LR European

The Fallacy of Cash on the Sidelines

Nice little argument that sounds cleverer than it is.

Think about the mechanics of the market where most investments are managed by 3rd parties (hedge funds, through mutual funds, charities and pension portfolios). Having been an 'institutional manager' covering each of these underlying investor groups, I can confirm that 'cash on the sidelines' is an absolutely valid concept.

Specifically, the person managing the portfolio day to day follows a 'model portfolio' usually agreed by an investment committee. The model will state allocations to cash, fixed interest, equities (and details within each sub division) and will be constructed with reference to an allocation 'benchmark' agreed with the client at the outset. The manager will be expected to follow asset allocation models to within a specified tolerance.

Within the models cash is cash held in a bank account. If cash levels have been allowed to build (eg. 5% cash becomes 7% if the other assets have fallen by 30%), or intentionally built (eg. increase target to 10%), there is 'cash on the sidelines'. If the client's benchmark index (agreed with the manager) against which performance is measured, includes a 5% target weighting to cash, for example, then holding 7% or 10% is a risk and performance will drag if the market rises.

Therefore, even taking a neutral view (or "don't know" view) on market prospects, investment managers are under significant pressure to invest in the current environment.

Precious Metals: Breakout, Fakeout or Shakeout?

A beautifully argued article. Thank you. However, I think you are wrong on a number of counts.

1)You suggest that gold has not performed in a year of financial crisis. There are few assets close to their all time highs apart from gold, so....

2)You suggest that everyone who could possibly want to be in the trade has been brought in to gold. Actually the allocation to gold among the big funds (pensions, general mutuals etc.) remains close to zero and the same applies to the major wealth managers. Gold remains a minority interest among private investors, albeit with a widening circle, but we have not begun to travel the slope of broad acceptance.

3)You suggest that a shake out is needed before gold can take off. Possibly, but I think you overstate this. Gold's consolidation over the past year has been one of the lengthiest in the current bull market and sellers have been thinned out already. We may well see what lies behind door #3, but I suspect it will be a small room that no one wants to remain in for long...

Will India's Changes Bring Headwinds for Gold?

"the success of this venture would, I think have an effect on the price of gold, even from a purely psychological standpoint."

I wonder if you think the effect would be positive or negative on the price of gold.

Some of the arguments in your article seem to suggest that this development will provide an exit route which Indians will leap on and presumably depress the price by flooding the market.

On the other hand, improving the liquidity of an asset almost invariably increases its appeal. If Indians discover that their investments in a store of wealth are now more readily converted to cash than before, surely they are vindicated?

The problem would come only when India faced a time of hardship leading to forced sales, but it is a myth to suggest that Indians have only ever been buying gold, so what changes there?

Sounds to me like the positive effects overwhelm the negative.

Silver Is Quietly Flashing a Buy Signal, But Buyer Beware

CFTC data always look odd. Is it really feasible that net longs are zero?

Markets Soar as President's Aura Fades

Extraordinary! You can no more blame Obama for the deep crisis in global economies (as reflected by market moves) than you can blame the second shift fire-fighters for the fire when they arrive to battle an inferno.

If you insist, perhaps we have an element of disappointed expectation in so far as we really did believe Obama could walk on water and solve any of the problems facing us, but now recognise that he is as limited as any other politician in face of this crisis.

But how many serious people actually believed the man was divine?

China: Is This Classic Post-Bubble Price Action?

That is precisely what is exciting about China's prospects. As the 3/4 of the population is lifted out of extreme poverty they start to be able to afford the non-essentials. Growth from zero to 1 is an infinite percentage move!

The recent data on car sales and white good sales in China bears out this dynamic.


On Nov 05 05:11 PM untrusting investor wrote:

> True, but how much can the average Chinese consumer purchase with
> an average per capital income of something like $6K? One has to guess
> that most of that per capita income would barely provide for subsistence
> living. Saw the statistics on China per capita breakdown and it was
> something like 3/4 of the entire population is $6K or less in annual
> income. The other 1/4 is of course doing better but much of that
> was at about the $20K annual level.

Gold: Who's Left to Buy?

Who's left to buy? You give the answer yourself when you say that 'every trader category is getting shorter'. Sooner or later investor allocations to gold will increase/ broaden and sooner or later there will be a short squeeze in gold as 'every trader category' scrambles to buy. Here's hoping! :-)

Gold: What Professional Futures Traders Think

While true that the main driver for gold at the moment is the US$, the price is currently rising in most currencies. A quick scan through the charts shows that although not hitting new short-term highs (yet?) in many of the stronger currencies gold's trend of more than a few months looks consistent in every mainstream currency.

Strange Action in Gold ETF Chart

ETFs are used by both speculators and investors. A fund allocating a higher weighting to gold because of uncertainties in fixed interest and equity markets would be there as a long-term investor. A speculator might be there for the short term and the inflow described as 'hot money'.

