Alan's Finance Blog

The perfect NO WORK money maker

NO Promoting, NO downline building, NOT MLM, NO products to buy and NOTHING to sell

This is a very RARE INVITATION for you to join an EXCLUSIVE Group of individuals
who have banded together to create a very profitable business organization.

A very small number of individuals will be accepted before this opportunity disappears.

We purposely control the number of associates involved so we can guarantee everybody makes
lots of money.

If you have ever wanted to be involved in a business that can create HUGE RETURNS on your
investments this is your chance.

The only difference is, You don’t have to be a millionaire to get involved.

To get in on this once in a life time opportunity send me an e-mail at:

opportunity@alansmoneyblog.com

Gold Slips, Back “In Thrall” to Investment as Paulson & Co. Reassures Clients

By: Adrian Ash, BullionVault

London Gold Market Report

BOTH GOLD AND SILVER fell back on Wednesday lunchtime in London, slipping 0.5% and 1.5% respectively as European stock markets dropped almost 1% from the opening.

Crude oil and broader commodity prices held flat, together with government bonds.

“BOJ deputy governor: signs Japan exiting deflation,” said a Reuters headline.

“Bank of England MPC minutes hint at inflation worries,” said the BBC online.

Over in India, “We are not getting [import] stocks,” said one bullion-bank dealer to Reuters earlier, despite European airports re-opening after Iceland’s volcanic dust cloud moved on.

Amid the current wedding season and ahead of next month’s auspicious gold-buying festival of Akshaya Tritiya, “This is supporting gold prices,” he said.

Forecasting little change in gold’s Rupee value by this autumn’s festival season in India – the world’s No.1 private consumer market – “The central bank will not miss buying gold on dips,” reckons Gnanasekar Thiagarajan, head of research at Commtrendz in Mumbai.

“In fact, China has been waiting to increase its reserve in gold.”

The People’s Bank of China reported adding 75% to its gold bullion reserves between 2002 and 2009, taking it to 5th place in the world league of official holders.

Last November, the Reserve Bank of India bought 200 tonnes of gold from the International Monetary Fund (IMF), taking it to 10th position.

A new IMF report today called for a global banking tax, raising money for a “bail out” fund to rescue the industry from “a future – and inevitably global – financial crisis.”

Wall Street giant Goldman Sachs – which yesterday reported record quarterly earnings at its fixed-income division – rejected US government claims that it misled foreign investors in sub-prime mortgage investments it created in 2007.

Paulson & Co., the New York hedge fund that made $1 billion betting against the mortgage derivatives which Goldman Sachs created, said its behavior had been “appropriate and conducted in good faith” in a letter sent to investors, quoted by Bloomberg.

The letter follows a conference call late Monday with 100 investors, the Wall Street Journal reports, reassuring clients about the hedge fund’s involvement in the case.

“It’s not a rush for the doors,” said one investor to Bloomberg.

Gold lost almost 3% from Friday’s high to Monday’s low, after news broke that Paulson & Co. – the largest single stockholder of SPDR Gold trust, the world’s largest Gold ETF – was named but not accused in the US government’s charges against Goldman Sachs.

The SPDR gold ETF trust closed Tuesday holding a record 1141 tonnes of bullion, unchanged for six sessions running.

“Which currency gives us the best indication of gold’s real strength?” asks the latest Metals Monthly from London’s VM Group consultancy, published for Fortis Netherlands.

“If we use the IMF’s Special Drawing Right, or SDR” – a notional currency launched to replace gold bullion in central-bank reserves in the late 1960s – “we find gold hit an all-time high of 762.48 SDR per ounce on 12th April, 1% higher than in early December.

“[This] clearly changes the narrative,” says VM, with gold prices standing “at an all-time high.”

Physical demand has been weaker than forecast, the report goes on, but it “picking up” in key markets led by India. But the market is “back in thrall to gold investment demand,” says the consultancy, noting six weeks of positive inflows to the 17 physically-backed ETFs it tracks.

Priced in the European Euro today, the gold price rose to a 3-session high of €27,445 per kilo, erasing almost all of Friday’s drop.

UK investors wanting to buy gold on news that average earnings growth lagged inflation yet again in March saw the price drop back below £740 an ounce, unchanged from last week’s finish as the Pound ticked higher on the currency markets.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Cash Futures, Physical Forwards, and London Gold’s “100-to-1 Leverage”

By: Paul Tustain

A note on the LBMA, gold futures and forwards, and “100-to-1 leverage” in London’s wholesale gold bullion market…

SOME COMMENTATORS are alarmed that the amount of ‘physical’ gold in London is not sufficient to meet the immediate demands of the market.

This concern is based on a simple misunderstanding. Read what follows and you will have a much better idea of how gold futures, forwards, the spot and physical markets interact.

Professionals who trade gold over the counter use a convenient standard for specifying the form of the gold they will deliver between each other. The standard is written and maintained by the London Bullion Market Association (LBMA).

This standard is the Good Delivery bar which weighs about 400 troy ounces, and is traded 100% fine (i.e. gross bar weight * purity). A Good Delivery bar must have been manufactured by a recognized refiner which subjects itself to rigorous and ongoing scrutiny by LBMA referees. All their output is carefully assayed.

Professional gold dealers, and they are mostly banks, trade both these bars, and notional contracts which are underpinned by these bars, i.e. ‘derivatives’ of the bars. These are things like gold futures, forwards and options.

Gold Forwards

The demand for forwards comes from volume buyers of physical metal – like gold dealers who wish to supply jewelry manufacturers – while the volume sellers are often gold mines and refiners. Both will make very specific forward settlement dates and conditions for the bullion delivery on a forward trade.

