GLD Watch - 02/24/2009

Hindsight is 20-20, but in December, I said that GLD looked like it was due for a run because of the MACD turning positive. It's now safe to say that I was right. Unfortunately for me, I didn't buy in... I was hoping for another dip to get in cheap, but it doesn't look like that will happen now. However, even at these levels, gold could still be cheap.


We did have a decently sharp pullback on gold tanks to the "Bernake Rally" today, but it didn't do much damage to the daily chart. Short term entry targets look like ~92 or ~87.

The investment objective of the SPDR Gold Trust (GLD) is for the Shares to reflect the performance of the price of gold bullion.

CNBC House of Cards

"Let's hope we are all weathly and retired by the time this house of cards falters." - Internal email Wall Street 12/15/2006

I just watched a great CNBC documentary by David Faber that recaps the origins of the global economic crisis. For replay: http://www.cnbc.com/id/28892719

Some key points:

- 911 disaster causes Fed to cut interest rates
- Mortgage rates dropped to lows not seen since the 1970's.
- Wall Street saw an opportunity to get into Mortgage Backed Securities (MBS) and compete with Freddie Mac/Fannie Mae
- Chasing the American dream, Americans bid up real estate prices, but they didn't read the fine print of their loans, overstated their incomes, and planned to withdraw equity from their future home values or planned to refinance at a later time.
- Wall Street's demand for mortgages allowed lenders to get creative and loose with "Stated Income" and "No Money Down" loans. (Lenders would give a mortgage to anyone.)
- While there was concern on Wall Street, imposing stricter standards would have effectively put any firm out of the market.
- People refinanced and tapped the equity in their homes to fuel home improvement and retail spending.
- Wall Street's MBS business exceeded expectations and foreign demand increased.
- Highly unqualified people became loan officers and were highly incentivized to close loans and refinance. Homes became ATM machines.
- Loan originators "never made a mortgage that Wall Street didn't want to buy."
- In 2004, President Bush brags about new home ownership rates. Greenspan encourages mortgage industry to come up with more creative loan alternatives.
- Negative Amortization Loans allowed buyers who couldn't afford loans to buy. In fact, these toxic loan had balances that increased over time.
- To attract institutional buyers, ratings agencies rate "investment grade" securities. Rating agencies had a conflict of interest to properly rate investments, for fear of losing future business.
- Banks created Collateralized Debt Obligations (CDO's), allowing investors to own small pieces of many properties to diversify their risk.
- CDO's were a vehicle to package bad loans with highly rated ones in order to give them AAA rating.
- Salesmen, lawyers, and investors alike did not understand what a CDO was. However, the investment pitch was convincing - It's safe, it's a sure thing with low risk. The AAA rating was more important than knowing what the investment was.
- Greed was prevalent. Buyers wanted their dream home. Lenders couldn't say no. Bankers asked for more mortgages and more loans. Investors sought higher returns.
- Lack of oversight by SEC and Federal Reserve. Greenspan says even if he had known the extend of subprime mortgages (representing 20% of all new mortgages in 2005), Congress probably would have stopped him, since new home ownership is a good thing.
- Warning Sign #1 - Mortgage Origination is a trillion dollar market that touches consumers without regulation.
- Warning Sign #2 - Housing Prices were going up significantly higher then Median Income.
People and even rating agencies assumed that housing prices would continue to go up in perpetuity.
- If Greenspan with hundreds of PhD's on his side, could not understand CDO's, how could the majority of the world understand them?
- In 2006, Subprime loans began to default and bankrupt lenders. MBS's delinquency rates rise and Wall Street stop buying mortgages from Subprime lenders. Mortgage credit begins to dry up and there are fewer qualified buyers. Home prices stop rising. People can't refinance out of adjustable mortgage rates. People fall behind on the payments that they didn't understand. Many are foreclosed. When people discover AAA rated investments are junk, wall street confidence is shattered and the global economic crisis begins.

The American Dream is shattered.
"If it sounds too good to be true, it probably is."

