We can’t remember the last time we checked out the Tel Aviv 25 stock index on a Sunday night.

It must have been… that’s right… we’ve never checked it.

But last night we did.

We figured that as the Israeli market operates Sunday to Thursday it would give us an idea of how the Aussie market could open this morning. We wish we hadn’t bothered…

Early doors it was down over 5%. And bstock, market, y the close it had given up 7%, falling from the previous close of 1,154 to end the day at 1,074.27:

Oy vey!

This morning, as we write the Aussie market is down over 1.5%. That’s on top of Friday’s 4% drop.

DON’T PANIC!

But wait. “Don’t panic” is the message from Australian Super chief executive, Ian Silk. He told the Sydney Morning Herald this weekend:

“All investors feel losses far more keenly than they appreciate gains, so people will say they have lost 3 per cent in a few weeks, but forget they gained almost 11 per cent over the previous year.”

Hmmm. That must be from the same industry that back in June told the Herald Sun:

“Super funds had a great run until the end of April, when we were looking at double-digit returns… In May, they lost 1.5 per cent and today it was another 1 per cent. Now we are looking at a return of about 7 per cent.

“There’s no need to panic. It’s just another example of what markets can do but funds have been pretty resilient.”

[Cough]

Since then, the Aussie market has dropped another 11.6%.

Where did all the gains go?

In other words, investors have said goodbye to the supposed 11% and 7% returns:

In fact, the Aussie market is today trading at its lowest point since July 2009. That was when the market was half way through the 50% rally from the March 2009 low.

So the idea that passive investors have somehow made an 11% return and locked that in as a profit is utter nonsense.

But while the passive investment crowd told investors not to panic a few months ago, that was exactly the time we told you to be wary of the market. A message we’ve banged on about for over two years.

Hopefully you’ve taken that advice and trimmed your stock market exposure to the bare bones.

(Incidentally, if our advice has saved you money we’d love to hear from you. Just drop a line to the Money Morning mailbag, moneymorning@moneymorning.com.au. We’ll print a selection of the letters later in the week. Just indicate in the letter if you’re happy for us to share your story.)

The best place to have your money these past few months has been gold. This morning the Aussie dollar gold price is $1,612. The idea of it reaching USD$2,000 by the end of the year doesn’t look so crazy.

But even if you didn’t sell your stocks, if you own gold, at the very least you should find your portfolio in a neutral position – any stock losses should be offset by gold gains.

Start buying ‘cheap’ stocks

That’s what investing for retirement should be all about. Protecting your wealth during times of uncertainty… and then taking risks as the uncertainty fades.

So, the big question is whether this is a time to buy.

As we look at the market this morning there are plenty of good buying opportunities.

We’re currently whittling down a long list of stocks to three or four we can consider for the August issue of Australian Small-Cap Investigator.

Because at some point investors will start to pick up beaten-down stocks. Prices will have fallen to a level where investors just can’t say no.

The key is not to go crazy, thinking you can pick the absolute bottom of the market. The best approach is to buy in gradually and stick to your risk-management plan. Because there’s no guarantee stocks won’t go lower.

But even if you do buy in, you’ve got to remember that should the market rally, it won’t be any different to the last rally.

For as long as the market is driven by central bank intervention and taxpayer bailouts, volatility will stay in the market. And that means staying active with your buying and selling.

It doesn’t mean you have to be a trader. But it sure does mean you need to be active. Take some risks and buy when the market looks low. And take money off the table when markets look high.

We know, that’s easier said than done.

But at the moment, while we don’t know for a fact the market has hit the low point of the crash, we’re prepared to risk that it has. And that means taking small positions in good value beaten-down stocks… and then adding to those positions if the market moves higher.

Cheers.

Kris Sayce
Money Morning Australia

Sorry for the late arrival of today’s Money Morning.

The market action has been nothing short of amazing.

We don’t normally like to flood these notes with pictures of charts.  But it’s worth it today to highlight some of the big market moves.