Private individuals would struggle to trade on their own account on the forward market, because they lack the settlement facilities – like vaulting accounts at the accredited vaults – which enable them to take and make delivery of Good Delivery bars. But a miner might go to an LBMA bullion bank and open a forward sale, and then arrange its gold to be shipped from a registered refiner direct to the buying bank.

So forwards are deals in physical gold, but not necessarily for immediate settlement.

Gold Future Contracts

Futures are different. Everyone – including private investors – can speculate on gold futures very easily. So is there physical gold behind futures trades?

A few Clearing Members of futures exchange will have a depository account with some real gold in it, though Ordinary Members would be unlikely to, and therefore cannot usually settle with their customers in gold.

Clearing Members’ gold sits in the depository vaults, and title to it rests with warrants which are passed between Clearing Members on the occasions there is a net settlement of gold between them. (Several years ago BullionVault spent quite a while trying to find a way of owning gold in a Comex Depository Vault, through a Clearing Member, but we never found a satisfactory way. Perhaps someone else has been more successful. If they have we’d be happy to learn how, and publish the details.)

Because there is not ordinarily access to gold via futures markets the huge majority of Ordinary Members of the futures exchanges, and their customers, settle cash, not gold. The cash amount they settle is calculated by reference to a specific price formula which becomes very relevant when a future contract expires.

Futures & Forwards Together

Futures and forwards work hand-in-hand. Futures give the bank the opportunity to approximately hedge out any price risk they have taken on a specific forward trade. Futures are standardized, highly liquid and easily traded in volume. The beauty of futures is that all the gradual liquidity of three months of forward deliveries on specific dates can be concentrated in a standardized futures contract which you can deal with any trader, because all the contracts expire on the same day and with the same terms, regardless of which trader you choose. This exchangeability is the source of their liquidity.

Forwards, on the other hand, are hopelessly illiquid. Each was custom built ‘over the counter’ for a specific settlement day. But forwards really are deals in physical gold – which will settle as Good Delivery bars, on almost every day of the year. So the flow of forwards through the vaulting system is smoother than the flow of futures through a futures exchange, which rush to close en-masse at expiry.

Adrian Douglas’ Misunderstanding

The key concern that Adrian Douglas (a director of the Gold Anti-Trust Action Committee (GATA), who attended the recent CFTC hearing) seems to have is that there is a giant physical exposure which remains undelivered. Let me explain why that is confused, while granting that there was no good explanation given by Jeffrey Christian (managing director of CPM Group, a New York commodities-market consultancy), who was in the hot-seat of a CFTC hearing. It is easier for me with the written word.

Forward contracts are priced according to two things: the price of gold, and the cost of money to the forward date of settlement (i.e. interest rates). Forward prices of gold stretch out into the future for months and years, forming what’s called the forward curve.

The entire length of that forward curve is what the LBMA member’s trader calls ‘physical’. For them this differentiates it from the cash-only-equivalent of a futures contract. So, when they talk about ‘physical’ or about the open ‘physical’ position they are talking about a whole lot of forward deliveries which sellers are under no obligation to deliver today, and which the buyers neither immediately want nor can demand.

Those forwards will fall due for delivery a day at a time without causing more than a ripple in the market. But being extended into a series of physical settlements stretching out on that curve for years, the open physical position is of course much, much larger than the amount of gold which happens to be in the various London vaults today. That’s no big deal, it’s where gold mines and aeroplanes come in.

So when a professional market analyst like Mr. Christian says the open physical position exceeds the amount of gold in the vaults all he is saying is that the gold which is due for physical settlement next week or next month has not necessarily been shipped in yet. But he knows (even if he does not express it very clearly) that the seller of a forward is on the hook for making the gold available on the appointed settlement date. And of course the seller will incur a severe financial penalty for failing to settle, which is why forward sellers don’t sell gold without being very sure they can deliver it.

Mr. Douglas seems to have made an understandable and honest mistake caused by the slightly confusing language which is used by traders. I hope you now see that the LBMA’s open physical position on its forward curve – far from being a risk – is a genuine benefit to the gold market’s smooth operation. It defines the daily rate at which real bars are needed into the future, and firmly places responsibility on the seller to make sure the gold arrives in good time. This helps keep the world of real bars settling efficiently.

At BullionVault we and all our customers benefit from this, because it means we can buy real bullion a few thousand ounces at a time from an LBMA dealer who keeps bars on hand to satisfy our modest demands. We don’t have to organize the shipments. We settle 48 hours after dealing, by sending a bank transfer and getting ViaMat (our recognized vault operator) to collect the bars. This is called spot trading, which is, in effect, the nearest 2 days of that long forward curve.

How Banks Use the Forward Curve

When novices jump into the spot market and buy up all the immediately available stock (and this happens from time to time) the result is a spike in spot prices which reflects a lack of sellers capable of making immediate delivery. It may not represent a fundamental shift in the value of gold; there might – for example – be plenty of gold arriving next week, and all of it available at a cheaper price.

What a trader will do is look at the shape of the forward curve. If he sees that the curve has developed a lump at 48 hours, caused by that aggressive novice’s buying, it will be profitable for him to sell his spare gold at spot, and buy forward by a week. He can deliver his bullion bank’s on-hand gold which will be replenished next week when the aeroplane arrives. And he will make money from the aggressive buyer who has paid a premium price for urgent settlement.

Meanwhile, as he buys one week forward in anticipation of the aeroplane’s arrival the effect is to distribute the novice’s order along the curve, and to smooth it out again. You may have read of gold bugs who put huge orders into the spot market to prove the gold is not there. Well now you understand why no-one sells it to them! Selling physical gold which you cannot deliver on time is a big mistake which professionals don’t make. If the gold bugs ordered 2 months forward – allowing time for sourcing and shipments – there would be plenty of sellers happy to take their business.

