investment tips

Thank you Ben: in celebration of $90 oil

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Today oil is above $90.  Last night I paid $1.119 (CDN) per litre for gasoline to fill my wife’s RAV4.  Unlike most people, I actually have a smile on my face when filling up.

I really owe a debt of gratitude to Ben Bernanke; you see he told 60 Minutes that he won’t stop with QE2–600 billion.  Quantitative easing is a fluid concept.  It is really as much as you need to make everything happy again.  And this is really like pouring money into my portfolio:  my positions are short the US dollar.  I’ve sold put options in US dollars against Barrick Gold (ABX), Gold Corp (GG), New Gold (NGD), Penn West (PWE), Pengrowth (PGH): gold and oil.  I hold long positions in most of these companies too.  Thanks Ben.  You have provided me with the Bernanke put so that I can invest in these companies virtually risk-free; if the economy sucks, you have decided to poor gas (QE) on the fire, and they are assured to explode in price.  Dear Ben, have I told you recently that you’re my best friend?  Now I know you think you can control inflation.  As long as you believe you can, you will continue to put money in my portfolio.  So please, by all means, just keep it up.

Nota Bene to my esteemed readers:  I may be just a little ironic in my tone above–I’m yanking Bernanke’s chain–not that that important man has either the time or the inclination to read my humble blog.  What I actually believe is this (does this scenario seem unreasonable today?):

hat tip: Monty Pelerin, “How inflation occurs”

Gold certificates vs. Sprott Physical Gold Trust

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I picked up some shares of Sprott Physical Gold Trust on a tip from a friend who is a lawyer at a Bay Street firm here in Toronto.  What backs up Sprott Physical Gold Trust?  Its Net Asset Value (NAV) as of close Friday is $11.60 per share, based upon 820,753 oz of physical gold held in the Canadian Royal Mint.

It is possible to buy Gold certificates from major banks.  What backs up the gold certificates of banks?  Well, the Bank of Nova Scotia says,

Scotiabank gold certificates are backed by the assets of The Bank of Nova Scotia.

And this:

Allocated gold is bullion held by a bank on behalf of the owner. The gold is separated from other metal that may be held by the bank and is identifiable by its unique bar numbers.

Unallocated gold is a claim on The Bank of Nova Scotia for the ounces entitlement to a specific quantity of gold bullion.

And finally, this:

RSP Gold Certificates sold through Scotia McLeod are allocated, while all other non-registered certificates are unallocated

This means that the Bank of Nova Scotia likely sells a great deal more gold certificates than the physical gold that they have to back it up, because they only hold allocated gold if the certificates are bought within an RRSP plan at their Scotia McLeod brokerage.  The rest is just paper.

The idea, therefore, that there is far more gold paper than there is physical gold is not at all far fetched.  This was exactly the point of a previous post that suggests that gold should be worth $56,000.  But because there is many more times more paper gold than physical gold, the gold market is actually flooded with worthless papers.  The Bank of Nova Scotia is not alone in this practice of selling unallocated gold.

The fractional reserve system of gold selling is a dangerous practice and it puts the buyer in a position of assuming the bank’s default risk.  If you put your money in a savings account, it is insured up to certain amount.  But it doesn’t seem that unallocated gold certificates are insured at all.  This website seems to give a pretty good explanation of unallocated gold certificates:  gold.bullionvault.com/How/UnallocatedGold

Gold at $56,000 per ounce?

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There is a story going around that the London Bullion Market Association has sold as much as 45-100 times the amount of gold futures as there is physical gold underlying the notes.  I first heard about this story from Monty Pelerin’s blog which featured a Max Keiser interview with Jim Willie (see videos below).  Then, on the Peter Schiff Radio Show, Adrian Douglas claims that gold should be selling at $56,000 per ounce. Even Peter Schiff was incredulous about it (see http://www.schiffradio.com/pg/jsp/charts/audioMaster.jsp?dispid=301&pid=51169 ).

Now, thanks again to Monty Pelerin, I’ve read Vincent Bressler’s “Empire of Fraud“, saying:

The futures markets are fractional reserve systems running at very low reserve ratios, something like 45 to 100 ounces of electronic gold and silver obligations for every unencumbered ounce of physical gold or silver. The day is coming when the physical price of gold and silver disconnect from the electronic price and they can not be brought back together again except through a massive devaluation of the dollar in terms of gold and silver. On this day the future’s markets in gold and silver will be stopped. There will be secret meetings. Those holding electronic gold tickets will be paid in be paid in dollars at the price of gold before the disconnect. And then I believe that there will be an explicit devaluation of the dollar with respect to gold on the order of 20 to 40 times.