First, the S&P/ASX 200…

The Aussie dollar against the U.S. dollar (the blue square in the lower right corner shows the current level of the Aussie – down six cents in a week!)…

The Aussie dollar against the Swiss Franc…

The U.S. S&P 500 volatility index (VIX)…

And finally, the Aussie dollar gold price…

So much for gold being a bad investment for Aussies!

As we’ve noted, the alarm bells have been ringing for days… months… actually, more than three years.

Last night in Europe and North America – and today here – the mainstream finally took notice.

This morning, stocks have taken one helluva beating.

Of course, that shouldn’t surprise you.  We’ve banged on about it long enough…

Fools making rules

Over at our sibling publication, the Daily Reckoning, value investor, Greg Canavan headlined his article, “When Fools Make the Rules”.  If you don’t subscribe to the Daily Reckoning you can check the article out online… and if you like it you can subscribe to the newsletter – it’s free too!

In a nutshell, Greg says fools are running the market.  And the biggest fool of all is Dr. Ben S. Bernanke.  But Bernanke isn’t alone.

Pretty much anyone who works at a central bank and thinks they can steer a market at will is either a fool or retarded mentally… or both.

There’s an ad running on finance channel, CNBC at the moment.  It’s for a foreign exchange and CFD trading company.

The ad features a guy standing at the front of a room talking about his trading… in the style of someone giving a motivational talk.  He says something along the lines of, “Do I go short the Euro against Aussie?  It depends on what Ben Bernanke had for breakfast…”

The camera scans round and the guy – from memory – is standing in front of a bunch of kids.  In other words, he’s not a hotshot Wall Street trader.  He’s a teacher who trades part time.

Anyway, the point is, even though the ad is trying to show that anyone can trade, the real element of truth is world markets are dependent on what Ben Bernanke had for breakfast… whether he had a good night’s sleep… and so on.

Now and for the past three years, nothing else has mattered.

So, it got us thinking.  How well have the central bankers and politicians done with their stewardship of global markets?  After all, supposedly these guys had to intervene because the free market was doing such a bad job…

Driving the economy into a ditch

Turns out they’ve done a crap job.

Remember, it wasn’t the free market that got the world into the pickle.  It was the government and central bank distortions that caused the mess.

But having fingered the free market as the cause, the central bankers and politicians now claim they’re in control and fixing things.

Only they haven’t fixed anything.  They’re just continuing the same crappy policies that ended with the economic meltdown in 2008.

So almost three years after the 2008 meltdown, markets are heading right back to where they came from.  The Aussie market – get this – is only 31% higher than the March 2009 low.

Or to put it another way, the Aussie market only has to fall 23.6% from today’s level to get back to that low.

What it shows is this: for all the trillions of dollars spent and created by central banks, on an inflation-adjusted basis (real inflation, not the rubbish published by government agencies), the Australian and world economies are no better off today than they were three years ago.

In fact, we’ll argue things are worse.

Individuals were encouraged to increase spending and debts because they were told the government would fix things.  Turns out that was a tissue of lies.

Yet still the mainstream tries to pin the blame on the markets and absolve the bureaucrats.  Our old sparring foe, Peter Switzer wrote this in a note today:

“Right now, so-called bond vigilantes are attacking Italian bonds driving down the prices and pushing up the yields and these guys are like short-sellers who sniff a bear market opportunity and go in for the kill. They need a ‘sheriff’ to come into town and make them pay.

“I asked Dr Shane Oliver from AMP Capital Investors if these financial terrorists needed to be crushed and how could it happen before they precipitate a recession?”

It’s laughable really.  The real “financial terrorists” are the goons the mainstream idolises: the central bankers and government bureaucrats.

They’ve single-handedly delivered more volatility to the market and encouraged (and forced) investors to take bigger risks than necessary.  And now, those investors are paying for it as their retirement wealth takes another hit.

Bear shoots the sheriff

But he’s right about one thing.  Short-sellers do sniff out bear markets, and one of the best in the business, Slipstream Trader, Murray Dawes has cleaned up massively for his traders this week.