BullionVault Gold

So where does this leave the private investor? Using BullionVault, you can buy ‘Good Delivery’ gold from stock which is already in the vault. You are not even waiting for spot markets to settle.

The unusual rule on BullionVault is that a seller’s gold must be on-hand, in the vault, for settlement; and the buyer’s cash must be cleared in the bank. That’s why we host the only gold market in the world which offers instantaneous settlement at the point of trade, and on a 24/7 basis. Thereafter, BullionVault simply looks after your gold. It’s your property. It isn’t available for any selling when the spot market goes to a premium, and we have neither the right nor the wish to play the curve the way a bullion bank does.

You can see this proven, each day, on our Daily Audit. If we were delivering gold out to make a few dollars on the forward curve our bar lists would show we were short of physical gold in our vault. This is why we regard it as so important to publish our bar lists, and their reconciliation to all customers’ holdings, on a daily basis. So far as we know we are the only gold business in the world which does this.

We hope this has cleared up any confusion about the amount of gold in London vaults. Now we’d like to finish with a quick look at who is manipulating the futures market, and how.

Gold Futures Manipulation

Futures brokers here in the UK routinely tell their new customers that 9 out of 10 private customers lose money by dealing in futures. We understand the regulators require this as part of the necessary risk warning.

Part of the reason – which has recently been alleged by GATA – is that it is quite likely that there is some price ‘manipulation’ of futures contracts at expiry. This sort of thing is not a gold problem. It is a problem relating to futures markets in general.

Imagine you are a professional futures market seller – not necessarily of gold, but of anything – and you have the ability to settle the underlying commodity, while private investors do not. You sell the futures whenever they appear to be at a premium over your forward curve, which will happen as the speculators get into a buying frenzy on the futures market.

Suppose that at expiry the futures price is low against the forward curve, which is quite likely if lots of private investors are on the long side and are rushing to close out their near contract. You – the professional – will be perfectly happy to buy the future back, so long as the discount to forwards remains worth it, because then your physical stock won’t have to be delivered out, and you won’t need to buy a new forward to arrange a relatively expensive new delivery of physical stock into your depository account. So you see private investors will only find buyers for their urgent sales if the buyers get a discount to fair value. The professionals are in the box seat because they can settle.

Now suppose the opposite: that at expiry, the future is at a premium over the forward curve (which is what happens when lots of short sellers who can’t settle have been dominating the speculator’s market, and are now rushing in to buy to close before expiry). Now the professional will act as the seller, but only if the future is offering him a premium over the forward curve, otherwise he’ll run his open long to settlement. So once again the professional has the whip hand over a crowd all trying to do the same thing to avoid settlement. Whichever way the market moves the professional is in the driving seat if he can sort out settlements, which is the position few (if any) private investors are in.

It gets worse. Rolling over to the new futures contract doubles the opportunity for the professionals to profit. If, having just sold at a discount, lots of private investors are rolling forward to buy the new futures contract for the next quarter then that future will offer the professionals a premium over the smooth forward curve, and the professional will willingly sell it to them as soon as the premium is sufficient to make it profitable.

So you see even when private investors are offered rollover at apparently attractive terms (e.g. at middle prices and half the commission) the reality is that they are selling the old at a discount and buying the new at a premium. Wherever your trade is in the same direction as a large number of market participants who lack the ability to run their position until settlement you will probably lose out in this subtle way.

This is where the artificiality of futures wrings profit out of un-sophisticated investors who wish to speculate. Who’s to blame? It’s hard to accuse a seller of price manipulation when he runs his two month old trade to settlement, and it’s very hard to blame the opportunist professional buyer for supporting a low price by buying at a discount at expiry! The only people who can really be blamed for the expiry and rollover costs are the people who bought futures without both the money and the storage facilities to settle, and that’s usually those private investors who are its victims; which is ironic.

That’s futures, and it’s ultimately each investor’s own choice. If you choose to play you are dealing in a marketplace which may force you to trade at the time of your maximum disadvantage.

At BullionVault our position is that you might cautiously use futures for short term speculation. But we think you’d do better to avoid them for long term capital preservation, which for many is what buying gold is about.

Instead, you should choose physical gold through services like ours, where there are no artificial barriers placed in the way of smoothly continuous trading and settlement. All you need to do to avoid an unfair price dip in futures at expiry is buy the real thing, and although that’s difficult with pork-bellies, with gold it’s easy.

Paul Tustain

Paul Tustain is founder & CEO of BullionVault, the world’s largest store of privately-owned investment gold bullion.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

How Greece Can Impact YOU!

The economic problems in Greece have made front page news for the better part of the past three months. And I’ve written several columns here in Money and Markets on the ongoing drama and its influence on the global currency markets.

But with all of this incessant talk about Greece, what does it have to do with you?

That’s a common question. And the answer: Potentially, a lot.

You see, Greece represents the growing mound of looming landmines in a global economy that has been damaged by the worst economic crisis in more than 80 years. And if there’s anything that should have been clear from the collapse in global financial markets in 2008, it’s that the world is a highly interconnected place, and so are its financial markets. So problems in Greece will likely mean problems for you and me.

Here’s why …

In a fragile economic recovery, investor and consumer confidence plays an important role in repairing economies … and likewise, restoring investment values and opportunities.

So a hiccup in investor optimism can be a huge blow to a fragile economy. It can make businesses more defensive and consumers stingier, thus sending stock prices lower and risk premiums higher.

In short, a lack of participant confidence can mean round two of a bear market in global stocks, and potentially a double dip recession for the global economy. And that’s highly possible because …

A Sovereign Debt Crisis Is Underway

ECB Executive Board member Juergen Stark said this week that the global economy may be entering a new “sovereign debt crisis.”

Respectfully, he’s a bit late in admitting that.

Last November, Dubai sent tremors through financial markets by announcing it would be “restructuring” its debt. The government later offered its bondholders just 60 cents on the dollar for their investment.

