Intermezzo: Using the Stock Screener

Sometimes, if I don't have any ideas anymore what to buy, I use the stock screener.

What you want to do is filter on 4 attributes: market cap, P/E, dividend yield and percentage change.

1) Market Cap: do not choose small companies as they are mostly fraudulent or don't have sustainable earnings. Don't choose big companies because these are not volatile enough to get fast profits from. I'd filter between 200 million and 4 billion.

2) P/E ratio: choose the companies with the lowest P/E ratio, these companies are dirt cheap while still having earnings. Cheap is below P/E of 5. But do not choose below P/E of 2 because those are mostly companies that are going bankrupt or have bad growth.

3) Dividend yield: always choose companies that have dividends, because these companies have real earnings and can prove they have sustainable earnings to reward investors. The higher the better of course, but don't push it above 7% as those companies probably don't have the money to pay out dividends on a regular basis. I'd go for companies with dividends between 3% and 7%.

4) Volatility: don't choose companies that are so volatile. Maximum year over year change should be between the 20% range.

And the winner is: Silicon Motion Technology. This company is based in Taiwan and in the semiconductor business. Has pretty good earnings, doesn't look fraudulent and has bullish articles supporting it. Deutsche Bank initiated it with a buy to $24/share. And the board has recently authorized a share repurchase of up to 10% of the company. Maybe a good idea to buy if you have too much money.

Leverage in Paper Gold Hits All Time High

In another blog post I said the leverage of paper gold to physical gold at the COMEX was at record highs, but now we get another new record high.

Open interest was 397590 or 39759000 ounces in total. Registered stock is 590816 ounces (which is an all time low). That's a leverage of 39759000/590816 = 67. This is up from the last time when it was 56. I wonder when it will break.

COMEX gold stock

Leverage in Gold

Increasingly more people try to short gold down, but it seems they are not really succeeding lately. If people really start buying it, they won't find it as everything went to Asia.

Why Bitcoin is a Bubble

In this article I'll show you why I think Bitcoin is a bubble, contrary to the bullish mentality we see today around Bitcoins. I don't know how high it will go, but I'd stay away from it.

Remember the most important rule in spotting a bubble: "90% of the move comes in the last 10% of the time".

In a year, Bitcoin soared from 12 USD/bitcoin to 1000 USD/bitcoin. In total we have a rise of 1000 - 12 = 988 USD/bitcoin.

10% of 1 year = a little over 1 month. The price was 180 USD/bitcoin a month earlier. So in the last month, bitcoin soared from 180 USD/bitcoin to 1000 USD/bitcoin. That's a 820 USD/bitcoin increase in the last 10% of the time frame of 1 year. 820 USD/bitcoin is also almost 90% of 1000 USD/bitcoin.

So in theory: "90% of the move (820 USD/bitcoin) comes in the last 10% of the time (one month)."

Which means, the bubble should now burst if I'm right...

Bitcoin Price

Moreover, as silver and gold continue their downward spiral, bitcoin continues surging. At this rate for example, we have a $20 billion silver market (above ground silver) and a $12 billion bitcoin market.

At some point very soon, the bitcoin market will overtake the silver market.

You can physically buy up every ounce of silver in this world with bitcoins, by just going to this site for example: http://bitcoincommodities.com/

Eventually these people need to do something with their bitcoins. Why wouldn't they buy up the entire silver market?

Silver Price

Bitcoin Market Capitalization

Additionally, this week we finally crossed the line where 1 Bitcoin costs the same as an ounce of gold. One Bitcoin costs $1230.

If you could choose between a Bitcoin or gold coin, I would certainly go for the gold coin and here is why.

First, we had Bitcoin (2008), then we had Namecoin (18-Apr-2011), Litecoin (7-Oct-2011) and now we have Peercoin 12-Aug-2012 and Primecoin (7-Jul-2013) and Feathercoin (16-Apr-2013) and Novacoin (9-Feb-2013) and many more to come.

If everyone invents new coins, there is only so much money that people can use to buy these coins. At some point we will get a crash in the value of these coins as more and more coins come out of nowhere.

The following site gives a list of the most important cryptocoins:

http://coinmarketcap.com/

To show you why I think Bitcoin is a bubble I took the cryptocurrencies with the highest market cap in this table.

