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Navigating Thru a Trading Fiasco

Two weeks ago the Canadian government announced that it was imposing a new tax on income trusts.  This announcement shocked the market and sent the Toronto Stock Exchange S&P/TSX composite index spiraling down 2.4% for the day.  To put that in US terms that was the equivalent to a 300 point drop in the DOW.  Billions of dollars were lost by this announcement.

Unfortunately I had recently taken a position in Enerplus Resources (ERF) the granddaddy of income trusts.  It was the first Canadian oil and gas trust formed in 1986.  Over the past five years, while the DOW was returning peanuts, its return was over 200%.  It has a 9% yield and pays a monthly dividend like clock work.  The plan was for it to become the anchor stock in an income oriented portfolio that I am building.  As I have mentioned numerous times, to be successful in this market you need to be either a trader or a dollar-cost averager.  Most will be far more successful as a dollar-cost averager.  I have written many articles on the topic on this site.  I make use both styles, but primarily I am a trader. 

On the day of the announcement, ERF dropped 14%.  That might have been the largest one day drop that I have experienced in a stock.  If it is not the largest – it is definitely in the top two or three.  Here are the comments from one mutual fund manager, “There is a knee-jerk reaction out there. You got a lot of mutual funds that might be experiencing cash-ins because the media headlines make the masses want to liquidate at whatever the cost.”  Based on his comments, I would presume that he was advising his clients not to sell.  I have been caught in downdrafts such as this before.  So, I was a seller.  Continue reading “Navigating Thru a Trading Fiasco”

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Dollar Declines After Reuters Says China May Diversify Reserves

I wrote an article a few months back titled “A Simple Relationship to Put Money in Your Pocket”.  In that article, I talked about how interest rates and bonds were inversely correlated.  Well, the dollar and gold is another inverse relationship.  The big news on Thursday was that China plans to diversify its foreign-exchange reserves.  Its reserves are approaching $1 trillion with nearly 72% in US based assets.  Any change in allocation will put downward pressure on the dollar pushing gold higher. The mere suggestion was enough to drive gold up 3%.

More …

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The Commodities Bull Market is Back

This article was updated on 11/6.  So, if you read it once it is worth a second read. 

It was just a few short months ago many were saying the bubble had burst in commodities.  First of all, I never bought into the bubble talk.  How can there be a bubble in commodities – when not one of your friends can name 5 gold stocks?   Back in the internet bubble days, taxi cab drivers could rattle off the names of internet companies without skipping a beat.  Before there can be a bubble the masses must participate.

The commodity bull market is being driven by simple supply and demand dynamics.   Just think about the amount of copper that will be consumed as China industrializes.  Mass industrialization takes many years.  Everyone knows that Rome wasn’t built in a day and China will be no different.

What the bubble promoters forget is that no bull market goes straight up.  The days of buy and hold – I call it buy and forget are over.  There is no certainty that a stock will be higher in 6 or 12 months although that is what Wall Street teaches.  I believe to profit in today’s stock market you have two choices:

  1. Either dollar cost average (DCA) into a clear cut long term trend like the industrialization of emerging countries.  Refer to the many articles on this site pertaining to DCA.
  2. Learn how to use simple trend lines. 

Looking at BHP’s chart below, the ideal purchase price over the last month would have been around $35. if all the stars lined up you could have purchased it at $35, but more than likely you would have been petrified that $30 was right around the corner.  Using charts, there is a strong likelihood that you could have picked it up at $38. Not quite $35, but in retrospect not a bad price. I think that you would be pleased with a 12% return in 4 weeks.  Continue reading “The Commodities Bull Market is Back”

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Are you Diversified?

Ned Schmidt makes some excellent points in his article “Moneyization Part Thirty-one.” First he builds the case that you are not as diversified as you may think.

The foundation for retirement in the U.S. has two components, the 401-k plan at work and the equity in the worker’s home. Unfortunately, the retirement plan components, 401-k’s for example, are overwhelmingly invested in paper assets. Plan sponsors have in near universal fashion failed to adequately diversify the offerings for employee retirement plans. Offering “twelve” mutual funds invested in paper assets is not diversification. It is still all invested in paper assets, one and only one asset class.

Then he suggests why you are not better diversified.

Most disheartening is that despite the growing body of evidence that Gold, and other precious metals, should be included in a portfolio, corporate plan sponsors ignore the important diversifying effect of these assets. Often either of two factors are influencing this situation. First, and most bothersome, is that many consultants to retirement plans either are not familiar with the benefits of Gold or choose to ignore it as it does not add to the financial well being of the consulting firm. In short, Gold pays no fees or commissions to consultants. Second, many plans simply have fallen into the clutches of mutual fund companies in order to save money, and the mutual fund company does not provide a full range of diversifying funds.

Finally, he concludes with a simple formula to help determine how much Gold should be purchased to better diversify your portfolio.

How Much Gold To Buy
Value of retirement plan
plus value of your paper asset investments
plus reasonable estimate of home equity
minus Gold & Silver currently owned
Equals amount of Gold to buy

The article has some very compelling arguments that will appeal to your practical as well as your academic side.

 Are You Diversified?

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5 Ways to Own Bullion

buffalo1.jpgIf you wanted to purchase bullion before the Gold and Silver ETFs existed your options were coins and bars of differing weights and  various certificate programs.  Pictured on your left is the American Buffalo 24-Karat 1-oz Gold coin.  This program was just started in December 2005.  Stop by your local coin dealer and pick up a few.  Better pricing may be possible through dealers with internet channels.  Below are links to 2 dealers that I have successful used in the past.  The US also has the gold eagle program that was created in 1986.  Many countries have gold programs - Canada has the Maple Leaf, Australia has the Koala, China has the Panda,  and there are many others.

Jim Puplava, of Financial Sense Online, has an excellent set of interviews on 5 different ways to purchase gold bullion. His last interview with James Turk discusses an innovative and inexpensive way to purchase Gold.

Until your friends start bragging about how many gold coins they own, it is pretty safe to continue buying precious metals.  Once it becomes part of the discussion, we are near the top.

Puplava’s Interviews

Bullion Dealers I have Used:
California Numismatic Investments
American Precious Metals Exchange

For more information of the American Buffalo and Eagle Programs:
US Mint