Now, Greece’s shaky finances represent a threat to the lifespan of the euro, the second most widely held currency in the world. And it stands on wobbly footing as the second domino in an unraveling global sovereign debt crisis. The other potential candidates include Portugal, Italy, Ireland, Spain … even the UK, Japan and the U.S.

That’s a lineup of suspects that, if under the gun of global investor scrutiny for their respective burgeoning debt problems, could mean a lot to you and me — and to the outlook of the global economy.

But the euro zone and the IMF stepped up last weekend and provided details of aggressive financial aid as a lifeline to Greece. And given the initial bounce in the euro and decline in market interest rates for Greek government debt, the hope was that Greece’s default threat had finally been put to bed.

Not so. In fact …

The Greece Problem
Is Far from Over

Those initial favorable responses to the aid plan are already being reversed as Greece’s bond yields and the euro are back to pre-rescue announcement levels.

The 16 euro members must unanimously agree to give Greece the funds.

For the near term, the rescue plan could plug the gap for Greece. It has 11.6 billion euros of government debt to refinance over the next month — and another 20 billion euros by the end of the year.

And funding from its fellow euro-zone countries could allow Greece to roll-over that debt, without having to pay the prohibitively high interest rate that global investors would require from such a high-risk borrower.

However, accessing those funds is no slam dunk. All sixteen member countries would have to agree to disburse the funds, and only if they deemed Greece unable to raise funds on its own.

Perhaps even more troubling, though, is if the euro lifeline gets extended, that opens up a can of worms. Because it means the euro-zone officials have breached the treaty guidelines upon which the euro was developed.

And it will also likely mean that Portugal, Spain, Italy and Ireland will be next in line for a handout — a recipe for a political and economic disaster in Europe and a potential break-up of the euro.

From there … the other debt-burdened dominos in line could become even more vulnerable.

Greece … a Big Deal

As the crisis in Greece continues to unfold, investors will look for safety.

With the U.S. stock market climbing, almost daily, to new post-crisis highs and the U.S. economic data showing solid recovery, Greece sounds like a distant problem.

But as you can see, the drama in Greece is a big deal! Not just for Europe, but for the world economy — and for institutional and individual investors alike.

Unfortunately, the euro zone is in a no-win situation. The European monetary union countries, with damaged balance sheets and a bleak outlook for growth, are stuck. And with a one-size fits all monetary policy and currency, they lack critical tools, such as devaluation, to work their way out.

So expect the sovereign debt crisis to continue to build. And be cautious of a quick downturn in global risk appetite, which can send stock markets and global demand heading south, and global capital heading for safety.

by Bryan Rich

The Stock Market Is Starting to Look Toppy

From a big-picture perspective, the stock market’s advance off the March 2009 low is nothing more than a huge, bear market rally.

To understand how I come to that conclusion, just look at two classical valuation measures, price-to-earnings ratios and dividend yields, in the chart below. You can easily see how this stock market bear, which started in 2000 at record overvaluations, still has a lot of work to do …

S&P 500, Price Earnings Ratio, and Dividend Yield, 1926 to 2010

With a price-to-earnings ratio of 23.39 on a twelve-months trailing GAAP earnings basis, valuations are as high as they usually get during an upward cycle.

And the dividend yield is under two percent. That’s way below the three percent threshold, historically indicating an extremely overvalued market.

Meanwhile, Bullish Exuberance
Is Back to Dangerous Levels

Do you remember the depressive sentiment during the depth of the crisis in late 2008 and early 2009? It looked like the world was coming to a standstill. Everybody seemed to hate the stock market. Even mainstream economists who tend to be bullish and upbeat all the time showed signs of doubt.

About a year and a half later that picture has changed dramatically!

Bullish forecasts for the economy and the stock market are back in vogue. In fact, Investors Intelligence is telling us that 51.1 percent of stock market advisors are bullish again, back up from less than 25 percent during the fourth quarter of 2008.

As shown in the bottom panel of the above chart, the number of financial newsletters leaning bullish is on the rise, too … well above the 2.0 level considered a bullish extreme.

Even more important, though, is the bullishness of mutual fund managers …

The average mutual fund cash level has fallen to a mere 3.5 percent as indicated in the following chart. In hitting that level, this important sentiment indicator has tied the record reached during the summer of 2007.

Equity put-call ratios are also falling dramatically, reaching euphoric levels not seen since 2000.

Conclusion: The Air Is Getting Thin for the Stock Market

The stock market has rallied roughly 80 percent since the March 2009 low bringing valuation metrics back to nose-bleed levels. Money supply growth has tumbled to a trickle, while stock market sentiment is back to euphoric highs.

And we still have to deal with a housing market that’s in shambles, an economy lacking growth momentum, and 9.7 percent unemployment!

All these observations add up to one compelling conclusion: The stock market has entered the last phase of the huge bear market rally off the March 2009 low. And the next few months will probably show the topping phase, the prelude of the next bear market leg.

Best wishes,

Claus

14 Risks with Supposedly “Safest” Securities

When AT&T, California, New York City or virtually any other borrower wants your money and offers its bonds for sale, it’s required to give you a prospectus that properly discloses all the relevant risks.

It has a legal obligation to tell you about any material weakness, hidden liabilities or contingencies that could diminish your chances of getting paid in full.

Every major borrower in America’s must submit to this discipline … except, unfortunately, Uncle Sam.

Uncle Sam publishes no prospectus … provides no risk disclosure … issues no warnings … and is virtually immune to related lawsuits by regulators or investors.

If you want to buy long-term U.S. Treasury bonds, you must do so almost exclusively based on pure faith.

But what if the U.S. government did have to publish a prospectus for its bond offerings?

What risks would it have to disclose? What skeletons would it reveal?

