purchasing power, and the gold price in terms of that currency rises as a consequence. The gold price is a barometer of how well—or perhaps more to the point, how poorly—central bankers are doing their job.

Governments have been debasing currencies since the Roman denarius. Why do you expect the consequences of this particular era of debasement to be so severe?

Yes, they have, and to use Rome as the example, its empire collapsed when the currency was debased. Worryingly, after the collapse of the Roman Empire, the world went into the so called Dark Ages. Countries grow and prosper on sound money. They dissipate and eventually collapse when money becomes unsound. This pattern recurs throughout history.

Rome of course did not collapse overnight. The debasement of their currency cannot be precisely measured, but it lasted over 100 years. The important point we need to recognize is that the debasement of the dollar that began with the formation of the Federal Reserve in 1913 has now lasted over 100 years too. A penny in 1913 had the same purchasing power as a dollar has today, which, interestingly, is not too different from the rate at which Rome's denarius was debased.

After discussing how the government of Cyprus raided its citizens' bank accounts in 2013, you suggest that it's a near certainty that more countries will introduce capital controls and asset confiscations in the next few years. What form might those seizures take, and how can people protect their assets?

It is impossible to predict, of course, because central planners can be very creative in coming up with different forms of financial repression that prevent you from doing what you want with your money. In fact, look at the creativity they have already used.

For example, not only did bank depositors in Cyprus lose much of their money, much of what was left was given to them in the forms of shares of the banks they bailed out, forcing them to become shareholders. And the US has imposed a creative type of capital control that makes it nearly impossible for its citizens to open a bank account outside the US. Pension plans are the most vulnerable because they are easy to get at. Keep in mind that Argentina, Ireland, Spain, and Poland raided private pensions when those countries ran into financial trouble.

Protecting one's assets in today's environment is difficult. John and I have some suggestions in the book, such as global diversification and internationalizing oneself to become as flexible as possible.

You dedicated an entire chapter of your book to silver. Which do you think will appreciate more in the next year, gold or silver? How about in the next 10 years?

I think silver will do better for the foreseeable future. It is still very cheap compared to gold. As but one example to illustrate this point, even though gold underwent a big price correction last year, it is still trading above the record high it made in January 1980, which was the top of the bull run that began in the 1960s.
In contrast, not only has silver not yet broken above its January 1980 peak of $50 per ounce, it is still far from that price. So silver has a lot of catching up to do.

Silver is a good substitute for gold in that silver, too, can be viewed as money outside the banking system, which is an important objective to keep wealth liquid and safe today. But silver may not be for everyone, because it is volatile. This volatility can be measured with the gold/silver ratio, which is the number of ounces of silver needed to equal one ounce of gold. The ratio was 30 to 1 in 2011, and several months later jumped to 60 to 1.

So you can see how volatile silver is. But because I expect silver to do better than gold, I believe that the ratio will fall to 16 to 1 eventually, which is the same level it reached in January 1980. It is also the ratio that generally applied when national currencies used to be backed by precious metals.

Besides gold, what one secular trend would you be most comfortable betting a large portion of your nest egg on?

Own things, rather than promises. Avoid financial assets. Own tangible assets of all sorts, like farmland, timberland, oil wells, etc. Near-tangibles like the equities of companies that own tangible assets are okay too, but avoid the equities of banks, credit card companies, mortgage companies, and any other equities tied to financial assets.

What asset class are you most bearish on?

Without any doubt, it is government debt in particular and more generally, government promises. They have promised more than they can possibly deliver, so a lot of their promises are going to be broken before we see the end of this current bust that began in 2000. And that outcome of broken promises describes the huge task that we all face. There will be a day of reckoning. There always is when an economy and governments take on more debt than is prudent, and the world is far beyond that point.

So everyone needs to plan and prepare for that day of reckoning. We can't predict when it is coming, but we know from monetary history that busts follow booms, and more to the point, that currencies collapse when governments make promises that they cannot possibly fulfill. Their central banks print the currency the government wants to spend until the currency eventually collapses, which is a key point of The Money Bubble. The world has lost sight of what money is.

What today is considered to be money is only a money substitute circulating in place of money. J.P. Morgan had it right when in testimony before the US Congress in 1912 he said: "Money is gold, nothing else." Because we have lost sight of this wisdom, a "money bubble" has been created. And it will pop. Bubbles always do.

As James Turk said, "near-tangibles like the equities of companies that own tangible assets" (i.e., gold stocks) are good investments—and right now, they are dramatically undervalued. In a recent online video event titled "Upturn Millionaires," eight influential investors including Doug Casey, Rick Rule, Frank Giustra, and Ross Beaty gathered to discuss the new realities in the gold stock sector—and why the odds of making huge gains are now extremely high. Click here to watch the event.


