Soros sells his gold... Paulson calls for $4,000 an ounce... Mexico's $4.6 billion gold purchase... Silver gets hammered... El-Erian's sobering op-ed... Portugal gets a bail out... And Greece needs another one... Comcast is bleeding... What's another $2 trillion?...
One of the biggest headlines circulating today is the story of George Soros' and other large hedge funds (including John Burbank's Passport Capital) selling their gold and silver. Prior to the alleged sales, Soros was the seventh-largest holder of SPDR Gold Shares (GLD). The Wall Street Journal article cites "people close to the matter" saying Soros originally bought gold to protect against deflation. Now, the $28 billion Soros Asset Management "believes chances of deflation are reduced." It's amazing what a few trillion newly printed dollars can do to change someone's mind.
Don't read too much into Soros' precious metal sales. For one, they're not confirmed. And the inflation/deflation reasons for gold in the article are bunk. People used to buy gold and silver to hedge against deflation. But they're no longer valued that way. Now, the metals are valued as money. They're hedges against the collapse of fiat currency (paper money).
Also, we don't know why Soros is selling these metals. Perhaps like Eric Sprott, Soros is simply reallocating funds from expensive physical metals to cheaper gold and silver stocks.
According to the article, John Burbank is taking profits on the gold trade. He's still long-term bullish. And he's looking to buy more gold-mining shares after a decline.
While Soros and Burbank are selling, two other hedge-fund heavyweights are still long. Yesterday, billionaire hedge-fund manager John Paulson told a U.K. news show that gold will hit $4,000 an ounce. And one of the best commodity traders in the world, Andrew Hall (a former Citigroup trader who runs the hedge fund Astenbeck Capital and trades for Phibro), told clients last month that precious metals will "march higher" unless we see "an imminent rise" in interest rates.
As we noted in yesterday's End of America Watch Box, we're now experiencing negative real interest rates (meaning inflation is running higher than nominal interest rates). In this kind of environment, you give up nothing holding gold and silver, which have no yield. Once the Treasury starts boosting rates, which we don't think will happen for some time, cash becomes more attractive because it can generate a yield... At that point, money will flee gold and silver.
Central banks are buying gold, too... Over the past two months, the Mexican central bank bought 93.3 metric tons of gold (around 3.5% of annual mined output) worth $4.6 billion – one of the largest central bank purchases in recent history. It increased its holdings from only 6.9 tons in January.
Mexico has more than $125 billion in foreign reserves. And guess which currency dominates its holdings? You guessed it... The U.S. dollar.
Also, Russia bought 18.8 tons of gold. And Thailand bought 9.3 tons in March.
Regardless, precious metals plunged today. Gold was down more than 2% to $1,508 an ounce. Silver fell more than 8% to $39 an ounce. It's down 19% from its April 28 closing high of $48.70.
If you're feeling jittery about your silver position, read today's Growth Stock Wire. Editor in chief Brian Hunt discusses silver's extreme volatility... And why the metal could fall to $20 per ounce and still be in a bull market.
Now that Osama bin Laden's gone, it's time to worry about the larger issues... In an op-ed for Time titled "Bin Laden Is Dead. Now It's Time to Fix the Economy," PIMCO co-CEO Mohammed El-Erian reminds celebrating U.S. citizens that our problems are far from over. And he explains why the terrorist's death didn't help the markets. (Hint: a crushing debt load and high unemployment.)