Gold vs USD

Typically, the U.S. Dollar and Gold share an inverse relationship. If the US Dollar rises, then Gold falls. If the US Dollar falls, Gold rises. Below is a chart I found that illustrates this relationship since the 1970's.

Over the past few weeks of January 2009, gold has been rallying WITH the dollar when, according to conventional wisdom, it should be declining. This does happen from time to time, but it is unusual.

In the diagram below, I was anticipating a decline (green circle) but it never happened. Instead, we rallied (red circle). As you can see, that doesn't happen too often.

What does this mean? Is this a greater trend? A sign of bigger moves ahead? Is it telegraphing more trouble in the financial markets? Is Gold now decoupling from the U.S Dollar as investors see it as the only true safe haven?

I'll be watching.

Sources: http://www.whiskeyandgunpowder.com/ and http://www.futuresource.com/

GLD Watch - 01/23/2009

Sigh. Well, as I said in my last GLD post, we did in fact retest 80... but we didn't get past it to test 70. It seems like we're breaking out of key resistance and above the 50 day moving average, when we should be declining. This seems bullish. To be honest, I thought we'd drop to 70 with an Obama stock rally. Instead, Gold rallied on "true safe haven" buying.


The daily chart seems to point to a near term breakout as well. Right now I feel like I missed the boat.


Next week is key. If we don't get a sharp decline, we're probably going to take off. However, I don't chase and I don't like mixed signals. I'm still going to wait for the next short term bottom. If it bottoms above 70, I'm buying. I keep telling myself to have some patience.

Visual Guide to the "Subprime" Financial Crisis

I saw an interesting (and complicated) diagram of how we got to where we are now in the financial crisis in September 2008. Some argue it's missing some details, but I think its pretty decent... albeit long.

Source: http://blog.mint.com/blog/finance-core/a-visual-guide-to-the-financial-crisis/

Peer To Peer Lending

I was watching CNBC and they discussed an interesting concept that has gained momentum during this credit crunch: Peer to peer lending. In other words, there are websites that allow individuals to lend to others individuals. The borrowers have 660+ FICO scores and provide a description of why they need the loan. Supposedly the default rate is below 1%.

Note: I haven't tried this out at all, but I'm thinking about trying the lending side with CD rates plummeting. It sounds like a win-win. Borrower gets a lower rate and a LOAN. Lender gets an above average rate of return.

I'm sure there are plenty of other competitors, but has anyone tried this? Or know of other competitors?

http://www.lendingclub.com/home.action

CEF vs. GLD

It recently came to my attention that CEF is another good alternative to GLD. The differences:

1) CEF is a closed fund that holds Gold and Silver bullion in Canada.

Please note that they are held in Canada (not the U.S.) so there's less chance of a confiscation. Paranoid you say? Pop quiz, when was the last time gold was confiscated in the USA? (Hint: Google "FDR Confiscate Gold")

2) GLD is taxed at a "collectibles" rate of 28%, whereas CEF is taxed as a "mutual fund" which is subject to capital gains.

Short term capital gains (held less then 1 year) are taxed at normal income tax rates. Long term capital gains (held over 1 year) are subject to 5% or 15% tax depending on your tax bracket.

3) Unlike the popular ETFs such as GLD and SLV, CEF does not lease out your gold.

They always maintain 90% or more of assets in unencumbered, segregated and insured, passive long-term holdings of gold and silver bullion. There are pundits out there that think GLD and the Comex will break due to "price manipulation" of gold by the big banks and Fed.

4) CEF does come with a hefty premium (currently at ~15% to NAV).

But this premium is less than the premium you are likely to pay on physical bullion. Check current NAV here. Supposedly, below 15% NAV is "good" for this fund.

5) CEF is diversified using a 50:1 silver to gold weight ratio.

GTU is another option for those that want only gold and not silver. For my gold watch, I'll still continue to monitor GLD as it tracks the "price of gold" more closely, but I may consider taking a position in CEF also or instead.