Don't miss this weeks FREE webinar "Insiders Guide to The Big Trade" with John Carter

Your Account Changing Video. A Must Watch!

If you could apply three small changes to your trading that could max your returns, and cut your commissions wouldn't you want to do it?


Watch: Three Account Changing Strategies


In this streaming video, you'll learn the three changes John Carter made to his trading that helped him earn more then a million dollars in one month. And this can be done in any size account large or small.


See his actual account and HOW right HERE


John shows his trades, both winners and losers, and shows you how you can do what he did to change his trading forever. Let's get started today.

See you in the markets!
Ray @ The Crude Oil Trader


So.....Who is suckering you into taking the wrong trades at the wrong time

Paper Gold Ain’t as Good as the Real Thing

By Doug French, Contributing Editor

For the first time ever, the majority of Americans are scared of their own federal government. A Pew Research poll found that 53% of Americans think the government threatens their personal rights and freedoms.


Americans aren't wild about the government's currency either. Instead of holding dollars and other financial assets, investors are storing wealth in art, wine, and antique cars. The Economist reported in November, "This buying binge… is growing distrust of financial assets."

But while the big money is setting art market records and pumping up high end real estate prices, the distrust in government script has not pushed the suspicious into the barbarous relic. The lowly dollar has soared versus gold since September 2011.

Every central banker on earth has sworn an oath to Keynesian money creation, yet the yellow metal has retraced nearly $700 from its $1,895 high. The only limits to fiat money creation are the imagination of central bankers and the willingness of commercial bankers to lend. That being the case, the main culprit for gold's lackluster performance over the past two years is something else, Tocqueville Asset Management Portfolio Manager and Senior Managing Director John Hathaway explained in his brilliant report "Let's Get Physical.

Hathaway points out that the wind is clearly in the face of gold production. It currently costs as much or more to produce an ounce than you can sell it for. Mining gold is expensive; gone are the days of fishing large nuggets from California or Alaska streams. Millions of tonnes of ore must be moved and processed for just tiny bits of metal, and few large deposits have been found in recent years.

"Production post 2015 seems set to decline and perhaps sharply," says Hathaway.

Satoshi Nakamoto created a kind of digital gold in 2009 that, too, is limited in supply. No more than 21 million bitcoins will be "mined," and there are currently fewer than 12 million in existence. Satoshi made the cyber version of gold easy to mine in the early going. But like the gold mining business, mining bitcoins becomes ever more difficult. Today, you need a souped-up supercomputer to solve the equations that verify bitcoin transactions—which is the process that creates the cyber currency.

The value of this cyber dollar alternative has exploded versus the government's currency, rising from less than $25 per bitcoin in May 2011 to nearly $1,000 recently. One reason is surely its portability. Business is conducted globally today, in contrast to the ancient world where most everyone lived their lives inside a 25 mile radius. Thus, carrying bitcoins weightlessly in your phone is preferable to hauling around Krugerrands.

No Paper Bitcoins

 

But while being the portable new kid on the currency block may account for some of Bitcoin's popularity, it doesn't explain why Bitcoin has soared while gold has declined at the same time.

Hathaway puts his finger on the difference between the price action of the ancient versus the modern. "The Bitcoin gold incongruity is explained by the fact that financial engineers have not yet discovered a way to collateralize bitcoins for leveraged trades," he writes. "There is (as yet) no Bitcoin futures exchange, no Bitcoin derivatives, no Bitcoin hypothecation or rehypothecation."

So, anyone wanting to speculate in Bitcoin has to actually buy some of the very limited supply of the cyber currency, which pushes up its price.

In contrast, the shinier but less-than-cyber currency, gold, has a mature and extensive financial infrastructure that inflates its supply—on paper—exponentially. The man from Tocqueville quotes gold expert Jeff Christian of the CPM Group who wrote in 2000 that "an ounce of gold is now involved in half a dozen transactions." And while "the physical volume has not changed, the turnover has multiplied."

The general process begins when a gold producer mines and processes the gold. Then the refiners sell it to bullion banks, primarily in London. Some is sold to jewelers and mints.

"The physical gold that remains in London as unallocated bars is the foundation for leveraged paper gold trades. This chain of events is perfectly ordinary and in keeping with time-honored custom," explains Hathaway.

He estimates the equivalent of 9,000 metric tons of gold is traded daily, while only 2,800 metric tons is mined annually.

Gold is loaned, leased, hypothecated, and rehypothecated, over and over. That's the reason, for instance, why it will take so much time for the Germans to repatriate their 700 tonnes of gold currently stored in New York and Paris. While a couple of planes could haul the entire stash to Germany in no time, only 37 tonnes have been delivered a year after the request. The 700 tonnes are scheduled to be delivered by 2020.