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After initial excitement, this moment of unity has largely been shrugged off by global markets as investors worry about the immediate risk of terrorist backlash and, more generally, the continued sense of malaise in the American economy... Unemployment remains stubbornly high. Youth joblessness is at alarming levels, with too many of the country's teenagers getting close to the point where they go from being unemployed to being unemployable. Various budget constraints have limited the scope for easy solutions, even if these were desirable. The debt and deficit dynamics are bad and deteriorating at both state and federal levels. |
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A major rating agency, Standard & Poor's, has already taken the previously unthinkable step of placing the country's AAA credit rating on negative outlook. And Americans can no longer rely on their central bank for yet another round of imaginative pump priming to buy them time, options and flexibility. In effect, America can't buy itself out of its economic problems, nor can it again kick the can down the road for much longer. Meanwhile, the rest of the world continues to outpace the U.S. in growth, competitiveness and wealth creation. |
No surprise here, but Portugal agreed to a $116 billion bailout from the European Union and the International Monetary Fund. "The international institutions recognize that the Portuguese situation isn't like the situation of other countries," Prime Minister Jose Sócrates said during the address. "The government has managed a good agreement. It is an agreement that defends Portugal." In other words, Portugal won't cut its minimum wage or any public sector jobs (which Ireland and Greece were forced to do). And employees will still receive an extra two months of salary for holidays.
So Greece and Ireland are still doomed, despite making extra cuts. And Portugal's prime minister, whose government fell apart in March, is bragging Portugal will take this $116 billion without making any cuts. I wonder what the outcome will be...
We often warn you not to trust anything a politician says (especially regarding finances). We're not trying to be political. We've just noticed a clear pattern... When a politician makes a declarative statement, we usually see the exact opposite happen. Take the comments George Papaconstantinou, Greece's finance minister, made at a recent press conference...
He said his government had no intention of restructuring its debt or negotiating a revaluation of outstanding bonds. (Note, we said last week, "Greece will have to restructure its debt.")
But in an interview published Monday in the French newspaper Liberation, Papaconstantinou called for an extension to the repayment period and a reduction in the interest rate paid on the $160 billion "loan" from the EU and IMF that saved Greece from bankruptcy in May 2010. The country already received one extension, from three to seven and a half years, and a one-percentage point cut in the interest rate in March.
Greece and Portugal are toast. But the euro still almost hit $1.49 today.
The decline of old media continues... Cable provider Comcast lost 39,000 television subscribers in the first quarter. Its subscriber count is now 22.76 million. Netflix, the DVD subscription and video-streaming service, has 22.8 million U.S. customers. Netflix charges $8-$15 a month versus an average of $71 per month for Comcast.
On a personal note, Comcast's customer service is awful. I have never encountered a company whose clients hate it more than Comcast. This trend will definitely continue.
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New 52-week highs (as of 5/3/11): Johnson & Johnson (JNJ), Intel (INTC), Philip Morris International (PM).
Some nice letters of support in today's mailbag. Send yours here... feedback@stansberryresearch.com.
"Your newsletter from late yesterday included this sentence: 'Someone compares Porter's letter in Friday's Digest to Hank Rearden's defensive speech in Atlas Shrugged.' I would simply call it Hank Reardon's Defense Speech. The comment in the newsletter that followed was more on point. Yeah, I'm nitpicking, but having read Atlas Shrugged and remembering Hank's trial defense, he was definitely NOT defensive. He actually went on the offensive.
"I love to read Porter's comments. It is refreshing to see someone talk in rational terms. I am so tired of listening to people (be they neighbors, colleagues or national media talking heads) rationalize their thoughts and actions that tend to fly in the face of reality; and Porter is definitely a man that faces reality, and puts it on a platter for his readers. Simply keep it up." – Paid-up subscriber Jeff
"I subscribed on Feb 17 and my eyeballs are worn from reading. So much great information! I joined because I seem to have lost about 15-20lbs; ie for years as I lost my ass! This is a thanks for the End of America and the opportunity to receive your teaching. I have learned so much!
"So... why do I thank you? On April 6, I had enough money to go into an investment. After having studied all of your mailings and read every article you provided me, I purchased SLV and GLD, 60/40 and daily watched and learned more. On 4/29 I exited SLV; On 5/2 I exited GLD, all based on what I have learned since 4/6. WOW $10,000 profit!! I'm now in cash watching the falling safe and ready to pick up the bread at the end. I'm also now a premium member and looking forward to my 10 pcs of silver and watching it soar, at the right time, which I think is coming soon." – Paid-up subscriber Richard C.
Regards,
Sean Goldsmith
Baltimore, Maryland
May 4, 2011