Larry Cyna's  Instablog

In a recent book titled "The Next Decade" by George Friedman, Mr. Friedman makes the point that the US remains the world economic power with 25% of the world economic production. His contention is that the US President must exert that power in many ways, always mindful that the USA is the world's economic powerhouse. This blunt assessment of the remaining power of the US economy and its military, is a reminder to the doomsayers who are convinced that the USA is in an economic free fall, that the US dollar is doomed, and that gold is the answer.

US $$$ Traveling Around the World
Even before WWII, but with pronounced effect thereafter, starting with the contribution of American military aid to its war allies, US dollars have left the shores of America and have funded the world. This transfer of wealth through military efforts continues to this day with troops and equipment stationed in over 100 places throughout the world. It continues with foreign aid and financial support to countries as diverse as Israel and Egypt and so many others.

The flow of US dollars from American shores continued unabated with The Marshall Plan following WWII to rebuild Europe. The result was a massive economic power created in Europe that almost rivaled the USA, but not quite, called the European Economic Union with its own currency, the Euro.

American post WWII aid to Japan created a new military ally and then an economic powerhouse. It continued with the enormous import of Japanese goods and services to America which fueled the economic powerhouse of Japan. Today Japan still ranks as one the world's greatest economic powerhouses.

America's appetite for energy created the start of OPEC and the massive flow of oil into the US. This created the "Eurodollars", being massive amounts of American dollars floating around the world. Then came the oil embargo in the 1970's, creating a massive outflow of US dollars to obtain alternate energy sources. Since then, there has been a large and constant flow of US dollars going overseas to fund oil imports.

With technological advances and greater prosperity, came an American appetite for consumer goods, fueled by stores such as Walmart, and China became the beneficiary by exporting enormous quantities of goods to the US and in exchange receiving US dollars. The result of this was yet another world class economic power created.

Through these various periods, the US continued fighting wars and sending enormous sums overseas for this conflict or that conflict.

A Seven Decade Pattern of Exporting Enormous Amounts of US Dollars.
The result of this repeating pattern of sending money around the world, is that there is now a whole family of economic powers including Europe, China, the Middle East, and Japan. Each of these economic powers controls great wealth and power, yet none approach the US in size, influence, economic power or military position. The US dollar has created prosperity in so many areas, and not surprisingly, the USA itself has grown and benefited more than any. It has been very good for the USA.

The US still has over 25% of the GNP of the entire world.

What Happens When a Country or Area Becomes Prosperous and Flush With Dollars
Remember the Japanese invasion of mainland US in the 1980's, looking to buy movie studios, New York buildings, famed companies, and so on. It was the Japanese invasion. Japanese tourists were everywhere snapping pictures with their Japanese cameras, buying up everything in sight. Americans stood in fear wondering what was happening to their country. In hindsight, America was enriched by attracting back these massive sums of money together with the knowledge and advancements of these newly rich people.

Remember the Arab Sheiks buying famed British landmarks, famed British department stores and newspapers? Once again, the money flowed around the world meeting demand and supply needs and opportunities.

China is no different. This week it was reported that China's sovereign wealth fund is among a trio of Asian investors vying to buy an £800m London office campus from Blackstone, the US private equity firm, in what would be the UK's highest value property deal since the start of the financial crisis. China Investment Corporation and government-backed funds from Korea and Malaysia have tabled bids for Chiswick Park, Blackstone's 1.1m sq ft development, according to people familiar with the process. In the past year, China has attempted to buy energy assets in the US and has succeeded in buying oil sands assets in Canada.

The current discussion is whether state owned or controlled enterprises should be allowed to compete with private enterprises, and accommodations and negotiations are continuing.

The essential point here, is that money flows to wherever it finds a home. The US dollar has funded the world and continues to fund the world, for the good of all, but especially for the good of US citizens. As a country obtains wealth, it seeks to do what every other country does with wealth, which is to invest it in safe and secure assets, which has always meant the USA and continues, more than ever, to mean the USA.

Why the USA
The USA has some advantages that are unmatched anywhere else, and no competition is on the horizon. These advantages make the USA a home and a magnet for worldwide investors. Some of these advantages are the rule of property law, the rule of intellectual law, the inalienable rights of the individual, the free spirit of the American way, a lack of threat of military action by neighbors, and above all is the continuing beacon of the almighty US dollar as a haven of safety.

US Dollar v gold
We hear so much about the 'fiscal cliff', about how the US debt is unmanageable, how inflation will destroy the American dollar and how you must have gold to protect yourself, and so on. This is all nonsense. The US dollar has proven to be the most resilient and safe method of exchange and shows no sign of losing this position. The other currencies can get together and form other currency blocks including the Chinese, the Europeans and so on. This may or may not happen, but their strength compared to the US dollar is just not terribly significant.