Jim Grant, editor of Grant’s Interest Rate Observer, provides the answers by publishing what a 30-year Treasury-bond prospectus might look like.

Here’s the litany of risks that Grant documents (in quotes), plus my interpretation of his points — along with my comments — below each …

Risk #1. “Improper payments by the federal government continue to increase despite the Improper Payments Information Act of 2002.”

The government pays hard dollars to recipients who are not eligible for payment. It pays for services that were never received. It pays full price for services normally sold at a discount. And it pays twice or more for the same services rendered only once.

Trivial errors? Not quite.

In fiscal 2009 alone, the government estimates that it made improper payments of $98.7 billion or about 5 percent of the total $1.9 trillion in related expenses.

That was nearly DOUBLE the improper outlays of just two years earlier ($49 billion) despite legislation aimed at reducing this problem.

If a business corporation was consistently making these egregious blunders, most lenders wouldn’t touch it with a ten-foot pole. But Uncle Sam continues to do it with impunity.

Risk #2. “Material weakness from ineffective internal controls over financial reporting that resulted in a disclaimer of opinion by the Government Accountability Office.”

If you’re running a public corporation and your auditor refuses to certify your financial statements, you’ve got big trouble. Unless you can promptly correct the problem, you won’t be able to raise money. And it may soon be next to impossible to stay in business.

Yet, shockingly, the U.S. government has failed its audit 13 years in a row. And as Grant points out, in 2009 alone, independent auditors found 38 material weaknesses in 24 agencies they audited.

Risk #3. “The dollar may not continue to enjoy reserve currency status and may decline in the future.”

Ironically, this risk is both the most obvious and the most widely ignored.

Treasury bonds are denominated in dollars. But no one — certainly not the U.S. government — can guarantee that the dollar will continue to hold its value or even that it will retain its status as a world currency.

If the U.S. dollar falls, so does the underlying value of U.S. Treasury bonds.

Risk #4. “The Federal Reserve, as part of its response to the financial crisis, may be exposed to significant credit risk.”

The Federal Reserve System has taken on large credit risks with its extension of credit to American International Group (AIG), its massive purchases of mortgage-backed securities and other expensive efforts.

In this respect, the Fed, is not very different from large commercial banks that got into trouble in the financial crisis: It is severely undercapitalized — with just 2.3 cents in capital for every dollar of debt on its books.

Worse, the Federal Reserve Bank of New York, the branch actually holding the high-risk assets, has only 1.4 cents in capital per dollar of debt. And that assumes the securities that it inherited from AIG are worth what the Fed’s models say they’re worth. In reality, especially given the poor liquidity of those toxic assets, they would probably fetch a lot less if sold on the market.

Any significant losses in their portfolio holdings, argues Grant, could leave the New York Reserve Bank with its capital impaired.

Risk #5. “Foreign official institutions hold a significant amount of U.S. government debt.”

Foreigners hold about half of all marketable U.S. Treasury securities. At the same time, the U.S. dollar accounts for 62% of all foreign exchange reserve holdings, according to the IMF.

But if the dollar falls in value, the worldwide demand for U.S. dollars and dollar-denominated bonds — U.S. Treasuries — could fall precipitously.

My take: That, in turn, could force the government to pay exorbitant interest rates or even impair the government’s ability to roll over its maturing debts.

Risk #6. “The United States is the dominant geopolitical power and has significant overseas commitments.”

The U.S. military is engaged in large-scale overseas conflicts; operates 716 sites in 36 foreign countries; and guarantees the security of many sovereign nations. This implies major drains and stresses — present and future — on the nation’s finances.

Risk #7. “The government is exposed to large contingent liabilities from its intervention on behalf of various financial institutions during the 2008-2009 crisis.”

Washington has made so many promises and granted so many open-ended guarantees to so many institutions, its true contingent liabilities are virtually incalculable. But here are the main ones Grant covers:

• The FDIC’s deposit insurance fund (DIF) has a deficit of $20.9 billion, with a credit line on the Treasury which can further drain government finances. But that merely reflects losses in the banks that the FDIC has bailed out so far.

• The far bigger threat comes from banks that may fail in the future, such as the 702 institutions on the FDIC’s list of problem banks, with total assets of $402.8 billion at year-end 2009.

• Worse, some of the nation’s biggest — and potentially most vulnerable — banks aren’t even on the FDIC’s official list, although the U.S. Treasury is fully committed to picking the tab in case of a failure.

• Fannie Mae and Freddie Mac are another financial black hole for U.S. government finances. The Treasury has already sunk $97.6 billion into the mortgage companies and, as a Christmas “gift” to America last December, it removed all limits on future capital infusions for three years.

• FHA also relies on the Treasury for financing. By law, its reserve ratio is supposed to be at least 2 percent. But in reality, it’s only about a half of a percent. Small problem? Not exactly. FHA mortgages are now dominating the entire industry.

• But all of the above are potentially dwarfed by the government’s financial market interventions since the debt crisis began, according to Grant’s estimates. Those interventions alone have totaled $8 trillion, or 55 percent of GDP.

Risk #8. “Mandatory outlays for retirement insurance and health care are expected to increase substantially in future years.”

The Treasury itself estimates that the present value of future social insurance expenditures — such as Social Security and Medicare — is $46 TRILLION! And that’s AFTER subtracting future revenues the government will collect on those programs.

Risk #9. “Ratings agencies may withdraw or downgrade the U.S. government’s current AAA/Aaa rating without notice.”

Moody’s has already warned that, unless major debt reduction measure are put into place, or unless the economy is a lot stronger than expected, the U.S. government’s triple-A rating may be in jeopardy.

My view: If the rating agencies fail to downgrade the U.S. Treasury department, global investors will take the initiative and effectively put into place their own downgrade — by demanding yields that correspond to lower rated bonds.