In fact this morning he sent the following note to them:

“My target of 4200 has been blasted through by last night’s price action. I think it is time to ring the cash register on all of our short positions here. We may see a sharp sell-off in the morning session on the back of margin calls but my feeling is that a 10% fall in a week is going to see fund managers stepping up to the plate in the afternoon in search of some bargains.”

In this case, when the Sheriff came to town, Murray shot back.  When the smoke cleared, only one man was left standing… and it wasn’t the Sheriff!

Murray’s efforts this week show why it’s important to be an active trader.

Sure the market could rebound back.  But why suffer the stress of waiting.  Surely it’s better to profit from the market moves.  When the market falls you can be genuinely happy it has… because you’ve got plenty of cash to spare.

So we can only hope you’ve taken our advice these past few years.  That you’ve become an active investor.  That you’ve bought gold and silver on the dips.  That you’ve reduced your share portfolio.  And that you’re now holding a big stash of cash in your bank account.

Because, while the market looks awful and losses are being made everywhere, NOW is the perfect time for cashed-up investors to start looking for value.

One key point: it doesn’t mean you buy everything today.  But it does mean you should be ready to buy.  That’s something we’ve worded-up Australian Small-Cap Investigator subscribers to be ready for next week.

Here’s a snippet from the special update we wrote to them earlier today:

“I’ve cleared my diary this weekend.

“Rather than taking the kids to the park or relaxing with a book, I’ll work on the August issue of Australian Small-Cap Investigator.

“Because while this may not be the bottom of the market, it’s a great time to look for cheap beaten-down stocks.  Especially those that could recover if the market rallies.

“As always, there’s no guarantee that will happen.  But when stocks have taken a big hit it’s always a good idea to scout out opportunities.”

To our mind, today’s market has September/October 2008 written all over it.  When other financial advisors panicked, we did the opposite – we started buying… And we’re ready to do so again.

Cheers.

Kris Sayce
Money Morning Australia

Before we get on to today’s Money Morning, don’t forget to check out Slipstream Trader, Murray Dawes’ free market update on YouTube.

He recorded it yesterday morning.

Murray was cock-a-hoop as weeks of groundwork bore fruit. We don’t know about you, but normally when you think of traders, you think of them making quick decisions… buying and selling in seconds.

If that’s the image you have of Murray, well, sorry to disappoint you. Rapid-fire trading isn’t Murray’s bag. We’ve seen how he works. He carefully pours over the charts… weighing up risk and reward.

This orderly approach means sometimes he’ll miss a good trade… but the extra work means he’ll avoid bad trades too… that explains his current record of 17 winners from 19 open positions – not even Murray is perfect <wink>.

Anyway, for a free behind-the-scenes peek at where Murray thinks the market is heading next, click here.

Meanwhile…

“For millennia, people have killed and died in pursuit of gold. In the recent downturn, so many investors have been eager to buy gold that it is sold in vending machines. Governments are as captivated by it as individuals are: for nearly a century, many nations’ central banks have stashed hoards of gold bullion in a vault at the New York Federal Reserve.” – New York Times

Reading that you’d think no-one has ever killed or died for paper money.

That no-one has ever killed or died for a leather briefcase.

And no-one has ever killed or died for a loaf of bread.

And the idea of gold in a vending machine… it’s almost as crazy as thinking you can stick a piece of plastic into a wall and suddenly paper money will appear… like magic!

As if that’s ever gonna happen… sorry? What’s that… ATMs you say.

Funnily enough, at the ‘Great Property Debate’ in Sydney a few weeks back, one of our fellow panellists was amused by the sight he saw at the Burj Tower in Dubai.

“It has gold vending machines in the lobby, ha, ha…”

We smiled.

More value than gold?

But the liberal media and mainstream attitude to gold shouldn’t surprise us. Another line from the New York Times states:

“When asked recently why central banks hold gold rather than, for instance, diamonds, Ben Bernanke said ‘tradition.’ Given the long history of humans considering gold valuable, does it make sense to continue this tradition, or should central banks focus on other assets with more intrinsic value?”

