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goldminingXpert (29.47)

People blaming illusions rather than owning up to commodity losses!

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September 11, 2008 – Comments (21) | RELATED TICKERS: GLD , USO , KOL

I quote a large chunk of Marcd77's post. I don't mean to pick on him in particular, a lot of people are confused on this. It figures that the people blaming the government or "PPT" for killing commodities have ratings under 20 while those of us who didn't buy into this nonsense have ratings over 99... but I digress.

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"To understand why commodities are plunging now – the S&P/TSX plummeted another 488 points yesterday – you have to go back to mid-July, when the U.S. Federal Reserve and Treasury first announced steps to support mortgage giants Fannie Mae and Freddie Mac.
The move, which ultimately led to the Treasury taking control of Fannie and Freddie this week, touched off a chain-reaction of market events that culminated with the wrenching decline in commodities.
According to Mr. Coxe, the Fed's ultimate goal was to trigger a rally in financial stocks, which would, in theory, help banks hammered by the credit crisis raise fresh capital and repair their balance sheets. To accomplish this, the decision to support Fannie and Freddie was deliberately announced on a Sunday, which had the effect of maximizing the reaction from thinly traded financial stocks on overseas markets.
Because many hedge funds were using massive leverage to short financials and go long on commodities, when North American markets opened and banks initially rallied, the funds were forced to cover their short positions.
At the same time, the U.S. dollar was rallying because the risk of holding Fannie and Freddie paper had diminished. The rising dollar, in turn, made commodities less attractive, giving funds that were already scrambling to cover their financial shorts another reason to dump oil, grains and other commodities." 

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Well no duh, the financials were as oversold as they've been in many years. The commodities were in a bubble unlike any seen since 1980. Does it take rocket science to realize that if hedge funds (i.e. momentum-chasing hot money) are chasing stocks, you may want to get out? Momentum chasing is doomed to fail once the tide turns causing a viscious crash. Yet you, the now-poorer commodity investor, kept pouring your money into the hedge-fund manipulated stocks. No one complains when they go up... but you all come out whining when the inevitable happens. The hedge funds dumped, they had to dump, cause they took a moronic position in masse, like lemmings off a cliff. Now people go around whining... it isn't my fault... the tulips really are worth what I paid for them... some shadowy group destoyed the market... even though garbage like JRCC was up 1000% this year... it wasn't overvalued. Oh NO! Of course not! You failed in your due diligence, and got what you earned for chasing a hot trade rather than a smart investment.

I love how the article Marcd77 quoted ends... The globe and mail article cited above said, "Mr. Coxe has no proof that the Fed and Treasury acted in concert to boost financials and sink commodities." However, Mr. Coxe said “There's no doubt whatever in my mind” about what happened, he says. 

No proof, no doubt. That's faith not logic. He has no proof for his "argument" yet he has "no doubt." Bwahahaha... it's different this time... until it isn't. See you at $600 gold. When you are reduced to blaming the gremlins over at the imaginary PPT or bilderbergers or CFR or what not, you need to dump your positions and re-evaluate your sanity.

Let's trade stocks on earnings and growth, not dreams, illusions, and fantasy, ok? 

21 Comments – Post Your Own

#1) On September 11, 2008 at 6:23 PM, marcd77 (< 20) wrote:

