Strong hands move markets and influence trends. Just as the trading activity of corporate insiders can signal company health so too may the asset choices of wealthy individuals. Recent activity in alternate asset classes the indices may signal a change in weather for stocks.
High end individuals have been exchanging their USD for works of art and precious gems, paying enormous prices to possess alternate portable assets. Christie's Fine Art, for example, recently set a record with $691 million spent at an auction of 20th century works. This trend of record art sales has been accelerating and is a red flag for the USD, equities and the economy generally. Does it mean that gold, an ancient store of portable value will soon rebound from a dismal YTD, down 22%? Demand has not flagged: foreign banks continue to buy heavily.
This article will consider how high net worth individuals shifting to portable assets may effect PM (precious metal) mining stocks. They, and bullion ETPs like Central Fund of Canada CEF), are ways that investors may hedge against high-flying markets, the deteriorating experiment with a fiat system and the inflation hidden by official stats.
QE means that the Fed has been monetizing US debt, growing its balance sheet from $500 billion in 2000 to $4 trillion today, an eight-fold increase. As David Stockman, former director of the OMB recently noted, this has been benefiting the top dogs in the markets at the expense of everyone else. Veteran trader Art Cashin, NYSE floor-manager for UBS who does a daily market watch with CNBC recently used an analogy like my reference to Poe's "Masque of the Red Death" to describe the hilarity of the partiers in this happy hour for equities. It's going to end, he suggested, but we can't be sure of anything because "the clocks don't have hands" anymore, that is, the numbers are broken: fiscal policy has utterly trumped fundamentals and created mad markets. Cashin worries about the bond as well as equity markets and commented on China's continued purchases of gold. He sees a chance that bond prices may plunge and gold rise. Former Fed Reserve official, Andrew Huszar recently referred to QE as "the greatest backdoor bailout of Wall Street of all time." The markets seem close to a euphoric peak as Federal policies create chaos in large areas of the economy. The S&P is up about 28% while earnings are +3%. Mom and Pop investors are pouring in: beware.
Stockman referred to the QE climax of fiat governance as "lunatic policies" leading to "global [economic] collapse." Many people, like Thorsten Polleit at the von Mises institute believe that socio-cultural and moral collapses are concomitant with economic-fiscal profligacy and decay. Among the way this decline manifests itself is in a growing gap between Main Street on one hand and Wall Street and the financial system on the other. How can retail investors best respond to this grave situation? What asset blend maximizes protection of retail assets?
Gold is a monetary metal and, as such, subject to short selling pressures. Macro dynamics, heavy demand and changes in world financial structures (like growing ex-USD trade) should be positioning it for a powerful and sustained rise. Like that "rough beast" in the famous Yeats poem, it is clear that a new monetary order is stalking toward us. I do not believe, however that investors can bank on a PM rise commensurate with impending pain for King Dollar. But before considering the outlook for PM bullion, ETPs and miners, let's look further at the rush by deep pockets into art, gems and real estate.
As noted, the evening of November 12, English painter Francis Bacon's 1969 triptych portrait of artist Lucien Freud sold at Christie's for $142.4 million. This beat the record of $120 million set last year at the sale of Edvard Munch's iconic work, "The Scream." A ten-foot tall stainless steel balloon dog sold for $58 million. It recalled the sale of Gustave Klimt's gold-flecked masterwork, "Portrait of Adele Bloch Bauer" for $135 million before QE lit the fire of hidden, corrosive inflation. A day after the asset transfer at Christie's, Sotheby's elicited $105.4 million for one of Andy Warhol's "Double Disaster Car Crash" paintings of 1963. His "Coke Bottle (3)" sold for $53 million and a portrait of Elizabeth Taylor for $21 million among notable exchanges of USD for alternate assets. One can laugh at the aesthetics but not the evidence of capital transfers.
Also notable were recent precious gems sales including that of a pink diamond for $83 million and an orange diamond for $35.5 million in Geneva. This complements the staggering sums paid for condos in Manhattan the past few years. Areas like Bedford - Stuyvesant that not long ago were no-go zones have condos selling over $1 million. The hi-end market has risen above $60 million / condo. Clearly high net worth individuals are exchanging USD for alternate hard assets at record levels. The rich are getting richer and many prefer $140 million in a modernist masterwork than in 10-year T-bills yielding 2.5%. Partly the exchange reflects the reality of high inflation with more to come. It also reflects a disinclination to have wealth sitting only or mainly in cash.
With this action in mind, keep an eye on the Pure Funds Diamonds / Precious Gems ETP (GEMS) and consider parking some of your wealth there. Since I first began mentioning its merits in the summer, it has moved from the lower to the upper end of its 52-week range, closing Friday at $21.86. It is lightly traded but is an appealing complement or alternative to investing (more) in PM miners.
Chris Powell, a consultant to GATA, editor for 40 years and member of the New England chapter of the Society of Professional Journalists, returned from meeting with two Asian CBs recently and confirmed that "the gold market is micro-managed." He expects that the current flight of physical gold from West to East will create greater monetary changes than the collapse of the London gold pool in 1968. Opaque, self-certifying markets tend to break down. COMEX gold holdings have fallen from 3 million to 586k oz. to cover paper claims worth 75x amount. However, do not expect prices of your bullion simply to rise or government policy to rest lightly when monetary arrangements are re-set. One still needs liquidity while forming an exit strategy.
It is more likely that gold and silver mining companies will be nationalized, de jure or de facto than that free markets and individual investment will be protected. If the health care industry can be nationalized, so can mining: look at China. One needs only extrapolate the trends embedded in social security, health insurance and their relation to tax and security policies. The crises and atrocities that began on 9/11 are more likely to increase than diminish. With this trend and juiced markets comes the value of more diversified assets.
Despite many daunting prospects in governance and commerce, don't give up on purchasing the best PM miners which remain near secular lows. Top companies like First Majestic (AG), Endeavour (EXK) and Silver Wheaton (SLW) remain at very low prices. This also seems like an apt time to enter or add to bullion ETPs like Sprott Physical Silver (PSLV) or Gold (PHYS) which have fallen again with the frequently attacked gold price. Despite the havoc that paper-contract short selling wreaks on this sector, it again is looking safer than indices surging on debt creation at a time of costly legislative snarls, disorder in international currencies and continuing stagnation in Europe. Adding to this, France had its credit downgraded by Standard & Poor Nov. 8 and its 10-year note jumped 24 basis points. It could happen here so for those who can stomach exposure to PM miners, there is a buying situation.
In "Chasing the S&P" I suggested that the markets have overshot even the elevated angle of the past year's gains and that a pullback even to the 1700-20 level would not break the established QE-supported trend lines. Overbought conditions increased last week. Unless we have entered still more uncharted turf, the chances for retracing toward 1720 by early December are real. There will be buying opportunities there. After that, the S&P's tragic rise will continue: expect that markets to race perhaps in 2014 amid heightening risks of a major re-set. It might be wise to wait a bit on equities and keep in mind that a major break in world economies, American consumer strength (an engine for global growth) and / or currency failures and change will at some point validate a conservative position anchored in alternate assets and cash.
Companies positioned for a stormy long haul are mentioned here. Issues as disparate as British Petroleum (BP), Starbucks (SBUX), Boeing (BA), Disney (DIS), CBS (CBS), TJX (TJX) and United Tech (UTX) are among the stalwarts I have discussed. Follow them and diversify your assets. The flood of money into art, gems and real estate signals stormy weather.