The New York Times doesn’t explain which assets have more intrinsic value than gold. We can only guess.

Perhaps the NYT is thinking of Aussie dollars, Euros, Chinese Yuan…

U.S. Treasury bonds…

Newspapers maybe!

We won’t get into a debate about intrinsic value. Except to say individuals and the market determine value.

Stocks have intrinsic value. So does property. And so does gold.

Guess what: chocolate bars and tinned fruit have intrinsic value too.

But only as long as they’re in demand. If no-one demands gold, property, shares, chocolate bars or tinned fruit their intrinsic value will be low… maybe even zero.

Anyway, News.com.au writes this morning:

“Gold back in favour as investors take cover from volatile markets”

In another sign of the mainstream not quite getting it, half the article is devoted to stories of people selling their gold… d’oh!

But look out, is gold in a bubble? The article says:

“The [Perth] Mint states that every week it has dozens of self-managed superannuation investors pouring up to $10 million into both gold and silver, which has also enjoyed phenomenal price growth.”

(Incidentally, our publishers – Port Phillip Publishing – have been one of those buyers at the Perth Mint… the metal is currently stored at a secure location. More details on why they’ve made this purchase soon…)

$10 million a week is $520 million a year. Or just 10% of what the Australian Securities Exchange (ASX) turns over each day!

Or according to the Australian Bureau of Statistics (ABS), $74.7 billion worth of building approvals went through in the 2010-2011 financial year… that means buyers spend over 100 times more on new housing than on gold and silver.

We’ll admit relative dollar values aren’t always relevant to decide if an asset is over-inflated. But it does tell you gold and silver are still fringe investments.

Fear Index higher but still low

So, is gold over-valued?

We can’t tell you for certain that it isn’t. Its value is determined by what the market is prepared to pay and receive for it.

But we do know that measured by James Turks’ Fear Index, gold is well below the early 1980s peak. Here’s a chart of his index going from 1967 to June 2010:

Source: gold-speculator.com

The small blue square on the right is our calculation of where the Fear Index is today – around 3.3%.

And our guess is the gold price is set to go even higher. Today the Wall Street Journal reports:

“The Federal Reserve should consider a new round of securities purchases to spur the economy if growth and employment keep languishing and inflation recedes, former top Fed officials said in a roundtable with The Wall Street Journal.”

If the Fed pours more fresh cash into the market that can only be good news for the gold price.

The question is how the Fed will stimulate. We doubt it’ll be as brazen as before. The mad men at the Fed are no doubt scheming to find a less obvious way of devaluing the dollar and unleashing more inflation on the world.

So what will they do? Who knows? We’ll have to sleep on it to see what we can come up with.

But predicting the actions of mad men is almost impossible. So even the craziest and dumbest idea we could think of will be a million miles away from the ideas swirling in the heads of Ben Bernanke and his pals.

What we do know is we’ll keep topping up on gold and silver at regular intervals… because we value gold and silver more than paper money.

Cheers.

Kris Sayce
Money morning Australia

[Aside: Can someone please turn off that bloomin’ crash alert!]

Dow Jones Industrial Average – down 265 points.

FTSE 100 – down 1%.

German DAX – smashed down 2.26%.

Italian MIB and Spanish IBEX both down over 2%.

Aussie dollar down to USD$1.075… and gold at a record USD$1,660.

It’s also near the all-time Aussie dollar record at $1,542.

And as we write, the Aussie market is down over 80 points.

From where we’re sitting the crash alert is deafening. Ear muffs are firmly in place.

But if you’ve followed our advice for the past three years you should be sitting comfortably today.

We warned you the so-called economic recovery was a sham… of criminal proportions.

Immoral and corrupt government officials and central bankers manipulating the market for their own benefit. And their banker buddies.

They win while the losers in this pathetic and disgusting game are the average wage earners.

Actually, we’ll rephrase that: …the average wage earners who don’t read Money Morning.

