Once In A Century Opportunity

“The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.”   --- Winston Churchill

We find ourselves in the situation where a stock market crash worse than 1929 (in which the Dow declined 89%) is becoming ever more possible.  Pension funds, endowments and personal retirement accounts are all at serious risk of almost total loss.  So called “diversification” will basically offer no protection from both a Stock Market and Bond Market collapse.

I have always thought of the 1929 market crash and 1930s Depression as a sort of “worst case” economic scenario.  In the 1950s, it was generally understood that it was the credit excesses of the 1920s that caused the 1929 Crash and Great Depression.  The consensus thinking became; that the only real way to avoid the fallout from a destructive crash was to avoid creating a giant credit bubble in the first place.  This is why the 1950s Federal Reserve Chairman quipped: “The Fed’s job is to take away the punch bowl just as the party is getting started.” By 1982, with the memory of the 1930s Depression almost completely faded, policy makers once again began to “stimulate” the economy with borrowed dollars.  By the mid-1990s we had exceeded the excesses of 1929 both in terms of the total amount of debt and in terms of stock prices.  To call the current situation dangerous is a vast understatement.  The 1929 excesses look tame compared to where we are today.

In the same fashion, that the only way to avoid a hangover is to not get drunk in the first place, excess borrowing to fuel an investment mania always leads from boom to bust.  A 400 year study of financial markets has shown this to be true every time.  It just makes sense.  When the boom ends, the accumulated debts do not.

Why then, aren’t we more worried?  Maybe it’s like frogs and boiling water.  I’m told that if you throw a frog into boiling water, it will jump out, but that if you put it in warm water and slowly heat it, the frog gets used to it and stays immersed, well past the point at which it can survive.  This strikes me as a valid analogy.  Since 1982, every economic difficulty has been fixed with the magic of “adding liquidity”.  Adding liquidity is nothing more than borrowing more money to “stimulate” the economy.  What is most disturbing is that while the water continues to heat up, (the debt bubble keeps getting larger and larger) because it has been going on so long, most are ignoring the long term implications.  Because debt has been expanding for the last 70 years fueling positive stock market returns, it is now considered to be a “given” that stocks will do well over “the long run”.  Debt wise, we have climbed to the peak of Mt. McKinley.  Is it wise to extrapolate climbing another 25,000 ft. because we’ve been able to climb so high?  You may climb another mountain someday, but if you plan for the future based on the past while paying absolutely no attention to where you actually are, your next step will almost certainly turn into a fall from which you will not recover.   

Starting in the early 1980s, many came to believe that deficits and debt didn’t matter:  Because that was what we were being told. We have recently lived through the 2000 Dot Com bubble bursting which was an even bigger bubble than in 1929.  But because we have become “used to” huge debt, we were “comfortable” creating another bubble -- this time primarily by using real estate, which peaked in 2006 and soon created an even larger economic decline.  We then watched in astonishment as seven years after the 2000 debacle the Dow dropped twice as far in roughly half the time.  It’s not so complicated; more debt made things worse -- much worse.   So now we have re-inflated the bubble a third time: As of 2014; there is currently 30% more debt worldwide than at the last peak in 2007 and we are experiencing one of the weakest recoveries of all time.  All this borrowing has yielded only weak (if any) economic growth and our national balance sheet keeps getting worse and worse, as the debt bubble gets bigger and bigger.  Eventually it must BURST, likely sooner than later.  The bubble is much bigger than in 1929, and we as a people were much more self- sufficient and so the economic destruction will be worse damaging to the individual than in the 1930s!                                   

We’ve established that debt is too high and that every time in the past, this has led to a bust.  But Government propaganda has sold us that we will find some way out of this mess.  But, with the amount of accumulated debt and the weakness of our current recovery, I think one has to admit that risk in our markets, particularly the Bond market, is exceedingly high.  Yet the standard portfolio structure by which college foundations are still measured is one of 60% stocks and 40% bonds.  This kind of approach gives most portfolios absolutely no protection against a scenario that, barring some sort of miracle, would have to be judged as inevitable.  Trillions are being mistakenly invested this way.

A huge problem I see is that those making investment decisions for large institutions are required to justify their decisions to others: Leading to the Lemming mentality of following the leader over the cliff.

