We'll have a Q&A session today, covering everything from precious metals to reserve banking to the derivatives markets.
Let's start with a very interesting question about gold and silver.
Q: Advisors frequently tell us not to be invested in gold/silver exchange traded funds (ETFs) as they could collapse and leave the investor with nothing but paper. Can that happen when one is invested in ETFs which are backed 98% by gold and/or silver bullion, such as the Sprott Physical Gold and Silver funds)? ~ Virginia R.
A: As long as ETFs are holding physical gold or silver, and essentially issuing certificates of pro-rata ownership in the form of stock, then there's nothing to worry about in terms of them collapsing. That's because the metal is there. Exchange traded notes (ETNs), however, are another matter. The structure of ETNs is complicated, and theoretically they are a much dicier proposition. When I look at an ETN, I look primarily at the "credit" and reputation of who is backing it.
Q: When will MF Global's principals be brought to justice? ~ Jerry
A: Probably sometime in January because, as the saying goes, it will be a cold day in Hell before that happens. But, seriously, I'd be more than surprised to see justice done here. The power of the protected class just seems to be impenetrable. Should Jon Corzine be in jail? Yes, he should.
Let's keep on going...
Q: The best advice you ever gave me was to read The Creature from Jekyll Island by G. Edward Griffin. But, here is my question - can you tell me and confirm it, absolutely? Is the Reserve Bank of Australia also owned by the Cartel? I've tried doing research on the Internet. Obviously, I've been to the Australian Reserve Bank's website, I noted that its "objectives" are exactly the same as those of the US Federal Reserve. But I cannot find any absolute confirmation that the Reserve Bank of Australia is definitely owned by the Cartel. I would be very interested to know. This information would certainly solve a healthy family argument - especially if you could find and post the proof! Thank you once again for all of your insights. ~ Carolyn
A: I'm glad you read the book. It should be required reading for everyone in the United States. As far as the Reserve Bank of Australia, they are not "owned by the Cartel." However, all central banks operate under the same principles as the Federal Reserve. And, as you know from The Creature, the Fed was fashioned directly on the Bank of England model. As my dear mother used to say, in her Scottish accent, "They're all tarred with the same brush." It's only too bad we don't tar and feather such rascals any more.
Q: Doesn't the Board of Directors have any fiduciary responsibilities - responsibilities that would make them culpable for the misdeeds they permit in some of these companies? I mean, where does the responsibility begin and end, where does character and integrity mean something? How about a law that says the Board meetings must be open to the public, after a reasonable specified time, so that they can't hide what goes on. I would think that at least the stockholders should have that right! I'm tired of the Good Ol' Boy Network screwing the rest of us! ~ John P.
A: Yes, the Board has a fiduciary responsibility to shareholders. It has tons of responsibilities in every which way. And yes, they are culpable. Only they have Directors' & Officers' (D&O) liability insurance, paid for by themselves. So, when they are guilty of gross negligence - which is what they are actually guilty of and which is not insurable - which they pass off as Management's mistakes and wrongdoing, they are covered, every which way. I agree with you. Board meetings should be made public. Why not? Oh, that would be to protect the insurance companies who insure the board from getting sued for their gross negligence. These issues, the problems that I call out, the ones that everyone sees as obvious, are all part of the problem. But they can be fixed with simple measures, such as demanding meetings to be transparent. But, once again, the protected class is never going to give up their positions - or their protections.
Q: It looks like the banks will steal 40% of all uninsured deposits in Cyprus, after having tried to even steal money from small insured depositors. I don't understand this. Since the European Central Bank creates money out of thin air, why do they need to steal money from depositors? ~ Jerry C.
A: That's a great question. Besides maybe sticking it to Russians outside the European Union, the move was a trial balloon. It was a blunt instrument delivering a blunt message: You, the public depositors, as well as creditors and equity investors in banks, had better start looking at the institutions you put your money into. Because We, the Germans, are tired of bailing out our EU neighbors - who can't support their own house of cards.
In another sense the message is We, the European Central Bank, are actually a house of cards and We can't do this bailout thing ad infinitum... so, we're advocating "bail-ins," where we will make you all part of the solution - since you all haven't figured out that we are the problem. In other words, the ECB and the EU are now incorporating innocent depositors in their backing of insolvent banks, being propped up by lies and extend and pretend games. It's the rhetoric of failure.
Q: Shah, how far below the current price of a stock do you put stops? ~ Jimatl
A: There is no one-size-fits-all answer to that question. It depends on where I get in, what my expectations are for the stock, and what might happen to change those expectations. If nothing changes and I want to have an exit point once I enter a position, I use technical analysis. Again, depending on the stock, its inherent volatility characteristics, and under what circumstances I'm buying the stock, I would look for initial support levels, and if they aren't too close to where I get in I usually (but not always) want to give the position some room-to-move. That's what I use volatility measures for. I would place a stop-loss order maybe one to two percent (of the stock's entry price) below that support.
Support levels are often "tested," so I don't want to get shaken out if traders probe that level. Support levels are widely watched and sometimes traders (I used to do it all the time myself in my hedge funds) will test those levels. If I saw a thin support level on a volatile stock that I didn't like, I'd short it down through support by hitting bids to knock it down, and see if I could break support. If I triggered a lot of stops and the stock fell, I'd win big. Don't hate me for being honest. That's what traders - with a lot of capital to play that game - do. That's also why there is no one right way to figure your stops. Because traders will probe to hit stops at support levels, I go below them, so as to not get gamed by the professionals doing their job, trying to make money.
Q: I'm an enthusiastic reader and I enjoy your wisdom - especially when you uncover Wall Street's crimes. I have two questions for your consideration. ~ Ted M.
- Will there ever be any criminal charges coming from the billions of dollar bankers have ripped off?
- Please explain to us just what are the "derivative" instruments - I understand they are in the trillions of dollars - floating around the world markets.
A: No! Sorry.
A: They are mostly credit default swaps, which are supposed to be customized hedging instruments on positions, real and synthetic (meaning made-up stuff) - basically anything you want to hedge against.
But in fact CDS are not just for hedging; they are the ultimate customizable instrument for speculation in... are you ready...anything. As in anything you want to speculate in. A bank will always take the other side of your trade, on pretty much anything you want to tee-up. That's because they can, and almost always do, sell the position you think they are taking from you to someone else - who they dupe into believing it's a good position - for a fee, of course. But most of the time banks make up the positions themselves and sell them like arms merchants selling nukes to North Korea. If it keeps on raining... the levee's going to break.
That's all for today, folks. Keep the questions coming, please.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.