You can see that we first had Bitcoin in 2009 and as we progress, more and more competing cryptocurrencies arose.

It gives us this chart:

More and more "bitcoins" emerge out of nowhere and that's why I think we will see Bitcoins implode at some point. This parabolic curve is the physical evidence of a bubble.

Second, Bitcoin's use is mostly speculative, you don't buy Bitcoin because you think it has value. People buy it to earn speculative profit from it. That's the biggest difference as opposed to gold. Also, you can't buy a lot with Bitcoin today. The most important retailers like Google, Amazon and eBay have their own payment system.

Third, gold has an intrinsic value while Bitcoins don't have an intrinsic value. Gold can never be duplicated and it is very difficult to mine it out of the ground. Also, gold is a universally accepted "currency", with an above ground stock of 170000 tonnes or a market capitalization of $7.5 trillion. If you know that the amount of U.S. dollars in this world is about $10 trillion (M2 money supply), then you can easily see that gold is competing with fiat currency. Now if we look at the tiny market capitalization of Bitcoin, we only have $12 billion. So the Bitcoin world is only 0.16% of the gold market. People would argue that this means that Bitcoin has much room to grow because of this difference in market capitalization. If you believe Bitcoin can compete with gold, then Bitcoin would need to go up a thousand times from its level today. I don't believe this will happen because of the reasons I pointed out earlier.

Conclusion:

Unlike Bitcoins, gold cannot be duplicated, nor can it be invented out of nowhere. I'd just stay with physical gold (GLD) (PHYS).

A Bitcoin for an Ounce of Gold

We finally crossed the line where 1 Bitcoin costs the same as an ounce of gold.

What would you prefer?

This:

or this:

I'm not sure anymore...

But be aware. We had Bitcoin (2008), then we had Namecoin (18-Apr-2011), Litecoin (7-Oct-2011) and now we have Peercoin 12-Aug-2012 and Primecoin (7-Jul-2013) and Feathercoin (16-Apr-2013) and Novacoin (9-Feb-2013) and......etc.... If everyone invents new coins, there is only so much money that people can use to buy these coins. At some point we will get a crash in the value of these coins as more and more coins come out of nowhere.

See a list of all coins here:
http://coinmarketcap.com/

To show you why I think Bitcoin is a bubble I took the cryptocurrencies with the highest market cap in this table.

You can see that we first had Bitcoin in 2009 and as we progress, more and more competing cryptocurrencies arose.

It gives us this chart:

More and more "bitcoins" emerge out of nowhere and that's why I think we will see Bitcoins implode at some point.

Marc Faber Talks About Gold Demand in Asia

Marc Faber talks about gold demand in Asia and has a special interest for platinum.

Marc also says: "Gold miners are the only sector in the market that are very cheap."

Gold Supply and Demand Analysis

What I like about Eric Sprott's letter to the World Gold Council are his numbers about the supply and demand in gold.

In that letter he said that demand far exceeds supply at this moment. See second column in table below. 

Demand is 5184 tonnes and supply is 4403 tonnes. If mine supply increases by 3% it would mean nothing compared to the increased demand from China.

Eric explains why demand is far more important than supply

But Eric's numbers haven't accounted for the increased demand from China and the decreased ETF outflows nowadays. If we take the current numbers I believe the Chinese gold demand could be in the 1560 tonnes and the ETF outflows could have halved to 450 tonnes based on the flattening slope in the GLD ETF.

That would give supply of 3936 tonnes and demand of 5670 tonnes. That's a deficit of 1734 tonnes, which means the gold price should go up.

On the supply side we need to watch what the mines produce, because that's a big part of the supply. ETF outflows are just a small part and they are declining. Gold recycling should be subdued due to low gold prices.

Gold Supply

On the demand side it is very important to watch China, India and Hong Kong as they control the whole demand picture. What central banks do are essentially meaningless compared to China and India.

Gold Demand

China Gold Imports from Hong Kong Rising Along

While the physical gold outflows of the ETF's of GLD continue (Chart 1) and those from the COMEX stay flat (Chart 2) (because they can't afford to lose anymore physical gold), all this physical gold is bought by Asia as net imports and gross imports rose to record highs (Charts 3, 4, 5).

