Commodity Trade Mantra

Financial Forecast: Six signs that 2016 will be much worse than 2015

Financial Forecast: Six signs that 2016 will be much worse than 2015

Financial Forecast: Six signs that 2016 will be much worse than 2015

Over the course of 2015 we witnessed several events that had, and will have, negative repercussions on our individual freedom. Orwellian totalitarianism is increasingly creeping into our everyday lives. How much more intrusive will the violations of our liberties get and for how long will the establishment get away with it? These are questions that remain unanswered. With regards to the financial system, no real solution was found to issues such as those in the Eurozone. Furthermore, the financial systems as a whole, once again, got deeper into debt. For how much longer can central banks and governments continue kicking the can down the road without any real reform? I will answer these questions and identify trends for 2016 by looking at six key issues that have had an impact this year.

  1. Geopolitical developments

We witnessed some troubling geopolitical developments during this past year. From the continuing conflict between Russia and Ukraine, territorial disputes between Japan and China, the escalating proxy war in Syria, the refugee crisis in Europe, the rise of religious tensions all over world to the rise of the Islamic State, the world has become increasingly unstable.

Going into the details of these conflicts is definitely beyond the scope of this article, but the fact is that we are witnessing several developments, all of which have the potential for a wide-scale escalation. From the perspective of the West, conflicts and wars in the past decades were for the most part, far away. Only now do we realize that this will change as we have already started to see in 2015. The times of conventional warfare, where two armies meet on the battlefront, is over. Future conflicts and wars will be fought closer to home. We should get ready for a period of increased instability, particularly when it comes to politics and security issues.

  1. Totalitarianism is on the rise

The sudden rise of ISIS and its affiliates is a disturbing development that produced mixed feelings, such as fear, rage and sadness amongst many more. Ultimately, they lead to the same result: States seeking more control by curbing individual liberties. One example we see is how, under the guise of fighting terrorism and illicit activities, Western countries are limiting the use of cash. JP Morgan has placed restrictions on the amount of cash that is allowed to be deposited and several European countries have banned large transactions in cash. Looking to the future, it seems that the current situation will continue to get worse and that we are headed towards an Orwellian state, under which no one is entitled to his financial privacy anymore.

Another hot-button issue is gun control. Since it became known that the San Bernardino shooting and the Paris attacks were apparently carried out with legally obtained arms, there have been increased calls for massive restrictions on private gun ownership. Disarming the masses is a necessity to control them and that is exactly what our governments are gradually doing.

“The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in Government” – Thomas Jefferson.

On the EU level, a disturbing development is the fact that FRONTEX (the EU agency responsible for border management) has stated that, should the refugee crisis get out of hand, it will intervene to secure the EU borders, even if the respective countries oppose its action. On a global level, the Transatlantic Trade and Investment Partnership (TTIP) says that arbitration courts will have the potential to annul national sovereignty when it comes to jurisprudence. We expect these tendencies of centralization to continue.

  1. Greece is “saved” and coming to a country near you?

In the beginning of this year, the topic of a potential “Grexit” dominated news cycles over several weeks. It seemed like a realistic possibility that Greece might leave the Eurozone. Instead, after yet another one billion Euro bailout package, Greece was “saved” and a “Grexit” was off the table (for the time being). Once again, political idiocy prevailed over economic rationale. In the end, delaying the inevitable failure of the Greek financial system is all that was achieved.

More astonishing than the fact that Greece, a country that represents less than one third of one percent of the world GDP, received another bailout package, was how it all played out. A bank holiday was announced, capital controls were implemented, cash withdrawals were massively restricted, the stock market closed and any assets inside the banking system (even safety deposit boxes) were not accessible by their owners. This is an unprecedented level of infringement on private ownership that has never been seen in a modern Western country.