Did you buy more bank shares? We hope not…

As we’ve noted for some time, the Aussie market was in classic bubble-denial territory. The same denial the housing spruikers have been in.

That somehow Australia is different… we’ve got the Chinese commodities boom… the Aussie dollar is a new reserve currency… blah, blah, blah…

But if you ignored our advice and you followed the mainstream advice you probably bought Westpac shares on 25 May. That’s when Michael Pascoe told his Sydney Morning Herald readers:

“To use the Westpac example as it’s suffered more than most, taking a snapshot at $21.52 this morning, the stock was yielding 7 per cent fully franked – the equivalent of 9.8 per cent. Yes, the Pascoe family super fund happily added to its holding.”

This morning Westpac is trading at $19.90. The lowest price it has been since July 2009. Good trade!

On the other hand, you could have heeded our warnings about the three-year false rally – especially in banking stocks.

And it’s not as though we’ve been quiet on this point. We’re not playing Harry Hindsight after the crash. Just two weeks ago on 14 July we wrote, “Why It’s Too Soon to Buy Beaten-Down Stocks”.

You can read that article here…

We signed off with:

“So for you and your investments it means keeping your crash alert turned to high. Cash – while not perfect – is a great asset to hold right now.

“If you’re holding plenty of it in your bank account you’ll be well placed to buy cheap assets (including stocks and real estate) when the market takes another turn for the worse.

“Bottom line: a brief but small rally could be on the cards… but the fall that follows it is set to be much bigger.”

Sure enough, the market rallied… but it was short-lived. The fall that followed was – and is – much bigger than the rally:

Source: CMC Markets Stockbroking

Now look, we’re not saying we’re perfect. Picking stocks to buy is tough in this market. That’s why in recent months we’ve wound back the throttle in Australian Small-Cap Investigator. (Although we’re about to put our foot to the floor in the latest issue – due out this week!)

But saving you money is only half our job.

The other half is to give you advice that makes you money. But most of our money-making advice is advice you’ve got to pay for.

Trader wrong-foots the market

Something Slipstream Trader, Murray Dawes has done hand over fist for his traders this week.

While most investors panicked yesterday, looking to sell out or trying to buy – what they thought – were bargains, Murray calmly and coolly sent this message to his subscribers:

“Market wrong footed

“The price action in markets last night after the US debt deal has been very telling. As suspected the euphoria from a deal lasted a nanosecond before everyone realised that there is no reason to be buying this market here. Italian and Spanish equity markets got smashed and the US saw heavy selling from the open.

“Many people were wrong footed by yesterday’s price action and we are now flirting with the major lows around 4450.

“I think it is worth having a short term trade here from the short side just in case this is the major break to the downside that I have been waiting for.

“There should be plenty of panic selling on the open after everyone got it wrong yesterday which should create some good downside momentum.”

Above this message were recommendations to short-sell four big, blue-chip Aussie stocks. This morning the market is trading 100 points below the “major lows around 4450.”

And Murray’s traders are already up 2-3% on these trades in just one day. And if those traders are using leverage (say, CFDs) the gains should be even bigger.

So, could the market still go lower?

It could. That’s why Murray’s keeping his options open and staying short.

All we know for certain is this: because of the deafening noise from the crash alert, we’ll keep paying attention to all the warning signs – gold, Swiss Franc, Aussie dollar, the VIX and interest rates.

Those are all things the politicians and central bankers think they can manipulate. But what they’re now figuring out is the free market is bigger and better than all of them.

Given a choice, we know which we’ll back to win any day of the week. Vive la laissez faire!

Cheers.

Kris Sayce
Money Morning Australia

‘Gold might hold pride of place among precious metals but there is lots to like about its shiny sidekick’ the Sydney Morning Herald wrote in May.

This was the first bit of attention the mainstream gave to gold’s ‘shiny sidekick’.

The white metal was unthought-of of until its recent Bull Run… no commentary… no forecasts.
In fact, how many commodity stock tipping experts talked about Silver before the April rally?

