The Party's Over by Richard Heinberg ---video

Richard Heinberg is the author of The Party's Over, Power Down, and Peak Everything. I highly recommend all three books, but I would recommend reading the author's first book to start, as it goes over the theory of peak oil on a general level, whereas his other books are more specific and philosophical in nature.

Personally, reading these books awakened me to a whole new way of thinking, and had a profound effect on my long-term investment decisions. The information detailed in these books I think provide another pillar of support for the iron-clad bullish case for gold and silver, although this is not the author's intentions.

Please enjoy the above YouTube video.

Horizon ETF Math

As I have mentioned before on this site, Horizon ETFs are a type of investment that allow traders to go long or short a particular market with 200% daily exposure. For example, this organization has two ETFs that track natural gas:

HNU-which stands for Horizon Natural gas Up
HND-which stands for Horizon Natural gas Down

This means that if in a given day, the price of natural gas rises by, say, 2%, then HNU should rise by about 4%, and HND should fall by about 4%.

Both of these ETFs were launched in mid-January 2008, with a price of $20.00 per share. What I was curious in finding out is what if you had purchased both of these ETF right from the start and held them to today. At first I thought that purchasing equal amounts of both ETFs would create a perfect hedge, with the gain of one fund offsetting the other. However, this was not the case.

Below is a chart showing HNU on the top panel, and HND on the bottom panel going back until the date these funds were launched:


If you click on the above image and read the annotations, you will see that if you had invested $10,000 into each fund on inception date, you would actually have produced a nice profit. The two funds, in other words, did not cancel each other out.

The reason for this is that as the price of natural gas rose, the balance of HNU was growing larger, and the balance of HND was becoming smaller. As this trend continued, the percentage change had a larger dollar value to work on with HNU and a smaller balance to work on with HND.

Put another way, the bull ETF has unlimited compounding potential upwards, but the bear ETF cannot reach zero, and its chart becomes what is know as asymptotic as it approaches the X axis of the chart.

Believe it or not, knowing this can be useful in the real world. Let's say you have $10,000 worth of energy stocks in your portfolio, and you feel that perhaps now you want to take out some insurance against a potential market correction. To do this you would buy $5,000 worth of HED, which will rise 2% for every 1% the Canadian energy sector falls.

At this moment your $10,000 position is hedged. But if energy stocks continue to rise, your insurance in HED will start eroding, which will mean that to remain hedged you will need to buy increasing amounts of HED to maintain the hedge. Conversely, if a correction in energy does in fact materialize, then you would become over hedged if you do not trim back your exposure to HED as the correction continues.

I still think these ETFs are an innovative product, and, luckily, a new set of these type of ETFs have just been released:

•S&P 500 Bull Plus ETF
•S&P 500 Bear Plus ETF
•NASDAQ-100 Bull Plus ETF
•NASDAQ-100 Bear Plus ETF
•MSCI Emerging Markets Bull Plus ETF
•MSCI Emerging Markets Bear Plus ETF
•U.S. Dollar Bull Plus ETF
•U.S. Dollar Bear Plus ETF
•U.S. 30-year Bond Bull Plus ETF
•U.S. 30-year Bond Bear Plus ETF

Gold Stocks, Silver, Copper, and the Dow

Above is a weekly chart showing GDX, the gold stocks ETF. What I wanted to point out is that gold stocks experienced a very nice bounce off a major area of support. I now feel that the short term trend for gold stocks has moved from neutral to up, so I decided to go long this sector, and will remain long until the short term trend changes.

The next chart is a weekly chart of silver, which also rallied this past week:


Ever since silver corrected from the $21.00 an ounce area, I have been slowly and steadily buying more and more silver coins, which allows me to dollar cost average. In both charts posted so far, I feel that the long term trend is up, so this means that dollar cost averaging is a strategy that has a high probability of paying off. Buying or selling in the direction of the long term trend always puts the odds in your favour.

In addition to feeling bullish on gold stocks and silver, I feel that copper is looking very strong right now. Unlike oil or gold, copper rarely gets any mention in the media, but is something that can make you a lot of money nonetheless.

If copper can decisively break above the $4.00 a pound resistance area, then I think there is the potential for an explosive move higher. In my previous post, I mentioned an ETF that follows the price of copper.

Also in my previous post, the theme that commodities will likely outperform stocks was mentioned. I think that this trend will begin intensifying in the coming weeks. Part of the reason for this belief lies in how ugly the Dow Jones charts look (monthly, weekly, or daily.)


The above chart shows the Japanese Yen on the top panel and the Dow Jones Industrial Average on the bottom panel. For the last month, I thought that the Yen would start rallying and this would take stocks down. However, for the most part, the Yen has fallen along with the Dow. The way I see this is that if the Dow can't even rally with the help of a falling Yen, then we are in serious trouble when the Yen eventually does turn around.

If the Yen begins rallying, it will start unwinding the so called carry trade, and cause stocks to plummet. The Yen appears to be bouncing now off its 200 day moving average, so this is a chart I will keep my eye on next week, as things may get very interesting.

Real Versus Nominal Stock Market Returns

Because the price of gold seems to be going through what is known as the summer doldrums, which is basically a period where there is no trend and a time where it can be more difficult to make profitable trades, I have decided to focus this post on another topic for the meantime.

What I will try to illustrate here is the effects of excessive money printing and inflation on real stock market returns over the past 10 years.

The chart below shows the S&P 500 divided by the price of gold:

One wonderful characteristic of gold is that it is able to sniff out the effects of excessive money supply growth. The amounts of money the government is printing is sometimes also known as M3, and M3 is a statistic the US Government fairly recently stopped calculating.

Although we no longer have M3, gold is just as able to detect money supply growth. This is because as the government prints (either physically or digitally) increasing amounts of money, that paper will start chasing only a finite amount of gold, and, thus, gold will rise.

Therefore, the above chart shows what I would say is the real value of the S&P 500 if the effects of money supply growth are stripped away. In other words, the bull market in stocks that began in around 2003 was not real. It was an illusion.

But why was the money supply increased so dramatically over the last couple of years? I think it was a way for the Federal Reserve to try to reinflate the stock market bubble that burst in 2000. Unfortunately, rather than reinflating stock prices, this newly printed money found its way into the housing sector, and began pumping up another bubble. Now that the housing bubble has popped, the money supply is again being increased to reinflate this bubble, but rather than reinflating home prices, it is inflating commodity prices now.

The next chart shows an ETF that follows the S&P divided by the price of crude oil over the last 10 years:


I feel that the above chart is dramatic proof that the S&P has not been rising in value in real terms. In other words, an 8% per year "growth" rate in the S&P 500 over the last several years is useless if everything you need to live on is rising by 25% a year.

Another example is to look at the S&P 500 against the CRB Index. What I like about the CRB index is that it measures a basket of items that an ordinary person would use on a daily basis. Items such as: gasoline, natural gas, corn, wheat, cotton, live cattle (beef), coffee, orange juice, and sugar.

As you can see, the stock market has not been successful at keeping up with the cost of even everyday necessities.

If investing in stock cannot protect against the ravages of inflation and excessive money printing, then what should the ordinary investor do? I think the best answer is to invest in the commodities themselves. In this type of environment, I personally try to invest in tangibles that cannot be created readily (like paper money can). Here are some ideas:

1) Physical gold, silver, platinum, or palladium
2) ETFs that invest in hard commodities:

• GLD for gold
• SLV for silver
• JJC for copper
• JJN for nickel
• USO for crude oil
• UNG for natural gas
• DBA for agriculture
  
• COW for livestock
• RJA for a mixture of all of the above