Risk #10. “The U.S. economy is heavily indebted at all levels, despite recent de-leveraging.”

Total credit market debt in the U.S. was $52.6 trillion at the close of last year’s third quarter — 369 percent of GDP, the highest ever.

Risk #11. “The increase in government debt as a result of the financial crisis in advanced countries may lead to greater concern over sovereign debt.”

Due to the Greek crisis, global investors are seriously questioning the security of other sovereign debts, especially in nations with shaky budgets and huge deficits.

Even if no major country defaults, these fears could drive up borrowing costs for any government associated with poor fiscal controls and other risks — like those we’re talking about right here.

Risk #12. “U.S. states and municipalities are experiencing severe economic distress and may require intervention from the federal government.”

Forty-one states are facing budget shortfalls in 2010, according to the Center on Budget and Policy Priorities. This poses a threat to federal finances whether Washington decides to bail out certain states or not.

If Washington bails out the states, it will be on the hook for even more money. If it fails to bail out the states, the state cutbacks could threaten the economic recovery, delivering more fiscal troubles to Washington anyhow.

Risk #13. “Elected officials may not take the necessary steps to ensure long-term debt sustainability and may take actions counter to the interests of bondholders.”

There’s no political will to fix the problem. If anything, politicians have proven that they are more than willing to take steps that make it worse.

Risk #14. “A rise in interest rates could adversely affect government finances.”

Right now, Uncle Sam is getting a bargain with low interest costs. But the combination of chronically massive deficits and these 14 risks make continued low interest rates an almost unimaginable scenario.
At 6 percent, the government’s interest expense would surge from $187 billion to $528 billion; at 8 percent, it would be $704 billion. Just for interest! Strictly in one year!

Why These 14 Risks Can Impact You NOW

When you buy a Treasury bond that doesn’t mature in 20 or 30 years, and when serious questions like these are raised about the long-term future, you can’t just say “I’ll cross that bridge when I get to it.”

Quite to the contrary, dangers that normally might not appear until decades from now could strike just as soon as investors perceive them to be a problem. They could slam the value of your bonds starting today.

Right now, for example, the yield on 10-year Treasury notes is within a hair of surging through a critical 4 percent barrier. When it does, don’t be surprised if bond prices go into a nosedive and long-term interest rates spike upward.

Four Follow-Up Steps

First, sell all long-term Treasury bonds, but do not abandon Treasury bills. They are short term. They are not vulnerable to price declines. And as a practical matter, there are no safer alternatives.

Second, hedge against potential dollar weakness with a modest allocation to gold-related investments.

Third, seriously consider subscribing to Grant’s Interest Rate Observer. Money and Markets is not affiliated with Grant in any way. But we value his letter highly and think you will too.

Fourth, watch your inbox for our historic announcement later today. Our readers have spoken — about 90% believe that Washington will NOT stop its spending/borrowing/money-printing binge in time to avert an economic catastrophe.

In other words, you’re telling us that a massive bond market collapse and interest rate explosion are now inevitable.

In just a few hours, we’ll show you how we’ll help you protect your wealth and profit — for free! So stand by for my email with the subject …

“Your head start on 660,000 investors!”

Good luck and God bless!

Martin

For more information and archived issues, visit http://www.moneyandmarkets.com

Teaching Your 401(k) to Roll Over and Other Tricks

Last week’s column talked about some of the “everyman” tax shelters available these days — including 401(k) plans and IRAs. Today I want to talk about how those two different accounts relate to each other.

Let’s start with a simple question …

Which Is Better — A 401(k) Plan or an Individual Retirement Account?

We’ll assume that your employer offers a 401(k) plan and that you also meet the income requirements to fund either a Roth IRA or a regular IRA.

It’s worth taking the time to figure out what retirement accounts work best for you.

My next question is going to be whether your employer also offers some sort of a contribution match.

If the answer is “yes,” and it probably is, then I’m almost always going to suggest going with the 401(k) plan first.

After all, your employer’s match is essentially free money, and an immediate return on the money you personally investment. Under this scenario, even putting your own contributions into cash equivalents is earning you something with rock-solid safety.

Sure, there could be some sort of vesting schedule that requires you to stay on as an employee before all the match is permanently yours, but it’s still a worthwhile opportunity. And please note that your own contributions are always yours to keep no matter what.

In addition, your 401(k) contributions will reduce your immediate tax burden. With tax day less than a week behind us, I’m sure that’s something you can appreciate!

Now, how much should you contribute to a 401(k) plan? If possible, at least enough to get the maximum match.

Beyond that, and assuming you have more money you can contribute to a retirement plan, I would then take a closer look at your other options.

Contributing the remainder to your 401(k) plan will continue to help you reduce your immediate liability to Uncle Sam. In 2010, the regular contribution limit is $16,500 with another $5,500 catch-up contribution limit for anyone 50 or older.

Of course, the exact benefits of putting more money into a 401(k) greatly depend on your bigger financial picture …

For example, will it help you avoid a higher tax bracket? Will it lower your modified adjustable income to the point of allowing you to take additional tax deductions or credits? Do you also live in a state and/or city with a high tax rate (and that allows you to deduct retirement contributions)?

As you can see, there’s a lot to think about. But it is worth spending a couple minutes to figure out.

With a few simple steps, your 401(k) can easily roll over to an IRA.

By the way, you should also consider your age. Why? Because the farther away from retirement you are, the more attractive the Roth IRA might be.

After all, it trades immediate tax relief for long-term tax-FREE growth in your portfolio. Obviously, the more time your portfolio has to grow, the more powerful that advantage becomes. And the farther out your time horizon is, the more likely it is that you’ll want to hedge against future tax hikes.