Chart 1: GLD Outflows

Chart 2: COMEX Gold Outflows (blue)

Chart 3: China Gross Gold Imports

Chart 4: China Net Gold Imports

Chart 5: Ratio Net to Gross gold imports

Bitcoin About to Take Over Silver market

As silver continues its downward spiral, bitcoin continues surging. At this rate, we have a $20 billion silver market (above ground silver) and a $10 billion bitcoin market. 

At some point very soon, the bitcoin market will overtake the silver market. It's very easy, it could be that silver goes down to $10/ounce and bitcoin just stays where it is at $1000/bitcoin and then we're there.

You can physically buy up every ounce of silver in this world with bitcoins, by just going to this site for example: http://bitcoincommodities.com/

Eventually the bitcoin people need to do something with their bitcoins. Why not buy up the silver market?

Silver Price

Bitcoin Market Capitalization

An Analysis on the All-in Sustaining Cash Costs of Gold Mines

In June 2013, the World Gold Council (WGC) published a guidance note on the all-in sustaining cash cost metric for gold mining companies. This way, investors can have a better evaluation on the real cost of mining gold. This metric adds additional costs which reflect the varying costs of producing gold over the life-cycle of a mine. To name a few: by-product cash costs, sustaining capital, corporate general and administrative expenses, and exploration costs. We calculate all-in sustaining costs as the sum of total cash costs (net of byproduct credits), sustaining capital expense, corporate, general and administrative expense (net of stock option expense) and exploration expense.

There is one flaw in this system though. These all-in costs only include additional all-in sustaining costs and do not include CAPEX for projects. If we would include these project costs, we would get an astounding $1784/ounce in 2012 for the bigger gold mining companies. Nevertheless, it's a first step in the right direction.

It is interesting to analyze how the all-in sustaining cash costs have progressed in 2013 as compared to 2012. All-in cost data has been taken from a research report of Dundee Capital Markets for the 2012 estimate.

Chart 1: All-in costs gold miners 2012 (Dundee Securities)

We see here that many gold miners are producing just under the average gold price of $1600/ounce in 2012.

Now we fast-forward to 2013, take data from a recent Denver Gold luncheon for the 2013 AISC cost estimate.

Chart 2: AISC gold miners 2013 (Agnico Eagle)

Again we see that the all-in sustaining costs are hanging just below the current average gold price of $1300/ounce in 2013.

Now let's compare these numbers year over year. Read on here.

Dr. Berninger Explains: Trading Financial Bubbles

This guy, Dr. Berninger is cool. Listen to what he has to say about QE and bubbles. Especially the second video.

Silver Smashdown Creates Record Silver Premiums in Shanghai

Yesterday's attack in the precious metals sparked a record premium at the SGE. We got a new record of 6.73%. 

Not so much in gold... But even so, I'm sure that the $1200/ounce gold will be a level where central banks are very happy to take it from precious metal sellers. 

It's amazing how the silver and gold premium charts differ from each other, it means that silver is in much higher demand than gold.

People's Bank of China Stops Supporting U.S. Debt

One of the more interesting stories this week has been reported by Bloomberg. The People's Bank of China is said to stop increasing its foreign currency reserves. What implications will this have? I believe that we'll see the start of a U.S. dollar collapse.

Look what Peter has to say about this:

Chart 1: PBOC Balance Sheet

All these years, the Chinese bank had increased their balance sheet up to $3.66 trillion of which $1.3 trillion are U.S. treasuries (Chart 1). This is almost half of the PBOC's balance sheet. Other assets include U.S. agencies, U.S. corporate debt, U.S. equities and other non-U.S. assets (Chart 2).

Chart 2: PBOC's U.S. Asset Composition

If the PBOC is going to stop the purchases of foreign currency reserves, this means that they will stop buying the assets above and mainly stop buying U.S. treasuries. That's what it all comes down to. This also means that their excess of U.S. dollars will need to be converted to other assets like the yuan, or even gold. In fact, one of the ideas of China is to prepare the yuan as a reserve currency and I believe this is a first step in that direction. We know that China has amassed a lot of gold, when considering the amount of gold imports from Hong Kong. I believe the PBOC should have added significantly to its gold positions since 2009. The PBOC hasn't reported their gold holdings since 2009 but it is said that they own around 4000 tonnes of gold right now. Needless to say this will be very bullish for the yuan going forward. If we take a look at the chart of the USD/CNY exchange rate we see that the yuan has already increased a lot. I believe the yuan will continue its ascent. To bank on this trend, investors can buy the WisdomTree Dreyfus Chinese Yuan Fd ETF (CYB).