The US dollar in our lifetime, has provided worldwide prosperity, opportunity and an accepted international method of exchange for goods and services. By the export and worldwide use of American dollars, all of these other large economic growth areas have been created and they remain sustained by the US dollar.

Don't be misled by those screaming that the end is nigh
This cycle, like every previous economic cycle shall pass, and the US dollar will remain the currency of exchange. For non-believers, I suggest you start carrying around a pocketful of gold to pay for your morning coffee. See how long until your pocket rips open from the weight.

The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

The Price of Gold Stagnates
Looking at the chart of the price of bullion (Gold) one sees that the current price is almost where it was several months ago, and nowhere near the high of 2011. It is currently resting slightly above $1,650, which is just a bit weaker than it was a few months ago. Since it hit its high of $1,900, it has not come close to that high. It tested $1,800 a few times, but those weak efforts failed to come close to previous highs.

The End of The World As We Know It
On December 22, 2012, according to an ancient calender, the end of the world would come.

To quote the ancient prophecy, "The sacred Aztec calendar is properly called the Eagle Bowl. It represents the solar deity Tonatiuh. The amazingly accurate calendar has been in use in various forms for more than 2,000 years. A Zapotec prophecy, based on the Eagle Bowl, states:"After Thirteen Heavens of Decreasing Choice, and Nine Hells of Increasing Doom, the Tree of Life shall blossom with a fruit never before known in the creation, and that fruit shall be the New Spirit of Men."

The 13 Heavens and 9 Hells were each 52 years long (1,144 years total). Each of the 9 Hells were to be worse than the last. On the final day of the last Hell (August 17, 1987), Tezcatlipoca, god of death, would remove his mask of jade to reveal himself as Quetzelcoatl, god of peace.

In the mythology of the Aztecs, the first age of mankind ended with the animals devouring humans. The second age was finished by wind, the third by fire, and the fourth by water. The present fifth epoch is called Nahui-Olin (Sun of Earthquake), which began in 3113 BC and will end on December 24, 2011. It will be the last destruction of human existence on Earth. The date coincides closely with that determined by the brothers McKenna in The Invisible Landscape as "the end of history" indicated by their computer analysis of the ancient Chinese oracle-calendar, the I Ching.

The Mayan calendar is divided into Seven Ages of Man. The fourth epoch ended in August 1987. The Mayan calendar comes to an end on Sunday, December 23, 2012. Only a few people will survive the catastrophe that ensues. In the fifth age, humanity will realize its spiritual destiny. In the sixth age, we will realize God within ourselves, and in the seventh age we will become so spiritual that we will be telepathic. "compiled by Dee Finney.

A bit difficult to read, but essentially a lot of analysis and theory coming to the conclusion that the world will end on a certain day.

Prophecies of Doom for The Financial Markets, for Currencies, for Countries
In spite of these prophecies of doom, which like every other prophecy that has come and gone, December 22, 2012 was like every other day. Which brings us back to gold. We heard so much about how gold would hit $2,000 by the end of 2012. Many were prophesying $2,500 with a rise to $5,000 in short order. Well, the end of 2012 is upon us, and gold continues to meander.

It is a fool's game. Looking back to our warnings of February 2012 when we warned that betting on gold is a fool's gamble, and our other warnings including "Gold The Great Gamble of October 17, 2012, those that listened to the doomsayers, were shown to have followed false prophets.

As we have pointed out so many times, printing of currencies does not automatically mean that gold becomes more valuable. Accumulating national debts does not mean that gold automatically becomes more valuable, Having a large debt does not necessarily mean that currency is doomed. All of the other persuasive rationale of the gold bugs, are equally based upon flawed assumptions.

We have presented all of these persuasive analytical arguments before, and yet the gold bugs remain eager to jump at the scenario of doom and gloom. I am sure that readers do not wish to be again reminded of the common sense and logical reasoning as to why gold is not the ultimate haven of security, but ignoring reality and also ignoring the market, is done at one's peril. For those doubters, I have provided links back to previous discussions and all of those comments remain valid.

The Future of Gold
No-one knows where gold will wind up. Perhaps there will be massive inflation, which will make the price of gold worth more in terms of some currencies. Perhaps interest rates will shoot up to combat inflation, in which case holding gold will become very expensive because of these high costs of borrowing and therefore gold will fall. Perhaps the Chinese and Indian demand for gold will again start climbing rather than falling, making gold more in demand. Perhaps governments around the world will start again to accumulate gold for their treasuries. All of these and so many other factors will affect the price of gold.

Backstopping all of this, is the fact that demand for gold overall continues to rise because of industrial demand, jewelry demand will continue to grow from more affluent consumers and many more of those consumers, and the production of gold will not keep pace and is troubled by ever increasing costs.