In such scenarios, you could simply opt to fund your 401(k) plan for the match and then contribute the rest of your funds to a Roth IRA every year. That’s a really nice balanced approach, in my opinion.

Okay, But What Should You Do If You Leave Your Job …
Or If You Have an Existing 401(k) Plan with a Previous Employer?

Obviously, if you’re at least age 59½ and you plan on retiring, you can withdraw the entire amount and start enjoying it penalty free. Note that your employer will withhold 20 percent for taxes.

However, if you’re not yet retirement age and you’re planning on getting another job, you have four choices …

Choice #1. Cash out your plan. This is the absolute worst move, in my opinion. Sure, you’ll get some money right away. But you’ll also be responsible for taxes and most likely a 10 percent penalty to boot.

Choice #2. Leave the money right where it is. Most employers (or their plan administrators) allow this, though many impose a certain minimum account balance, such as $5,000. This is a fine choice if you really like the options available through your old employer’s plan. However, from an administrative standpoint, it’s a pain because it will be one more account to keep track of.

Choice #3. Roll the money over to your new employer’s plan. If you’re going to participate in your new employer’s plan (and I hope you will!), then it’s likely that you’ll be able to bring your old 401(k)’s assets into the fold. That will allow you to keep all your retirement assets in one place. Plus, it will be much easier to see how your overall portfolio is allocated.

Choice #4. Roll the money into an Individual Retirement Account. Yes, you would still have one more account to keep track of. But you also have:

1. Unlimited investment options. You are no longer at the mercy of your company’s plan. In an IRA, you can buy stocks, bonds, mutual funds, ETFs, etc.

2. Low trading costs. Some employer pension plans charge exorbitant fees for managing your money, and often these costs are hidden. In contrast, there are plenty of no-fee IRAs available from deep-discount brokerage houses.

Again, only you can decide which option would work best for your particular situation. But in my opinion, the rollover IRA option is going to be best for most people and circumstances.

The bottom line is that both 401(k) plans and the various flavors of IRAs offer you unique opportunities, especially when it comes to controlling your tax situation. So I encourage you to learn all you can and use them to best advantage.

Best wishes,

Nilus Mattive

Gold’s Goldman Drop Blamed on Strong Correlations, Chinese Whispers & ETF Exposure

By: Adrian Ash from BullionVault

London Gold Market Report

THE PRICE OF GOLD bounced from a new two-week low for US investors early in London on Monday, rising 0.7% from beneath $1125 an ounce as silver, energy prices and world stock markets also extended Friday’s sharp losses.

Crude oil fell towards $81 per barrel, while the Euro tracked gold vs. the Dollar, and the Dollar itself hit a 4-week low vs. the Japanese Yen.

Following Friday’s news that investment bank Goldman Sachs is being sued by US regulators for fraud, “Precious metals were unable to avoid the liquidation,” in the words of one London dealer.

“As risk sentiment plunged, investors shifted from equities and commodities into US Treasuries,” says HSBC in a note, and “Gold is clearly sensitive to changes in investor risk sentiment.”

“Ultimately, we’re looking at a pull back in risk,” says a currency analyst. Gold prices had just “hit high correlation [with stocks and commodities] but now risk is off.”

“In an interesting manifestation of the ‘Chinese-whisper effect’,” says long-time gold advocate Martin Hutchinson at Money Morning, “a frantic ‘Sell Goldman’ call obviously got transmuted into ‘Sell Gold’.”

Goldman Sachs’ stock lost more than 12% on Friday, falling to a 7-week low.

However, the Paulson & Co. hedge fund – named but not charged in the SEC’s accusations against Goldman Sachs – is also the single largest investor in the SPDR Gold Trust (GLD), controlling some 8.4% of the securitized gold ETF fund according to end-2009 filings.

Worth some $3.5 billion at current prices, Paulson’s GLD position compares with the $1bn apparently made after helping to select and then betting against subprime mortgage-backed bonds sold by Goldman Sachs to other institutional investors.

Concerns over the “massive build-up of investment stocks” in exchange-traded funds were most recently raised by the GFMS consultancy at its Gold Survey launch here in London last week.

Holdings at the SPDR gold ETF ended Friday unchanged for the week, standing at a record 1141 tonnes of bullion.

If fraud were proved against Goldman Sachs, notes the Financial Times‘ Alpha blog, “then John Paulson’s hedge fund will be braced for compensatory claims.”

But “Everyone in the market knew that portfolio agents [creating a package of different mortgage-backed bonds] would be lobbied both by long and short sides,” notes John Gapper in the main FT paper today.

Bullish investors buying the resulting product effectively offered to pay the bears if the bonds defaulted, earning what was akin to an insurance premium in the meantime.

“The evidence that Goldman actively misled [German bank] IKB and [debt investor] ACA Capital about the transaction, as opposed to not disclosing everything, is patchy. There is no ‘smoking gun’ e-mail.”

What’s more, Goldman Sachs said Friday that it lost $90m on the deal itself – even after accounting for the $15m fee it received from Paulson & Co. for creating the disputed product – by investing in the collateralized debt obligations it sold to IKB.

The German bank, apparently “among the most sophisticated mortgage investors in the world” according to Goldman Sachs, received almost €10 billion in emergency government aid after nearly collapsing in late 2007.

“[Friday's drop was] a good thing from the point of view of continuing this rally” in global equities, reckons James Paulsen, chief investment strategist at Wells Capital Management, speaking to CNBC.

“I really think this market was stretched. You had a heck of a move in 45 days. It’s a refreshing pause.”

Ahead of Friday’s 2.5% sell-off in gold prices, speculative players had raised their bullish betting on Comex gold futures and options for the third week running, latest figures from US regulator the CFTC show.

The “net long” position of bullish minus bearish bets held by hedge funds, private investors and other non-industry traders rose by almost one-third from the start of April to last Tuesday evening – the fastest fortnightly pace since Sept. 2009 – to hit a 3-month high equal to 909 tonnes of gold.