Chart 3: USD/CNY

To read on, go here.

Art Prices Predict CPI

From Kingworldnews:

According to Austrian Business Cycle Theory the prices of capital goods (= asset price inflation) increase first in the course of an inflationary process, while consumer price inflation (= rising consumer prices) only ensues later. The asset price inflation that is currently in train can be identified by a multitude of symptoms. Prices for antiques, expensive wines, vintage cars, but also real estate and especially stocks recently increased strongly.

This quote is actually a very interesting one, because it can be added to our collection of correlations. Whenever you look at the trend in art, stocks, real estate (capital goods), you can predict the CPI. Because capital goods asset prices will always increase first and when this money flows into the economy, the CPI will increase afterwards. Note that art, stocks are not included in the CPI, that's why the CPI doesn't show inflation yet.

Peter Schiff has explained this too in one of his radio shows. He says that the QE that we see now is boosting asset prices. Eventually all these earnings will flow to the consumer and that's when we will see the CPI go up.

So in the graphs below, you will first see the red (art), yellow (stocks) and blue line (real estate) go up and afterwards the CPI will increase. That's why I believe that stocks can go down, while the CPI keeps going up, because we have this delay.

Bitcoin Bubble

Remember the rule: "90% of the move comes in the last 10% of the time".

In a year, Bitcoin soared from 12 USD/bitcoin to 1000 USD/bitcoin. In total we have a rise of 1000 - 12 = 988 USD/bitcoin.

10% of 1 year = a little over 1 month. The price was 180 USD/bitcoin a month earlier. So in the last month, bitcoin soared from 180 USD/bitcoin to 1000 USD/bitcoin. That's a 820 USD/bitcoin increase in the last 10% of the time frame of 1 year. 820 USD/bitcoin is also almost 90% of 1000 USD/bitcoin.

So technically: "90% of the move (820 USD/bitcoin) comes in the last 10% of the time (one month)."

Which means, the bubble should now burst if the theory is right...

The problem is, I think this time is different with Bitcoin.

What do new rules at LME mean for metal prices?

Weeble posted an interesting question, which I don't know the answer to, but I can guess:

Albert, I always find your blog very educational.
I am interested in what you think of the following. It seems to me to be a big deal but nobody is commenting on it. Will it cause more bullion to come in to the market short term or will the increase in transparency show the weakness in the system? Thanks.
http://uk.reuters.com/article/2013/11/07/uk-lme-warehouses-idUKBRE9A611O20131107

So basically the LME shortens the warehousing queues by decreasing waiting time duration to 100 days (July 2013) and now to 50 days (November 2013). Beginning from April next year.

I'm not an expert on LME warehousing. But what I've read is that traders think it will make prices of commodities go down, because all that supply goes into the market and it would become less attractive for warehousing companies to bid for metal. On the other hand, this change in plans means lower warehouse levels and that will make delivery more difficult. There will be delays. What if there is a sudden demand in copper in China while warehouse levels are lower and what if dealers need to deliver on the expiring short positions. We will see backwardation. As a matter of fact, backwardation is correlated with LME copper levels as shown below.

You can see that LME copper levels go up and down (Chart 1) in striking similarity with the copper contango curve (Chart 2: red graph). It's too early to make conclusions though...

Chart 1: Copper Warehouse Stocks Level

Chart 2: Copper Contango Theory

And as you know from the copper contango theory, if copper goes into backwardation, the copper price will go up. So a lower LME warehouse level due to the new rules at the LME, will result in higher copper prices. That's my guess.

Remember what we had in the nickel market. We almost had a nickel default at the LME in 2006.

Excerpts from the LME’s press release of August 16, 2006:
Those with short positions in nickel falling prompt on Friday 18 August 2006, and on subsequent prompt dates until further notice, who are unable to effect physical delivery an/or unable to borrow metal at a backwardation of no more than $300.00 per tonne per day, shall be able to defer delivery for a day at a penalty of $300.00 per tonne. Those with long positions for prompt on those days who are subject to deferred delivery shall be entitled to compensation of $300.00 per tonne per day

And what happened when nickel was at record low stock levels? The nickel price soared afterwards.