It is the Fed's responsibility to act as the lender of last resort to our economic system.  Commodity prices in general reflect inflation of either one of two kinds.  Demand pull or cost push.  Knowing your track record I am certain I do not have to note the differences between the two.  The perception in the marketplace remains that demand pull inflation is mitigating and that deflationary issues will persist preventing cost push inflation.  The commodity price correction has has occured all while the dollar has blasted off.  In my opinion what we have to ask if why did the dollar blast off?  I believe it's the demand for dollars in order to eventually reinflate the system.  The Fed and Treasury need US dollars in order to provide capital to the GSE's and other entities requesting funds.  Once the trade started every black box and hedge fund followed suit jumping on the latest trend and bowing out of commodities which then created additional demand for US dollars driving the price even higher.  Owning gold is relatively straightforward, if you believe that monetary inflation will continue to take place (as history has proven) gold will generally maintain your purchasing power beyond that of the inflationary effects of monetary policy.  In economics we have either an economy increasing at a more rapid pace or decreasing at a more rapid pace.  I am in the latter camp as I believe that the housing market, credit stress and OTC derivatives will continue to put downward pressure on the economy.  That being said when the current stock of the Treasuries capital runs out in a slowing business environment with reduced taxes via lower property values, higher unemployment rates, etc. then capital will have to be created at a rapid pace, it is that monetary inflation that I believe will lead to price inflation.  In 1978 gold corrected by 50% before moving up hundreds of percent over the next two years.  Gold's short term price is irrelevant to me, it's direction or long term trend is all that concerns me and I am quite convinced of my opinions via thorough research. 

To more directly address the article and your reply - I have no way of knowing whether intervention took place or not, I suspect coincidentally that some sort of effort to reduce oil prices takes place nearing elections where incumbent parties lag behind in polls.  As I recall this took place in 2006 as well.  There are numerous instances where the government intervenes in the free market in order to affect the outcome, I cannot assume here that this was an impossibility just because it sounds conspiratorial.  I felt the article was interesting and displayed one man's point of view - which is why I posted it. 

In sum I welcome your criticism and the challenge posed by your assertions.  We all have opinions and this forum is intended to allow us to share those ideas with others.  This is what makes our country great.  Dreams, illusion and fantasy can sometimes preclude reality.

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#2) On September 11, 2008 at 6:42 PM, jahbu (89.61) wrote:

The illusion that 10 USA dollars is worth an ounce of silver?

Wall Street may say it is, but main street aint buyin it.

Put it this way if Walmart was sellin silver eagles at 10 bucks they would be sold out in minutes.

How do you expect the American People/Government to pay off 57 trillion in debt with a strong dollar?

600 dollar gold?  Man I hope so,  that would be fantastic opportunity, considering most mining companies cannot even bring it out of the ground at those prices.

Jahbu

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#3) On September 11, 2008 at 6:44 PM, russiangambit (29.25) wrote:

For what it is worth I am with marcd777. You will never convince me that companies that are actually making money deserve to be in single digits P/E while the loosers like finacials and retail rally.

As for dollar, there is no doubt in my mind that there is concerted buying of USDs by bankers and the public statments to keep the momentum going.

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#4) On September 11, 2008 at 7:00 PM, russiangambit (29.25) wrote:

> How do you expect the American People/Government to pay off 57 trillion in debt with a strong dollar?

Exactly. They want to inflate their way out of debt, they just don't know how to break it to the public.

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#5) On September 11, 2008 at 7:26 PM, goldminingXpert (29.47) wrote:

marcd77... very good response... nice to see you have more mental firepower than the clueless Mr. Coxe of the Toronto Globe and Mail article. I believe deflation, not inflation is on the way, but this is a topic of much discussion on which we are probably not capable of changing each others' opinion. There's a big difference between the inflation/deflation divide, where both sides bring meritous arguments... and beliving a PPT thing is crushing commodity stocks... pure fantasy.

jahbu... I will also be buying at $600 gold... looking forward to it in fact.

Russiangambit: The mining companies I follow sure aren't trading at single-digit P/E's... the oils are and I'm buying them (Disclosure: Long DIG at 65.)... the steels, base metals, and materials will get killed by the depression first before rebounding... current P/E is irrelevant for those names.

Also at Russian, the government can't pay off a 57 trillion deficit with a strong dollar agreed. However, they will default, not hyperinflate. 

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#6) On September 11, 2008 at 7:42 PM, GeneralDemon (20.93) wrote:

What???

I believe the commodity investors were trying to protect their wealth from a declining dollar. You (with your smug rating) say "haha, the financials were way oversold and I (you) somehow knew the government would step in.

I am very aware of that particular time in July (look when I started CAPS!). Should you throw your ratings at someone who was hit by short term governmental intentional manipulation?