Precious metals dealing in Asia today “was disappointingly slow” says one Hong Kong broker, “despite the substantially lower prices” in gold, silver, platinum and palladium.

The silver price meantime hit a new April low of $17.48 an ounce, extending Friday’s “collapse” below what technical analysts at bullion bank Scotia Mocatta call “massive technical support” at $17.66.

“While the Goldman Sachs saga has been the main factor” driving prices, says Leon Westgate at Standard Bank today, “geology has also been an issue [because] gold is often transported using commercial airlines.

“With flights in much of northern Europe still banned, due to the volcanic eruption in Iceland, there are concerns over the availability and movement of physical gold…impacting premiums in other parts of the world.”

Trade association the London Bullion Market Association told Bloomberg that its members haven’t yet encountered any problems securing supplies.

“With physical hubs dependent on air freight from London and Zurich – and in tandem with local metal stocks running thin – [the Icelandic eruption] could lead to local prices trading sharply into premium territory” outside Europe, reckons UBS strategist Edel Tully.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Raising The BAR: Bar Patterns & Trading Opportunities

How a 3-in-1 formation in cotton “triggered” the January selloff
April 17, 2010

By Nico Isaac

For Elliott Wave International’s chief commodity analyst Jeffrey Kennedy, the single most important thing for a trader to have is STYLE– and no, we’re not talking business casual versus sporty chic. Trading “style,” as in any of the following: top/bottom picker, strictly technical, cyclical, or pattern watcher.

Jeffrey himself is (and always has been) a “trend” trader, meaning: he uses the Wave Principle as his primary tool, with a few secondary means of select technical studies. Such as: Bar Patterns. And Jeffrey counts one bar pattern in particular as his favorite: the 3-in-1.

Here’s the gist: The 3-in-1 bar pattern occurs when the price range of the fourth bar (named, the “set-up” bar) engulfs the highs and lows of the last three bars. When prices penetrate above the high — or — below the low of the set-up bar, it often signals the resumption of the larger trend. Where this breach occurs is called the “trigger bar.” On this, the following diagram offers a clear illustration:

Now, how about a real world example of the 3-1 formation in the recent history of a major commodity market? Well, that’s where the picture below comes in. It’s a close-up of Cotton from the February 5, 2010 Daily Futures Junctures.

As you can see, a classic 3-in-1 bar pattern emerged in Cotton at the very start of the New Year. Within a few day the trigger bar closed below the low of the set-up bar, signaling the market’s return to the downside. Immediately after, cotton prices plunged in a powerful selloff to four-month lows.

February arrived, and with it the end of cotton’s decline. In the same chart you can see how Jeffrey used the Wave Principle to calculate a potential downside target for the market at 66.33. This area marked the point where Wave (5) equaled wave (1), a reliable for impulse patterns. Since then a winning streak in cotton has carried prices to new contract highs.

This example shows the power of a fully-equipped technical analysis “toolbox.” By using the Wave Principle with Bar Patterns, one has a solid, objective chance of anticipating the trend in volatile markets.

And in a 15-page report titled “How To Use Bar Patterns To Spot Trade Set-ups,” Jeffrey Kennedy identifies the top SIX Bar Patterns included in his personal repertoire. They are Double Inside Days, Arrows, Popguns, 3-in-1, Reverse 3-in-1, and Outside-Inside Reversal.

In this comprehensive collection, Jeffrey provides each pattern with a definition, illustrations of its form, lessons on its application and how to incorporate it into Elliott wave analysis, historical examples of its occurrence in major commodity markets, and ultimately — compelling proof of how it identified swift and sizable moves.

Best of all is, you can read the entire, 15-page report today at absolutely no cost. You read that right. The limited “How To Use Bar Patterns To Spot Trade Setups” is available with any free, Club EWI membership.

Blaming “Market Manipulators” For Losses is a Huge Obstacle to Success

To win, you must accept the fact that losses are part of the game.

In 1984, Elliott Wave International’s founder and president Robert Prechter won the U.S. Trading Championship, setting a new all-time profit record of 444.4% in a monitored real-money options account in 4 months. In the average 4-month contest, over 75% of contestants, mostly professionals, fail to report profits.

In November 1986, in his monthly Elliott Wave Theorist Prechter published a Special Report titled, “What A Trader Really Needs To Be Successful” and gave 5 important tips to would-be market speculators. You can read them now, free (details below) — but here’s Bob’s fourth point:

4. Accept the Fact that Losses Are Part of the Game.

There are many denials of reality which automatically disqualify millions of people from joining the ranks of successful speculators. For instance, to moan that “pools,” “manipulators,” “insiders,” “they,” “the big boys” or “program trading” (known today as “high-frequency trading” — Ed.) are to blame for one’s losses is a common fault. Anyone who utters such a conviction is doomed before he starts. But my observation, after eleven years “in the business,” is that the biggest obstacle to successful speculation is the failure merely even to recognize and accept the simple fact that losses are part of the game, and that they must be accommodated.

The perfect trading system does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Speculation is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! He even strikes out often. But he still earns six figures a year, because although not perfect, he has approached the best that can be achieved. You don’t have to be perfect to win in the markets, either; you “merely” have to be better than almost everybody else, and that’s hard enough.

Practically speaking, you must include an objective money management system when formulating your trading method in the first place. There are many ways to do it. Some methods use stops. If stops are impractical (such as with options), you may decide to risk only small amounts of total capital at a time. After all is said and done, learning to handle losses will be your greatest triumph.

The last on my list is [the point] I have never heard mentioned before. …

Keep reading this free Special Report titled, “What A Trader Really Needs To Be Successful” now — all you need to do is create a free Club EWI profile.