Once this happens, the dollar will be further devalued against a large number of other commodities and will probably actually collapse altogether as the world’s reserve currency.  Few believed the warnings about fraud which was going on in the real estate market and yet that bubble collapsed.  Lying, manipulation and greed is the common story in our times.  I’m preparing for this one.  I am long on Barrick ABX, New Gold NGD, Lakeshore Gold LSG, and Detour Lake Gold DGC; and I’ve now also taken a long position on Sprott Physical Gold PHY.U, which claims to keep actual physical gold in the Canadian Royal Mint.  I’ve sold puts on ABX, GG, DGC and NGD.

Here is Max Keisar interview Jim Willie in three parts:

Part One:

Part Two:

Part Three:

The Shale Gas Bubble

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On the first of this month I mentioned reading an article from Oil Drum on the Marcellus shale play.  The article suggested that shale gas would only be profitable when the market price is above $7 mcf.  Now other analysts are saying that 7.50-8 mcf is needed to cause shale gas to break even.  In an article by Dave Cohen, the words “bubble”, “sleight of hand”, “shenanigan”, “magic tricks” and “fraud” are terms that are being applied to shale gas.  The bottom line is that drilling takes place in order to increase reserves so that the play seems to increase in value but the reserves are overstated because they require decline rates which are much less dramatic than they have proven to be.  Cohen summarizes (emphasis his):

The shale gas boom has been the sole bright spot in America’s energy picture, and maybe the only bright spot in the economy as a whole. And what does that bright spot turn out to be? An asset play whereby shale gas producers, conniving with bankers, inflate their own value, hoping to get out while the getting is good.

I’ve now completely emptied my portfolio of Enerplus Resources which is seriously invested in the Marcellus shale play.  Enerplus has a lot of other great things going for it, and a fat dividend, but when you see an investment that doesn’t make sense then it is time to get out.

(Hat tip:  Devon Shire, “Can Shale Gas Companies Who Drill Uneconomic Wells Make Good Investments ?“)

Chris Bosh: A Diminished Brand

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Toronto Raptor fans were disappointed when Chris Bosh decided to sign with Miami and to play with Lebron James and Dwayne Wade.  This is perhaps the biggest investment error that a player like Bosh could have made.

Toronto fans have seen it before.  Damon Stoudemire, Mighty Mouse, left Toronto to join the Portland Trailblazers.  He went from “the man” to a role player, and his career was never even close to the same–but perhaps it’s only because he had a marijuana problem.  Arguably Vince Carter has not done as well since leaving Toronto.  Tracy McGrady left Toronto to escape Carter’s shadow, and it diminished his chances at a title, though not his scoring ability.

But Bosh’s decision is a little puzzling.  Is a chance at being a contender immediately so important?  What happened to the David Robinson approach of sticking with the same franchise and building brand for himself and for the city.  Is that approach dead?  Perhaps not with Kobe Bryant who is a Laker for life.

Bosh’s numbers are down across the board.  I suggested to a friend that he would become the Lamar Odom of Miami (but Odom is much better rebounder); Bosh is not even second fiddle in Miami.  In Toronto the offense revolved around getting it to the man, the go-to guy, Chris Bosh.  Now, his shot attempts are down 33% from 16.5 attempts per game last season to 11 per game in Miami.  Even more telling, his free throw attempts per game are down 45% from 8.4 to 4.7.  He is not getting the touches–the ball-handlers James and Wade are getting theirs–but poor Bosh requires that someone pass to him.  But there is no Jose Calderon in Miami.  Wade and James will make the All Star team.  But Bosh will only make the All Star team by sympathy vote.

If he had stayed in Toronto and built up a contender around himself, he had a chance of retaining his brand, an all star, perhaps an all-time great player.  Now, the only chance he has of regaining his market capital is if he helps Lebron and Wade win a championship in Miami.  But then he is not Lebron’s Scotty Pippen.  He is more like Lebron’s Ron Harper or Tony Kukoc.  He doesn’t rebound well enough to be Lebron’s Dennis Rodman.

As for whether Miami will win a championship any time soon, I have my doubts.  The last time Bosh, Wade, and James played together on the same team, they lost to the Greek national team.