Look at the above chart and think of the debt buildup as a great “wave”.  Successfully investing over the last 30 years has been like riding a tsunami of credit expansion.  When the tsunami hits shore (debt expansion can’t go on forever), no matter how good they have become at surfing, and a crash will wipe them out.  It’s my belief that most pension funds, foundations, individuals, and corporations that do not prepare for such an eventuality will be destroyed just like the devastation that occurs when any tsunami hits.

My own interest in finance has been life-long. I worked as a stock broker from 1969 to 2003.   My career began with an exclusive focus on individual companies.  The 1987 market crash provided a difficult but critical lesson on the importance of the general market.  Fortunately for both me and my clients I was an Elliott wave Guru and we were able to profit handsomely from the Crash and I bought my first Mercedes.

 By the mid ‘90s, I had become more familiar with market cycles and how broad economic forces can influence all markets.  My concern grew as we began eclipsing the extremes in market prices and debt from the 1920s.  The market continued to set new, significantly higher prices, and by 2003, I left the industry because the major Brokers barred me from any extensive SHORTING, especially not the Nifty 50. Since I felt I could no longer make recommendations. I joined a one office Canadian firm that specialized in Gold, Silver and resource based stocks including Oil. I caught both the top of the Securities Market on the short side as well as the bottom of the Gold and Silver Markets with the junior oils tossed in for good measure. I then had a heart attack and realized that I had enough money to retire to Florida and play Golf. Out of boredom, I started Uncommon Common Sense.

I now see a unique opportunity to combine both careers by first taking advantage of the upcoming stock market decline and Buying Gold and Silver and then by purchasing assets at bargain rates once the coming crash is over. To anyone taking an objective look at where we are now, it is clear that our Titanic is headed for an iceberg.    I won’t be establishing a track record because there has never been a bigger debt tsunami and this will be a one-time event.  I predict that taking refuge in the perceived safety of those who are successfully navigating the markets under current conditions will prove to be a very costly mistake.  When I listen to financial “experts” discussing corrections, buying opportunities and other various details of the markets, I can’t help but feel they aren’t considering the big picture.  The majority of the decline in 2008 took place on only 8 trading days and nearly sank our whole economy.  The primary culprit was too much debt and now we have even more and rapidly rising debt!  We may have engineered a very anemic recovery and new highs in the stock market, but we haven’t solved the underlying problem of too much debt.  Rather, we have made it much, much worse and that’s not even mentioning Derivatives in the Quadrillions.

I have positioned myself to take advantage of the descent from this historic debt peak.  Most people are not equipped to take an independent look at the current situation, so for those few who can, this is a giant opportunity.  Some of the smaller indexes fell by 70 or 80 percent in the 2007–09 stock market debacles. Specialized financial instruments that I plan to employ rose to many times higher during that decline.  This time should be worse, so the reward could be even greater.  I have a two-fold strategy:   First, we will take advantage of the upcoming stock market decline, by buying Reverse ETF’s actually increasing our asset values even as the market declines and of course by loading up on gold and silver.  Then, in one to three years, we will begin looking for worthy companies to buy or invest in.  Imagine how you would feel if you multiplied your capital during a major decline and then assets were selling for pennies on the dollar.  What an opportunity!

This is not an attempt at market timing. That is why I am not recommending buying Options. The world has never seen a debt bubble of this size, so this is a one- time challenge/opportunity.  Calling for the end of a mania is a difficult undertaking and this mania has proven to be longer lasting than anyone (including me) could have reasonably predicted.  What is important is that the longer this mania lasts, the more complacent many become, and the higher the risk becomes.  This explains why we have record numbers of Americans receiving food stamps at the same time that the stock market and investor optimism are setting new all time records highs.  Things aren’t OK, but we have propped up the markets for so long that people believe it will last forever.  It won’t.  Many warning lights are flashing red right now.  The sell-off since the beginning of the year looks ominous.  A year before the 1929 crash, interest rates started rising while commodity prices fell indicating a risk of deflation – or collapse in prices.  The same scenario is true today. 

One more point I would like to emphasize.  NOTE: Positioning ourselves in the market now to multiply our funds to use for investment at much lower levels will later provide an important boost to the economy when it needs it most.  Keeping cash strapped businesses operating will provide jobs and growth when both will be desperately needed.  Providing jobs after an economic calamity will go well beyond the huge investment returns I feel will be likely.  It will be an important support for our country.