You may be embarrased by this post of yours if the dollar collapses.  

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#7) On September 11, 2008 at 8:22 PM, goldminingXpert (29.47) wrote:

I didn't know the financials were coming back like that... I don't believe I had a single financial outperform on the whole summer (other than CM).. I missed it. However, I didn't get killed in commodities like much of the formerly 99+ rated CAPS players. If you avoid losses, the wins come easily.

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#8) On September 11, 2008 at 9:10 PM, Donnernv (< 20) wrote:

I don't often comment.  It's usually not worth the trouble.  But here I shall.

My CAPS portfolio is full of commodities and energy.  It mirrors my RL portfolio, except in RL I own a ton of gold and silver.  In CAPS I've taken a 99==>87 hit.  Worse in RL.

Frankly, I don't care.  I've been alive and investing for a very long time.  And I've developed confidence and a trust in the simple realities.  And those are:

Crude oil has peaked.  Nat gas will in ten years.  Coal is nasty (but we need it).  Every commodity is facing growing demand and an increasingly costly (or shrinking) supply.  Our energy in the future will come from nuclear.

The dollar is going into the pits.  Precious metals have always been a store of value during inflationary periods.  Deflation may or may not appear, but it won't last long in the typhoon caused by the dollar becoming the American peso.

If one believes these ex cathedra statements, today's market action will be overcome by their obvious implications.

One year?  Two?  Five?  Frankly, I don't much care.  I'm not a trader, I'm an investor.  To me, the future is clear.

As an aside, I have written a well-researched white paper on peak oil and the future of energy.  It's pretty long with many URLs, but it may be useful to bring folks up to speed with reality.  If you happen to want a copy, email me at aol with the subject line REPORT.

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#9) On September 11, 2008 at 9:17 PM, dexion10 (27.60) wrote:

thought provoking post goldmining expert - thanks.

Also a good point about how investors (myself included) sometimes blame external events for their losses rather but take all the credit for their successful trades.

I do believe that commodities are going down here and that the patient will be rewarded for buying at values that are closer to worst case near term NAV's

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#10) On September 11, 2008 at 10:32 PM, goldminingXpert (29.47) wrote:

Dexion--I'm hoping for $9/oz silver and plan to buy hand over fist at that level. Also hoping for $34 NEM and $70 XOM... I don't think I'll get the $70 XOM, but I can dream, can't I?

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#11) On September 11, 2008 at 11:54 PM, gman444 (28.84) wrote:

Nice blog--valid points made by all..one thing you don't mention, gmxpert, is that commodities were down for a very long time prior to their parabolic rise.  The hedgies increase the volatility, but I don't think they change the long term trend.

Also, Alan Greenspan and his handpicked succesor, Helicopter Ben, have strong philosophical leanings which favor inflation. 

The inflation vs. deflation argument is one of the most important ones out there, and there are great points on both sides.  My own theory is that that global slowdown will be brief and/or mild, and that hyperinflation will take hold before deflation overwhelms the markets. 

I look for one more leg down when the financials/homebuilders drop again, followed by a (this time) slower, steadier rise in the commodities. 

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#12) On September 12, 2008 at 2:01 AM, SemperGumby77 (53.12) wrote:

Let's lay some groundwork here. First the assumptions :

1. Can we all agree that deflation is a fate worse than inflation?

2. Can we also assume that the Fed will stop at nothing to avoid it?

3. Do we all agree that the Fed will be perfectly happy to run the presses at high speeds to avoid deflation?

If so, I just don't see how we get deflation here. What am I missing?

And for the record, I'm also in the camp that believes that most of this downtrend in energy and commodity prices is due to the leveraged hedge fund unwinds. Its the only rational explanation for why foot-in-the-grave financials would rally (b/c of short-covering) at the same time that low P/E  commodity stocks would crumble. Its the only rational explanation....

But please, if I'm missing something, definitely fill me in. I'm here to learn.