Chart 3: Nickel stock levels Vs. Nickel Price

Everything points to higher prices in my opinion.

Indian Gold Premiums a Proxy for the Gold Price

If you know that India is the second largest buyer of gold in the world, you would guess that India matters (Chart 1).

Chart 1: Consumer Gold Demand per Country

Now look at the premiums these Indians are paying for physical gold (Chart 2). The premium is currently 22%. So there is this disparity between the U.S. gold price (blue chart) and the Indian gold price (yellow chart). The question is: "Which one is most likely the equilibrium price?".

Chart 2: Indian Gold Premium

As we all know that India is a much larger player in the gold market than the U.S. (on the physical side), we should come to the conclusion that the Indian gold price is more likely to be the equilibrium. Indians will never stop buying gold. This implies that the gold price should already be at (1270+ (1270*22%)) = $1550/ounce instead of the current $1270/ounce.

Meanwhile, at Shanghai we see ever increasing silver premiums.

Chart 3: Shanghai SGE silver premium

Correlation: Employment to Population Ratio Vs. Potemkin Rally

I read about a very unusual correlation at Zerohedge. Apparently, there is a similarity between the employment to population ratio (red graph) and the Potemkin Rally (blue graph). (The Potemkin Rally graph measures the ratio between the stock market and the Fed's Balance Sheet.)

There are implications if this correlation is true. It means that when the U.S. government prints money (otherwise known as QE), the blue graph goes down (in a scenario where the stock market flattens out). If the blue graph goes down, the red graph goes down too, which means the unemployment rate goes up.

This means we are venturing into a paradox. It means that we get to a stage where money printing makes the unemployment rate go up instead of down. Janet Yellen's QE won't help employment.

But the alternative is equally bad. Not to print money could make the stock market crash, which will also result in a declining blue chart. So we are now stuck between a rock and a hard place.

Silver Premiums Going Through The Roof

Just an update on something very interesting in the silver market. We already know the U.S. Mint is selling a lot of silver, but this is also visible in the premiums.

It occurred to me that we are seeing rising premiums again in some miners.

And we see the same thing at some bullion dealers, we are approaching new highs.

Not so much in junk silver.

But take a look at this. I first thought it was a miscalculation, but I checked it thoroughly. It was reality. In Shanghai we saw a major jump in silver premiums.

It will be interesting to see what the future will bring.

Bitcoin Correlated To The Amount Of Bitcoin Users

In the Bitcoin world, more and more people are using this virtual currency. Chart 1 gives the amount of transactions a day and it's booming. If you really think more and more users are going to use Bitcoin, you will know that this chart 1 is going up.

Chart 1: Bitcoin: Transactions Per Day

When more people use Bitcoin, while there is a finite supply (Chart 3), of course the price of Bitcoin will go up (Chart 2). 1 Bitcoin costs around $400.

Chart 2: Bitcoin: Market Price

Chart 3: Bitcoin: Amount of Bitcoins in Circulation

With that increase in market price of 1 Bitcoin, the market cap is now $4 billion. Which is still a very small number compared to how big our world is. So I believe there is still a lot of upside.

Chart 4: Bitcoin: Market Capitalization

As long as the governments don't interfere, I believe the market of Bitcoin will continue to grow as more and more users pile into this virtual world (Chart 5). Chart 5 gives the amount of Bitcoin addresses, which is more or less the equivalent of the amount of users.

Chart 5: Bitcoin: Amount of unique Bitcoin addresses

This last chart is the key to watch, as more and more people use Bitcoin, you will see more and more adresses, because a Bitcoin address is almost the same as opening a bank account.

Now compare Chart 5 to Chart 2. Yes, that's your correlation.

Bitcoin's price is correlated to the amount of user accounts. If you believe that more and more people are going to use Bitcoin, you will know the price of Bitcoin will go up. People can say it's a Ponzi scheme, that it's a hype, but I say a market of Bitcoin and related tangible buy-able products will not disappear from the earth. Their presence will only increase. So it wasn't that complicated, Bitcoin doesn't follow the gold price, it was much simpler, Bitcoin followed the hype itself. The higher the demand, the higher the price.

Buy 1 bitcoin if you dare, that $400 might multiply to $400000 in a few years.