Lastly, this is an amazing once in several centuries opportunity.   The amount of debt worldwide should give anyone cause for concern.  A portfolio of stocks, bonds, real estate or commodities will suffer across the board when all this debt we have built up begins to deflate.  You have to consider it to be at least an urgent and real possibility.  Investing in Gold and Silver and Buying Reverse ETF’s will serve as an insurance policy in a frightening period of unprecedented debt collapse.


There are multiple signs that the time may be right. For example, the Gold price recently broke through its 200-day moving average, which it hadn't done in a year. The price has rallied off a double bottom ($1,178) and broke through resistance at $1,275. Technically the yellow metal looks very good.  And finally, there are so many black swans circling that we really shouldn't call them black swans anymore. What caused the financial crash in 2007 has NOT been fixed, but merely papered over.

Take Greece for instance, which is on the verge of bailout number three. The Greek government has €11 billion in bonds coming due in May. The IMF is €3.8 billion behind in scheduled aid payments because it wants to understand the country's finances going forward. Good luck with that.  European Union analyst Andrew Cullen wrote in The Cotillion Observer that the current calm in the EU precedes a storm. He sees three events crashing into an overleveraged, over-exposed derivative banking system that if not fixed will lead to a huge crisis.  The European Central Bank (ECB) like the FED will soon be forced to buy assets from banks, flooding the banks with liquidity in order to allow them to then purchase more sovereign bonds in order to hold interest rates down. Failure of ECB bank stress tests will spur a recapitalization of the banks, causing a deep stock market correction to follow.

The recent emerging-markets turmoil was likely just a warm-up for what's brewing. And what's brewing may be good for precious metals, but not for the rest of the world that heretofore has been relying on ever increasing massive new injections of newly printed Fiat money. Forget about China, They are probably in the worst trouble of all, as they discover that their Socialist Capitalism must still follows the Economic laws of the Bible, which is FREE MARKET CAPITALISM

BEWARE THE IDES OF MARCH - The writing is on the wall

Mark my words: There isn't a snowball's chance in Hell that we will be spared the consequences of our leaders' incompetence and corruption.  Moreover, the crises that brought us to this economic judgment day are still with us; still growing and increasing in intensity.

In 2014 as in every other year in recent memory Washington's disastrous policies have lit the fuse on what will surely be a catastrophic collapse of the US dollar.  The Federal Reserve is continuing its mindless tinkering with the economy that has triggered violent swings in the economy and investment markets for the past 100 years.  Washington is continuing and intensifying its efforts to invade your privacy; spying on your computer, email and cell phone and also on where you go, what you do, who you meet and even what you say to them but most importantly, how much money you have and where you keep it.

The Obamacare catastrophe is driving health insurance costs through the roof while endangering many lives and families and pushing many insurance companies to the brink of bankruptcy. Washington's out-of-control spending and the exploding national debt are gutting the value of the US dollar, treasury bonds and many financial stocks. The world's governments and central banks are intensifying trade wars by slashing the value of their own currencies.  Despite the recent Fed-driven bull market in stocks, large brick-and-mortar retailers like J.C. Penney, Aeropostale Inc., Fresh Market Inc. and others have given up as much as 72.3% of their value due to Obamacare and the rising minimum wage. The Obamacare catastrophe has already negatively impacted major health insurance stocks with UnitedHealth Group Inc., WellPoint Inc., Humana and others plunging as much as 26.4% since just before the last election.

Obscene federal spending is already stifling the fledgling real estate recovery with higher mortgage rates, crushing the value of many mortgage stocks like Armour Residential REIT, Inc., American Campus Communities, Inc. and Digital Realty Trust, Inc. by as much as 41.6%.  Massive money printing by the US Federal Reserve is already undermining the buying power of the dollar, driving the price you pay for bread  up 6%, steak is up 17%, ground beef is up 21%, unleaded regular gasoline up 60% and more since the "Quantitative Easing" program began.  Washington's disastrous interventionist policies overseas are already placing a damper on trade in many parts of the globe, driving the stock of shipping companies like CAI International, Inc., Atlas Air Worldwide Holdings, Inc. and C.H. Robinson Worldwide down.

Don't Miss this Golden Opportunity!