  1. Fed hikes interest rate

The Fed hikes interest rates for the first time since the financial crisis of 2008. For the past 7 years we have had an interest rate band between 0-0.25%, which essentially is “money for nothing”. With its decision, the Fed became the first large (and the leading) central bank to effectively hike interest rates. Meanwhile, on the other side of the Atlantic, the ECB cut its deposit rate (slightly) deeper into negative territory and prolonged its QE program that is now expected to continue until March 2017. Since last summer, the media continuously speculated about a rate hike and its timing. So, will interest rates start to normalize after the long-awaited change in monetary policy? We don’t think so! We believe that the main reason the Fed decided to hike rates was to regain some of its lost credibility. For the past seven years the monetary floodgates have been open with no clear positive effect on the real economy. A continuation of zero interest rate policy (ZIRP) would have been an admittance of failure. With this slight rate hike of 25bps, the Fed is trying to show the world that its policy during the financial crisis worked.

We all know that the economy in the US is not as healthy as the Fed would like us to believe. When we throw in the potential explosive impact the failing shale industry could have on the economy and the strong dollar, that is likely to increase due to this interest rate move, we doubt that this move by the Fed is the turning point and that the Fed will continue hiking rates as it has done previously in such cycles. The Fed raised interest rates because it had to, but don’t expect the monetary shenanigans to be over. There is a lot more to come!

  1. Defaults surge as global debt explodes

2015 has seen the greatest number of corporate defaults since the financial crisis. Many of the companies that are defaulting are from the energy and materials sector. Why? It is the logical outcome of the excessive borrowing by corporations who were misled by close-to-zero interest rates. And, of course, we cannot forget the boom in the shale industry. With a barrel of oil costing over USD100, shale oil was a very interesting investment. Now with oil hitting rock bottom, some oil producers are operating at a loss and only continue operations to be able to make their interest payments. Standard & Poor’s rating of junk or speculative corporate bonds has gone up to 50% from a previous 40%. Unfortunately, the world did not learn its lesson after the financial crisis and instead of deleveraging, it has accumulated more and more debt, as seen in the chart below. Of course, it’s not only the corporations; governments have not learned their lesson either.

Source: Bank of America Merrill Lynch

The issue of debt will continue to follow us for some time to come; the house of cards will eventually collapse, but we think that politicians and central bankers have the will to “do whatever it takes” to prolong its eventual demise. What we will likely see in 2016, however, is a massive increase in defaults. Yields for high-yield issuers are already at alarming levels. What exactly will be responsible for the next crisis is hard to foresee. It might come from the possible collapse of the shale industry, the strengthening dollar that will make it very hard for emerging market countries to repay their debts, or a completely unexpected sector (who knew what subprime was back in 2006?).

  1. Oil price collapse

Crude oil prices fell to their lowest levels in nearly 11 years, as crude oil nearly reached USD35 per barrel. The price of oil has been on a continuous downward trend and has declined nearly 70% since the summer of 2014. From our perspective, the main factor that led to this decline is the US shale oil “revolution”. It was truly a revolution when one considers that the boom in shale oil production allowed the US to surpass Saudi Arabia, the world’s largest oil producer. Meanwhile, OPEC hasn’t changed its stance as it insists on maintaining its strategy to increase market share, even if this comes at the expense of oil prices plunging.

I am not an expert on oil and therefore it’s not my place to provide predictions regarding where the oil price is heading, but I would rather want to discuss the impact of the oil price movement. First, a collapse of the oil price, the commodity that is widely used in the industry, has historically always been a herald of recessionary tendencies. In my view, the oil price clearly signals that the economy is not as healthy as is portrayed by the mainstream media. Second, the continued failure of companies in the shale industry has the potential to bring on a crisis that would dwarf the previous financial crisis. Last, but definitely not least, is the question of how oil exporters, such as Saudi Arabia, will finance their budgets when oil revenues massively decrease and they are no longer able to “buy” their population’s silence with gifts.

So how can we position ourselves in such an environment?