It is not right to combine these two very different investor groups as 'hot money'.

FWIW I believe we are consolidating recent gains in the middle or early stages of gold's bull run. We have yet to see the type of acceleration in prices that would denote a dominant element of speculative, 'hot', money. I think that will come before long....

Credit Crisis Watch: Some Positive Developments

Excellent review of the major credit metrics. Thank you.

Rolex18, what is that all about? Maybe you were hoping to read an article about something else altogether? FWIW, my own view is that buying TIPS right now would be one of the highest risk strategies. We are sliding into deflation, not inflation. Money is being lost faster than it being created. Yes, we all know that government spending on this scale (let alone potential quantitative easing) is inflationary. We also know that governments must be (desperately) hoping for inflation to erode their debt burden. What we don't know is when. We could follow a variant of the Japanese template with an extended deflationary environment for many years.... I do agree, though, that in this situation, keeping investment thinking short term is appropriate.

Gold Bears Stop Sector from Overheating

Well presented and thorough. Thank you. Perhaps my only quibble comes towards the end of your article when you ask the question:

"How long will it take the 1.3 billion gold-starved consumers of China to buy their fill? Perhaps the better way to phrase the question is: how many thousands of tons of gold will it take to satisfy this bloc representing more than 20% of our entire population?"

As I am sure you are aware, the vast majority of that 1.3 billion struggle to afford basic sustenance and have little hope of feeding their gold hunger.

Nevertheless, within that massive group is a tiny percentage of many tens of millions of Chinese who can and do afford to invest and are certainly helping on the demand side of the equation. So your argument was right, but the quantum was just a wee bit over-exuberant. ;-)

Gold as a Hedge, Not an Investment

There is a simple fact that the article misses: the performance of gold is correlated to instability. Not to inflation or to deflation. except in so far as those accompany economic instability.

In this context, yes, gold can be a trade against all the world's currencies. In fact, it often has been throughout history.


On Nov 16 11:03 AM Brian McMorris wrote:

> You hit on a key point that others somehow miss: The US Dollar is
> the world's reserve currency. This means that one way or the other,
> almost every other currency is indexed to the dollar (China's link
> is direct). So, when the dollar goes down, all currencies go down,
> more or less depending on the degree of linkage.
>
> Gold as a trade against all the world's currencies makes no sense.
> Gold might trade higher in a relative sense, one currency against
> another (as Oil does), but as an alternative to paper currency?
> I don't think so. Global fiat currency is based on the aggregate
> asset base of the world. There is not enough, nor enough interest
> in gold as a representative of the global asset base for it to serve
> as currency (and really no need). It is a speculative play only,
> and therefore is as likely to go down as up, especially once supplies
> begin to increase.

Gold Prices: A Familiar Trend

Your chart shows that gold corrected sharply after its accelerated peak in the early 80s and then proceeded to form an extended base from which it has finally broken up decisively.

Why do you not think that is a screaming buy signal?

Before worrying about the price action wait for an acceleration such as shown on the chart from the late 70s - a rate of change which is obviously unsustainable. We are not there yet on the basis of the chart you show.

Defensive in Short Term; Intrigued About Japan

Not sure why the sarcastic comment on Saut's statement about China pulling the world out of recession.

I am sure you too must have noticed that China has been emerging as a significant sized economy. Sure, it is premature to talk about it being the largest economy in the world (though it will be soon enough), but it is certainly already large enough and integrated enough in the global system (trade, money flows) to be able to pull (or push for matter) the global economy.

Jeffrey Saut's article is a good read and well argued on uncontroversial facts. Thank you.

On Jul 14 05:40 AM whidbey wrote:

> One would never know you sell stock. China pull the world out of
> recession? Were these comments written late at night? Your advice
> is to be taken very lightly and disregarded at every turn. But you
> may be right about this week. Bradley and Phi Mate turn dates are
> due and they may be up, for a while.

S&P 500 Cycle Is Clear - Rally Approaching End

Privately, I pencil in potential targets for The Bear that make the hairs on the back of my neck stand up with fear.

However, I have few things to say, if any, that are not widely known, discussed and understood by many.

Right now, I am conscious of how very few people believe this rally will be anything more than another spasm in the bear: how many people are convinced that Now is the Time to start at least a correction, if not a full resumption of the bear trend.

Well, some things are not quite lining up here. If the problems are known and the majority expects prices to fall, then who is the seller going to be? And if we can't quite find him/her in time, how can we be sure one of those people on the sidelines with all that cash wont start to buy? I can see a few buyers, but very few sellers which might mean we have another major squeeze higher.

It doesn't mean I don't think we will see those scary numbers on the downside. Just not soon.