Gold declined from $1,900 in September 2011 to $1,188 on December, 19, 2013. Silver declined from $48.50 to $18.50 during approximately the same time frame. Precious metal equities declined by approximately 70% over this period. This move down played out exactly as was scripted. However, let’s review the causes of this decline. We start out with the most important words ever written by a regulator: BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR. What are we to read into this, particularly the word “worse”? Obviously, worse than LIBOR, could not mean that more money was fraudulently earned since the LIBOR markets are many orders of magnitude larger than the precious metals markets. Then it could only mean that the egregiousness of the pricing dysfunction was materially larger in the precious metals than it was during Libor.

The chronology goes as follows:

  • November 27, 2013, BaFin announces an inquiry into precious metals manipulation on the London Bullion Market Association (LBMA).
  • Mid-December 2013, BaFin is reported to have seized documents from Deutsche Bank (DB).
  • January 17, 2014, BaFin announces that the manipulation is “worse” than LIBOR. On the same day, DB also announces its withdrawal from the LBMA Gold and Silver price fixings.

Let’s imagine how this played out. My guess is that BaFin, having reviewed DB’s trading practices, reported their findings to DB’s senior management. They are horrified at the findings (yah, right!!) and decide a retreat from LBMA is required. This seems logical.

Let’s now discuss why bank traders get involved in price manipulation. In the most simple of all analyses, they don’t do it for the bank, but they do it to fraudulently receive higher bonuses. Otherwise, why take such personal risk? If we assume that manipulation of precious metal prices was the reality, as a bonus seeking trader, when do you want the price to be the most favorable? The answer is: By year-end and mid-year periods, when bonuses are calculated.

Figure 1: Gold Price Bottoms at Mid-Year and Year-End

Source: Bloomberg, Sprott Asset Management LP

If we look at what happened in 2013, the two lowest Gold prices were on June 27th and December 19th (Figure 1): Perfectly obvious.

In 2013, the supply/demand data for Gold suggests that physical demand was overwhelmingly greater than mine supply (Figure 2).

Figure 2: World Gold Supply and Demand 2013, in Tones

It is obvious that precious metals markets were manipulated in 2013. It is also obvious that demand far exceeded annual mine supply. If Gold prices are back on their long-term trend, ex-manipulation, a linear progression of the Gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 3).

Figure 3 shows estimates of cash flow per share (CFPS) for different sized Gold miners under Gold prices at both $1,300 and a $2,000 per ounce. As you will note, the potential returns vary from 180% for the lumbering seniors to 420% for some of the smaller producers.

Figure 3: Upside Scenarios for Different Types of Gold Miners

Assumed Cash Flow multiple: 10.

All Figures in US dollars.

Estimates are for FY2014.

Source: Sprott Estimates and RBC Capital Markets. Eric Sprott and/or Sprott Asset Management Funds beneficially (directly or indirectly) may own in excess of 1% of one or more classes of the issued and outstanding securities of the above issuers). Are these gains likely to materialize? So far in 2014, the senior miners are up 27%, while the junior miners are up 42%. Not a bad year. But, we are only seven weeks into the year.

Gold and Silver have broken their downtrends and have surpassed their 200 day moving averages. The golden cross (i.e. the fifty day rising through the 200 day) still awaits, but it is most likely to happen within weeks.

When was the last time that an obvious reversal of an anomalous, yet explicable market dysfunction allowed you to imagine that you could expect multi-hundred per cent returns over a short time period? Don’t miss this Golden Opportunity!

HOW NOW DOW & GOLD                                                                              

As far as whether the bottom has been made or not, I hate to tell you that it’s still 50 – 50. Gold just like the Stock Market can and probably has one more sell off in Gold down to 1050-1100. Then it should be off to the races to $3000, while the DJII still has one more upside leap to 17,000 - 17,500. The turnaround will be fast and furious. The breakdown in the Stock Markets will rejuvenate the safe haven status of Gold and Silver. Percentage wise, Silver will outperform Gold.

I am sorry I cannot be more specific, but we are dealing with severely manipulated markets by desperate people. But the fundamentals are so strong that even all the king’s horses and the all king’s men cannot stop the inevitable for much longer from happening again (1980).  



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Aubie Baltin CFA, CTA, CFP, PhD.

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This letter/article, like all my others, is for education purposes only and is designed to help you make up your own mind; not for me to make it up for you. Although I include recommendations from time to time, being a bi-monthly publication, it is not meant to be a trading letter. Only you know your own personal circumstances, so only you can decide the best places to invest your money and the degree of risk that you are prepared to take.

Gold has been discovered on every continent on earth.

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