Therefore, the price of gold will not fall to those historical lows in the $250 range. Demand is too strong and supply is too limited. In the short term, gold may fall because of demand factors, and the slowing of demand from so many gold funds. Weakness in the short term could easily happen, and those leveraged to buy gold would feel the pain. In the longer term, there is fundamental strength and gold will fluctuate in price, but certainly not in the upward trajectory that took it in an unbroken line to $1,900.

Buying Gold For Your Portfolio
Gold is better left to traders to buy and sell, and to funds who mirror demand from investors. Some gold in your portfolio is always a good thing, but like everything else, too much of a good thing, can get painful.

The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Comments From Part I - Stop Losses Are Protection for investors - A Fallacy
A stop loss is more often than not, a guarantee that normal and reoccurring volatility in a stock, will trigger the stop loss and as a result the investor will sell every time the stock plunges on a temporary basis. A stop loss is supposed to protect you against a continued decline in value by selling the stock when a predetermined loss is reached, but in most cases, that level is just a temporary plunge with an almost instant recovery.

Another factor is that professionals often cause the plunge in value so that they can trigger your stop loss and then buy your stock at a severely depressed price. In other words, the innocent get fleeced by the pros.

What affects the investor most, is liquidity in a stock. When a stop loss order is triggered, one assumes that there will always be buyers to buy this stock at the price at which you are offering to sell the stock. Unfortunately, this is often not the case. Often the reason that a stock falls, is a lack of buyers to buy the stock that the seller wishes to sell by triggering their stop losses, so the effect is - an immediately downward pressure on the price of the stock, meaning

A Guaranteed Loss - of Unrestricted Magnitude
Ignoring the other cautions, consider why a stock falls in value. Falls are usually quite dramatic and usually quite sudden. It is rare for a 20% drop in a stock that moves slowly and methodically down 20% in value. It does happen of course, but the probability is that the calm and slow decline in value is less frequently seen that one might think. If this slow and calm drop in value occurs, then stop losses work perfectly. They are ideal in this situation, unless of course you are a long time value investor and are prepared to hold a stock for a long enough period that you ignore the bumps in the road.

What Usually Happens - Selling at Market
Understand what a stop loss is. It is a standing order to sell at "market". That means, that when the price of the stocks falls and hits that preset value, an order to sell is triggered. Usually (with exceptions) that order is an instruction to sell immediately no matter what. So the stock will be sold at whatever price is bid by prospective buyers. Because usually, there are no limits, whoever is offering whatever price will buy your stock. So, conceivably you could be selling for a 20% loss, or a 50% loss, or an 85% loss. Triggering a market order is like digging into your pocket and handing your money to any stranger that happens to be walking by at that moment. You have no say in the matter. The stock is sold to the highest bidder at that moment in time, without restriction.

Essential Protection if You Use Stop Losses
Never, ever, put a stop loss in place without setting limits on how low a price you will accept. This at a minimum ensures that if you do sell the stock, you will only sell it in a price range that you have pre-determined.

Now consider what you are doing. You will sell the stock at a time, and a price, that you have not determined. If the price is falling dramatically, which is usually the case, you will not sell the stock by using a stop loss, because the price will quickly fall through your specified range and as soon as it hits the minimum price that you have specified on its way down, your selling stops. So your protection means that none, or only a bit of your stock was sold. An unintended consequence is that your sell order will put more downward pressure on the price of the stock, causing it to fall farther and faster than it otherwise would.

Conclusion
Using stop loss orders can protect you, but only in a very narrow range of circumstances. usually using a stop loss order guarantees that you will lose more money than you bargained for.

You broker may insist that you have to take this risk in order to protect yourself, but reality is that if a stock falls, you still have the opportunity to decide what to do, rather than have a predetermined sell order "at market".

It is an old adage - those that accept advice without doing their own homework, usually pay the price. BUYER BEWARE.

Stop Losses Do Have an Important Use
In futures trading, in commodity trading and in derivative trading, stop losses are essential. This type of trading is not generally used by the value investor, but they comprise a larger part of the market than the value investor. In this type of trading, there is tremendous leverage. Generally one puts only a small amount of the total investment on the line. If the trade turns against the trader. the invested amount can be eaten up in seconds, resulting in margin calls, forced sales, demands for extra cash to be invested, and other very serious consequences.

Stop losses in those types of environments are essential. To fail to have a stop loss in place, is to risk everything on every trade. A bad trade can wipe the trader out.

Because traders constantly buy and sell, they consider that some trades will be losers and some will be winners. Stop losses ensure that the losing trades are ended quickly, whereas the winning trades are allowed to continue to supposedly increase profits. In that environment, stop losses are a valuable tool. An additional feature is that in these tpes of markets, liquidity is almost always high, so that trades are executed promptly,and generally at the price of the stop loss.

The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.