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#13) On September 12, 2008 at 4:47 AM, saunafool (98.77) wrote:

Count me among the crushed, but my CAPS rating has only fallen from 99 to 98 (so far). I was in a little earlier than most on the commodity plays (early 2007), and I'm going to start adding more soon.

I like the carnage. I repeat the Fool Mantra: down, baby, down.

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#14) On September 12, 2008 at 11:35 AM, LordZ wrote:

I think I would have to side with commodity stocks, especially among companies that are actually making real world profits and creating real world commodities.

Iron ore increases 100% in price, yet mining stocks that are to reap this go from top to bottoms in stock price, while financial companies that neither make profit nor make any real world goods go from bottoms to new tops.

What does this picture say, everyone wants to own the winners, but don't pay attention to the static, oh sure I could have sold my BHP, but why ???

to minimize potential unrealized losses,, NOBAMA please

I'll maybe sell my BHP 20 years from now when its worth 100 times more in value.

Meanwhile LEH is not around, BSC not around, INDYMAC who ????

If only I could summon the courage to buy more.

But at least i'm not selling into the nonsense.

 

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#15) On September 12, 2008 at 12:08 PM, MLGtrader (98.57) wrote:

I completely agree that we should trade on earnings not speculation.  Now commodities are a buy because they are the only strong secotr earnings-wise.  They have been sold and short sold on the negative momentum.  Once we see the tide turn, something like what happened to the financials will happen to commodities.  I already called the bottom (when we were at it).  I think we could see a strong push up soon.

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#16) On September 12, 2008 at 1:18 PM, wrote:

I agree with marcd77.  I think people need to open their eyes and think for themselves.

Why is the US gov suddenly interested in anti trust charges against Google??  It has nothing to do with Youtube and the truth right?

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#17) On September 12, 2008 at 2:36 PM, XMFSinchiruna (27.47) wrote:

Here's your evidence that the dollar rally, and thus the recent third wave of the commodities correction, was orchestrated by central banks acting in concert to prevent a technical break of the USD into the critical danger zone:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=82096&t=01006124249416869148

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=81510&t=01006124249416869148

Sure, my CAPS score has languished badly during this correction. As I've argued elsewhere, though, that would only be of concern to me if I had any notion that the run for commodities was actually over. In real life, I adjusted not one single holding, except for some additional buying at these levels wherever possible. A 30% pullback in my overall portfolio, while tough to stomach if you're zoomed in and following the daily action, means nothing in the long run... losses are only losses of you sell.  :)  I've lost nothing!  :)

 

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#18) On September 12, 2008 at 6:23 PM, rudolphsteiner (< 20) wrote:

Gold isn't really a commodity. As far as oil goes, let's wait and see. I don't really care what my stocks do over a few months. I'll bet you that in 3 years oil is over 200$. If you want to ignore all the evidence about oil supply I don't really care, but if you're going to call them illusions, lets see your evidence, other than a short term price change.

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#19) On September 12, 2008 at 7:04 PM, goldminingXpert (29.47) wrote:

I also believe $200 oil is coming... the illusion is blaming the PPT, the Jews, the Gremlins or whatever for crashing the stocks in the short-run, when it was really just a hedge fund mania.

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#20) On September 12, 2008 at 11:49 PM, dinodelaurentis (72.75) wrote:

i'm another commodity bull. holding oil and gold, things will shift, no problem.

and if my coming war thesis pans out,... say no more!

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#21) On September 13, 2008 at 12:19 AM, Harold71 (22.90) wrote:

"The illusion that 10 USA dollars is worth an ounce of silver?

Wall Street may say it is, but main street aint buyin it."

Well someone else sees the truth as well.  The prices on ebay, a big marketplace, have been dramatically higher than spot.  Junk silver is frequently commanding a 25-30% premium to spot.  Silver eagles (in rolls) are selling for $7 over spot right now.  The demand for physical bullion is very high, even as paper traded prices fall nearly every day.

Kitco is basically out of silver.  They have 1000 oz bars.  The other day they had the philharmonics, and now they're gone too.  Main street is dumping the dollar.

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