Most overlooked it. And now, they’re busy telling punters the metal is due for a pull back.

When the media talks about precious metals the only thing they write about is it being in a bubble.

Take this from CNN’s Money Magazine. When asked about silver, senior editor Walter Updegrave said:

‘Any reasonable person should be wary about any investment that’s up so much.

‘History shows that bad things can happen after such meteoric rises. Think dot-com stocks and Internet mutual funds in 2000 and house prices after hitting their peak in 2006.’

Updegrave wrote this only a few days after silver touched those new highs. And while we agree the short term price move wasn’t sustainable, the fact is most mainstream commentators didn’t suggest buying silver before the rally.

And that’s because most mainstream commentators just don’t understand silver.

George Maniere from Minyanville.com is one analyst frustrated by commentators who think silver is in a bubble:

‘I will go on record right now and say that this is nonsense. A bubble is not determined by price. A bubble is created by a run-up that is not supported by fundamentals.’

He believes as long as central bankers play with the value of money, the price of silver will go up.

He adds, ‘What… will continue to drive the prices of gold and silver up is the continued debasement of currencies.’

It’s not a bubble… It’s the fundamentals

Yet, it’s not just money printing that’s driving silver prices higher.

There are rock solid fundamentals that make silver a worthy investment.

The mainstream ignorance of precious metals gives editor of Diggers & Drillers, Dr Alex Cowie the giggles.

He told his readers:

‘Don’t forget that most of them know less about silver than your neighbour’s cat! And ask yourself how many of them were calling silver to go up before the rally?’

Long term subscribers would know that silver has been on the Diggers & Drillers buy list since it was USD$16.50.

But the media blackout on the shiny stuff gave his subscribers an investing edge.

And while everyone else was looking the other way Alex added to the silver exposure with a couple of leveraged ‘silver plays’.

In the April issue of Diggers & Drillers Alex wrote:

‘I last made the case for silver in the December issue… when silver was USD$25. Just five months down the track and silver almost cracked UD$50.’

Have a look at the chart below:

Source: silverprice.org

I asked Alex why he was still backing silver when the price had doubled.

‘…some precious metals are more precious than others’.

Demand demand demand but no supply

Compared to gold, silver has far more uses.

Aside from being a valuable precious metal, it’s also an ordinary, everyday metal. And our tech-savvy lifestyles are dependent on it.

To turn on your microwave, TV, washing machine and dishwasher, the switch components need silver. You’ll find it coating your CD’s and DVD’s. There’s silver in your mobile phone and even a tiny smidge in a battery to power quartz watches.

And odds are, the demand for silver isn’t going to decline either.

Consider this. The world is rapidly moving towards solar energy. More than 90% of the solar panels use silver in paste form. If you’re not familiar with silver paste, it acts as a conductor of electricity. It’s fixed to non-conductive surfaces making it electrically and thermally conductive.  Importantly, there’s no replacement in sight.

Rapid changes in technology have increased the industrial fabrication for silver. In 1990 the electrical and electronics market consumed 90 million ounces (Moz). By 2010 the same sector needed over 242Moz.

Last year the world only managed to produce one billion ounces.

Put in perspective: one small part of the silver market needed one quarter of the supply!

Shrinking stockpiles sees silver reach … an ounce

It doesn’t help that our silver stockpiles are nearly empty. Alex was keen to make his subscribers aware of this:

‘We used to have far more silver in storage. But we have blindly painted ourselves into a corner by consuming all of it. It was cheap for decades and we discovered hundreds of industrial applications for it.’

But it’s not just industrial demand that’s growing.

Investor demand is at an all-time high. Alex wrote:

‘The US Mint, Royal Mint and Perth Mint keep setting record sales. The US mint has even suspended sales of some of its lines. In my own experience, I’ve found that Australian bullion dealers are rationing sales.’

Alex is certain this is only the beginning for silver. If you want to see his prediction of where silver could be within two years click here…

Regards,

Shae Smith.
Assistant Editor, Money Morning