However, it appears there is not enough free and unencumbered physical gold to meet even that generous schedule. The Germans have been told they can come look at their gold, they just can't have it yet.

Leveraging Up in London

 

The City of London provides a loose regulatory environment for the mega banks to leverage up. Jon Corzine used London rules to rehypothecate customer deposits for MF Global to make a $6.2 billion Eurozone repo bet. MF's customer agreements allowed for such a thing.

After MF's collapse, Christopher Elias wrote in Thomson Reuters, "Like Wall Street cocaine, leveraging amplifies the ups and downs of an investment; increasing the returns but also amplifying the costs. With MF Global's leverage reaching 40 to 1 by the time of its collapse, it didn't need a Eurozone default to trigger its downfall—all it needed was for these amplified costs to outstrip its asset base."

Hathaway's work makes a solid case that the gold market is every bit as leveraged as MF Global, that it's a mountain of paper transactions teetering on a comparatively tiny bit of physical gold.

"Unlike the physical gold market," writes Hathaway, "which is not amenable to absorbing large capital flows, the paper market, through nearly infinite rehypothecation, is ideal for hyperactive trading activity, especially in conjunction with related bets on FX, equity indices, and interest rates."

This hyper leveraging is reminiscent of America's housing debt boom of the last decade. Wall Street securitization cleared the way for mortgages to be bought, sold, and transferred electronically. As long as home prices were rising and homeowners were making payments, everything was copasetic. However, once buyers quit paying, the scramble to determine which lenders encumbered which homes led to market chaos. In many states, the backlog of foreclosures still has not cleared.

The failure of a handful of counterparties in the paper-gold market would be many times worse. In many cases, five to ten or more lenders claim ownership of the same physical gold. Gold markets would seize up for months, if not years, during bankruptcy proceedings, effectively removing millions of ounces from the market. It would take the mining industry decades to replace that supply.

Further, Hathaway believes that increased regulation "could lead, among other things, to tighter standards for collateral, rules on rehypothecation, etc. This could well lead to a scramble for physical." And if regulators don't tighten up these arrangements, the ETFs, LBMA, and Comex may do it themselves for the sake of customer trust.

What Hathaway calls the "murky pool" of unallocated London gold has supported paper-gold trading way beyond the amount of physical gold available. This pool is drying up and is setting up the mother of all short squeezes.

In that scenario, people with gold ETFs and other paper claims to gold will be devastated, warns Hathaway. They'll receive "polite and apologetic letters from intermediaries offering to settle in cash at prices well below the physical market."

It won't be inflation that drives up the gold price but the unwinding of massive amounts of leverage.
Americans are right to fear their government, but they should fear their financial system as well. Governments have always rendered their paper currencies worthless. Paper entitling you to gold may give you more comfort than fiat dollars.

However, in a panic, paper gold won't cut it. You'll want to hold the real thing.

There's one form of paper gold, though, you should take a closer look at right now: junior mining stocks. These are the small cap companies exploring for new gold deposits, and the ones that make great discoveries are historically being richly rewarded… as are their shareholders.

However, even the best junior mining companies—those with top managements, proven world class gold deposits, and cash in the bank—have been dragged down with the overall gold market and are now on sale at cheaper than dirt prices.

Watch eight investment gurus and resource pros tell you how to become an "Upturn Millionaire" taking advantage of this anomaly in the market—click here.


Watch "The 80/20 Trading Rule, Lessons from a Millionaire Trader

Using John Carter’s 80/20 Trading Rule for Your Trading

It’s true in every successful business so why wouldn’t it be true in our trading? What we really make money on, our work that’s really profitable is the result of approximately 20% of our work. The 80% of the time we are usually working our butts off to squeeze out the last morsel of profit.

But why? Maybe we have no choice in our typical bricks and mortar businesses. But when it comes to trading, if we are using 10 or 15 trading methods or styles and only making money on 3 of them why do we bother?

I bring this up because my good friend and trading partner John carter has just sent me a video that proofs just that in his 2013 account. When analyzing his primary trading account [the one he made well over a million dollars in last year] he proofed just that. He made 80% of his profits from 20% of his trades.

Here are just a few of the highlights of what he discovered and will show you…….

    *    He discovered one secret to cutting the noise out of the financial markets to focus on high probability,   high reward trades

    *    How his trading was being transformed by an Italian economist’s observation in 1906

    *    His real account trading results for 2013 leaving nothing to the imagination

    *    Who is suckering you into taking the wrong trades at the wrong time

    *    What happened for the first time after 25 years of trading

          And much more...

John has produced a new video that goes into detail about how he accomplished these amazing but simple results.

Simply tap here to watch John’s video “John Carter’s 80/20 Trading Rule”

Please feel free to leave a comment and let us know what you think about John’s video.