The S&P 500 ticked at all time new closing high on Friday. For the first time ever it closed with a 19 handle “big figure.”

http://themacrotourist.com/images/Azure/SPXMay2714.pngS&P 500 Index – new closing high!</a> </div>

What is interesting is that stocks are rallying in the midst of many market “experts” calling for a correction.

David Tepper: I’m nervous about the market

“We’re witnessing our second tech bubble in 15 years,” warned Greenlight Capital’s David Einhorn

“On almost any metric, the US equity market is historically quite expensive. A sceptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla Motors,” – Baupost Group’s Seth Klarman

I am not trying to pick on these hedge fund managers because I deeply respect all three tremendously. But I am just trying to point out how the “smart money” is most likely under invested for this latest move higher.

This is also evident from the weekly release of the CFTC positioning for futures contracts.

When you combine the large S&P 500 contract with the E-mini contract, the speculators made the following changes last week:

  • long positions decreased by 49k contracts
  • short positions increased by 67k contracts
  • there was net selling by speculators of 116k contracts

This is the chart of the net speculator position for the S&P 500 E-mini:

http://themacrotourist.com/images/Azure/ESSpecShortsMay2714.pngS&P 500 E-mini speculator net position</a> </div>

The previous time we had speculators this short was into the early year “trash crash.” But this latest selling has been into the face of a rising market.

Here is the same chart but with the S&P 500 plotted above:

http://themacrotourist.com/images/Azure/SPXSpecMay2714.pngS&P 500 above with speculator’s net positon below</a> </div></p>

The hedge funds and other speculators are selling into this rally. They don’t believe.

Now don’t get me wrong – I am by no means suggesting that this means you should be buying. I think the stock market is priced at levels that only 26 year olds with no memory of 2007/8 could be buying. (and for any 26 year olds that might be reading – take no offence – what I would give to be 26 years old again…)

I am merely pointing out that even though the market is being dragged into new highs, the “market pros” are not participating. Whether this means that the top will not be put in until they capitulate, I am not sure.

But there is a potential for a massive squeeze if for some reason these underinvested (and full on speculative shorts) decide to buy. I am merely glad that I gave up on my short positions earlier.


James Rickards’ book

Over the week-end I finished James Rickards’ book – The Death of Money: The Coming Collapse of the International Monetary System.

Although the title makes it sound like a tinfoil hat wearing hyperbolic gold bug fluff piece, there are actually some really great parts.

http://themacrotourist.com/images/Azure/tinfoilMay2714.png

Given the book’s title you would think the James asset allocation would be 50% gold and the other 50% guns, ammo and freeze dried food. However, when you cycle through his hyperbole, you end up with his conclusion that only 20% of your portfolio should be in precious metals.

But (and here is the point I would like to stress today), he insists that the metals be in physical form. James rightly points out that many of today’s precious metals derivatives have mechanisms built in that in times of stress will allow for the settlement of the derivative in the form of cash.

So far my long precious metals call has done nothing but cost me money. But I completely agree with Jim in that if you are going to own precious metals as a hedge, you should be buying products that do not run the risk of being arbitrarily cash settled.

Although buying physical metals and storing it somewhere secure is probably the best option, the next best alternative is to own closed end funds that are specifically designed to offer a physical ownership substitute.

For example there is the PHYS Sprott Physical Gold Trust that is designed to “Without exception, the Trust’s physical gold bullion is fully allocated and stored at a secure third party storage location in Canada. The physical gold bullion is subject to periodic inspection and audits. Unlike other bullion funds, the Trust does not have an unallocated account that is used to facilitate transfers of gold between financial institutions that act as authorized participants.” It is a particularly good idea for US investors as “For U.S. non-corporate investors who hold units for more than one year and make a timely Qualified Election Form (QEF) election, gains realized on the sale of the Trust’s units are currently taxed at the long-term capital gains rate of 15% (20% for higher income taxpayers), versus the maximum of 28% applied against most precious metals ETFs and physical gold coins.”

During the height of the gold bull market, this product was red hot and traded at a large premium to NAV. However, since gold has become an investment pariah, the premium has actually shrunk to a discount. Here is the chart of the premium/discount to NAV:

http://themacrotourist.com/images/Azure/PHYSMay2714.pngPHYS price with premium/discount to NAV on bottom panel</a> </div>

For me, buying PHYS instead of GLD is a no brainer.

But I actually prefer another trust that has been around much longer than the Sprott product. For my long term retirement accounts I own Central Fund of Canada. This product owns both gold and silver. The discount to NAV is even larger for this product as it doesn’t have the same marketing push as the Sprott Fund:

http://themacrotourist.com/images/Azure/CEFMay2614.png

By buying CEF you can effectively own physical gold and silver at a 5% discount to spot.

I know that it seems like precious metals will continue going down forever (as I write this they are once again getting shellacked) , but some day this whole money printing science experiment is going to go awry. You want to make sure you own a product that does not limit your upside.

I fully expect that at some point in the next decade we will have a delivery issue in the precious metals square. Many contracts will be forced to settle for cash. Products like the Sprott Physical Gold Trust and Central Fund of Canada will find themselves on the receiving end of huge inflows as investors scramble for “safe product.” It would not surprise me at all if these funds at some point go to a 100% premium to NAV.

I know this a bold prediction, so I am going to take the chicken way out and couch that with the caveat that in terms of timing; I have absolutely no clue. All I know is that when they are giving away these funds at discounts, you should be slowly accumulating – not selling.


Positions

http://themacrotourist.com/images/Azure/PositionsMay2714.png</p>