Why GLD Is Bad and GOLD Is Good

Friends, here is why the GLD fund aka ETF is the worst investment if you like GOLD.

gold2confetti

1.  GLD Is Paper Gold

GLD is actually the SPDR Gold Trust Electronic Traded Fund.  It is a promissory note for GOLD.  It is backed by physical gold but the real ratio is controversial.  See

http://www.forbes.com/sites/afontevecchia/2011/11/15/is-gld-really-as-good-as-gold/#7b10e4f93ca1

2.  GLD Is Supported By The Fed Which Wants the US Dollar High and Gold Low

In a previous post, I discussed how the US Dollar and GOLD move in opposite directions.

In that post, I explained that the Federal Reserve wants to keep the dollar high so to do that, it depresses GOLD prices by encouraging the sales of paper GOLD.  See

https://michaelekelley.com/2015/07/20/dear-fed-plz-raise-gold-price/

3.  GLD is a CDO aka Tranche

Remember the Great Recession of 2008?  It was brought on by CDOs and tranches based on bundled mortgages.  GLD is a tranche aka a bundle of paper gold.

Statistics prove that 13% of CDOs before the Great Recession were sold to multiple buyers.  It is like selling an acre of land in Florida multiple times.

https://michaelekelley.com/2015/01/28/remember-cdos-theyre-baaaack/

4.  Paper Gold is rumored to be oversold by 200 times

You need to read this.

http://www.zerohedge.com/news/2015-11-30/paper-gold-dilution-hits-294x-comex-registered-gold-drops-new-all-time-low

5.  GLD Has Lagged Gold Mining Stocks Year To Date

NEM, a gold mining stock, is up 34% from 01/01/2016 to 2/5/2016.

Meanwhile GLD is up only 10% from 01/01/2016 to 2/5/2016.

That is probably because investment companies are avoiding GLD.  So NEM is a GOOD investment right now not GLD.

 

Here are Solutions when a Recession Comes

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

 

Here is Some More Information

Lessons From How The Great Recession Happened and What A CDO Is

http://www.ase.tufts.edu/gdae/Pubs/te/MAC/2e/MAC_2e_Chapter_15.pdf

Good luck!

PS  I own NEM and care about you but I cannot be held responsible for your decisions.

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The Kelley Monetary Policy Rule

Everybody hates rules but this is a breakthrough policy to free the fearful Fed.

fear

Background

The Federal Reserve Board (Fed) has held the Fed Funds Rate (the interest rate the Fed charges banks) below 1 percent for 7 years.  That is unprecedented.   The Fed originally lowered the Fed Funds Rate to 0.25% to counteract the last Great Recession.

When the Fed lowered its primary interest rate, it also started Quantitative Easing (QE) by buying securities in order to pump money into the economy to stimulate it.  Now the Fed has stopped buying securities via QE.

Today

The next step according to the standard Fed playbook is to raise the Fed Funds Rate, completing the unwinding of the previous actions.

Unfortunately the Fed Funds Rate has not risen to normal levels because the Fed is afraid to hurt the economy.

What Is Normal?

https://michaelekelley.com/2015/02/11/fed-inflation-target-is-abnormal/

According to the above website, if the Fed wanted the Inflation Target to be 2%, then the Fed Fund Rate should be 2% plus 1.44% or 3.44%.  Then 3.44% should be the normal Fed Funds Rate.

What Are The Fed’s Options?

How does the Fed get back up to the normal 3.44% Fed Funds Rate?  It can do one of these:

1.  Reverse QE by selling securities OR

2. Set the long-term interest rate to set a goal OR

3. Simultaneously raise the Fed Fund Rate AND offer another round of QE.

Ideally, the Fed should have raised the Fed Funds Rate while phasing out QE from 2011 to 2014.

The best is option 3 which has the most influence and least fear.

But How Fast?

A return to normal Fed Funds Rate involves small baby steps in a gradually higher Fed Funds Rate while offering a phased out QE.

If the Fed only raised the rate .25% each quarter, it would take 13 quarters or over 3 years to get to 3.50%.

Kelley Monetary Policy Rule

The Taylor Rule involves raising the Fed Funds Rate 1 percent for each 1 percent in inflation.  We have no inflation so the Taylor Rule is of no help.  The Kelley Monetary Policy Rule states the Fed Funds Rate will be increased gradually and QE will be reduced gradually to zero at a rate inversely proportional to the Fed Funds Rate.

This should eliminate any fear by the Fed or the financial market and get us back to normal.

Good luck.

Why Another Recession Is Coming – In English

Friends, here is a tutorial on how we got here and how to prepare for the worst.

ssminnow
Easy Money

The Federal Reserve (Fed) offered Quantitative Easing (QE) 3 times.  At first it saved the big banks and the stock market started going up.  But then the Fed kept giving out easy money to the big banks.

Leveraged Loans and Junk Bonds

The banks, that received the QE money, issued junk bonds and leveraged loans that were used for debt creation not real products and services.  Specifically QE went to Mergers and Acquisitions (M & A) and oil investments.  Here is an example.

Richard Baker, chief executive, along with his investment firm, NRDC Equity Partners, relied heavily on borrowed [leveraged loan] money. Of the $1.2 billion that it paid for Lord & Taylor, only $25 million [2%] came in the form of equity, with the remainder made up of debt financing. [The New York Times]

Do you think any of us could buy a house with 2% down? Nope.

New Bubbles

For 2014, three things happened.  The dollar reached a new record high, the Dow Jones hit a record 32 times and leveraged loans went back to 2008 pre-recession levels.  Some economists are calling this a bubble.  Here is a chart to prove it.

See https://michaelekelley.com/2014/12/20/leveraged-loans-predict-crash/

Some Good News

The good news is the stock market is up, gas prices are low and unemployment is back to 2003 levels.

But the Economy Struggles

The economy is struggling for several reasons.  First, the easy money went into debt rather than real products which creates jobs.  Secondly, very little money went into infrastructure which also creates jobs.

And Wage Inequality Is Greater Than Ever

The CEO to worker compensation ratio is 296 to 1 today versus 20 to 1 in 1965.   The rich have gotten richer.  Unfortunately the upper class does not change its spending patterns.  Several studies have proved this despite what politicians say.

So the economy has stalled even though the stock market is up.  Only the middle and upper classes have money to invest in the rising stock market.

Oil Price Drops and Leveraged Loan Bubble Bursts

Oil prices have dropped because of excess supply and over-leveraged oil investors.  For more information see this easy to understand website.

http://wolfstreet.com/2014/12/07/bloodbath-in-oil-patch-junk-bonds-leveraged-loans-defaults/

Solutions for the Federal Reserve and Congress

Here are some solutions because blogs should offer solutions rather than just complain about our problems.

There is still time for the Federal Reserve to pump up the economy by providing funding specifically for infrastructure which will create jobs and kick start the economy.  Also Congress, or better yet, each state can raise the minimum wage.  The economy will only take off if new jobs are created or lower class or middle class people get pay raises.

Here is a list of 7 suggestions that will not soak the rich.

http://www.marketwatch.com/story/7-ways-to-help-the-middle-class-without-soaking-the-rich-2015-02-05?page=1

But if the government drags its feet or does more of the same Quantitative Easing, here is what you can do to prepare for the worst.

Solutions for the Rest of Us

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Lessons From How The Great Recession Happened and What A CDO Is

http://www.ase.tufts.edu/gdae/Pubs/te/MAC/2e/MAC_2e_Chapter_15.pdf

Good luck!