The outlook for the future looks bleak: continuously growing debt, looming defaults on a major scale and geopolitical tensions. So, how can we best position ourselves?

In times like these, where it is almost impossible to predict even the near future, we seek security. Holding precious metals like gold and silver is a claim to wealth and value. It gives their owner independence and protection from the whims of governments. Given recent events in Greece, we learn that gold and silver are only a safe investment as long as you have full control over it and can access it at any time. Holding gold outside the banking system is therefore, in my view, essential.

Those who know me know that I am Swiss and rather biased towards my home country. To me, Switzerland strikes the perfect balance between international neutrality with a history of a safe and stable political landscape, and an environment that encourages investment and guarantees private ownership rights.

 

 

Submitted by: Claudio Grass

The U.S. Exports More Gold To Hong Kong Than It Produces

The U.S. Exports More Gold To Hong Kong Than It Produces

The U.S. Exports More Gold To Hong Kong Than It Produces

As the Federal Reserve continues to prop up the highly leveraged debt based financial industry, the flow of U.S. gold heading East picked up significantly.  According to the USGS most recently released survey, Hong Kong received 56% of total U.S. gold bullion exports in September.

Actually, U.S. gold bullion shipments to Hong Kong were so large they exceeded its total domestic mine supply in September:

U.S.-Gold-Exports-To-Hong-Kong-vs-Mine-Supply-SEP-2015

As we can see, the U.S. exported 19.3 metric tons (mt) of bullion to Hong Kong, while its total domestic mine supply was only 18.7 mt.  The other top sources of U.S. gold exports were:

Switzerland = 11.4 mt

United Kingdom = 6.9 mt

India = 5.7 mt

U.A.E = 1 mt

Not all of U.S. gold shipments were in bullion form, some were exported as dore bars.  Dore bars are semi-pure bars poured at the mines requiring additional refinement.  India received 5.6 mt of gold dore bars from the U.S. while Switzerland imported 4.3 mt and the U.A.E, almost one metric ton.

That being said, the U.S. continues to export more gold than it imports or produces from domestic mines.  For the first nine months of the year, the U.S. suffered a 24 mt deficit as it exported 380 mt of gold versus 155 mt from its domestic mine supply and 201 mt it received in gold imports:

U.S.-Gold-Exports-vs-Imports-&-Mine-Supply

Not only the U.S. exported more gold than it produces, Australia is doing the very same thing.  Of the 214 mt of gold exported from Australia during the first nine months of the year, China (and Hong Kong) received 136 mt or 64% of the total.  Total Australian gold exports went to the following countries:

Australian Gold Exports (Jan-Sep 2015):

China  = 136 mt

Singapore = 34.7 mt

India = 15.4

Thailand = 12.2 mt

United Kingdom = 6.4 mt

Total Australian mine supply during this period was only 205.2 mt (source: Australian Government Resources & Energy Quarterly Report).  Even though Australia does import gold, here is another example of a Western country exported 100%+ of its domestic mine supply to the East.

Why is this interesting?  Because two of the top four gold producing countries in the world exported the majority of their gold supply.  Let’s look at the top four gold producing countries below (wikipedia):

Top 4 Gold Producing Countries 2014:

China = 450 mt

Australia = 270 mt

Russia = 245 mt

United States = 211 mt

We know that all of China’s gold mine supply stays in the country, so does the majority of Russia’s.  However, Australia and the United States exports the majority of their domestic mine supply.  Which means, the East continues to trade worthless fiat money or U.S. Treasuries for gold while the West manufactures more paper derivatives and debt.

Unfortunately, this is not a sustainable financial or economic business model for the West.  While precious metal investors are frustrated by the low paper price of gold and silver, there is light at the end of the tunnel.  I explain this in a recent interview with Crush The Street.  If you have not watched the interview below, I highly recommend it.

 

 

Courtesy: SRSroccoreport

China’s Money Supply Could Indicate Additional Room for Gold Demand

China’s Money Supply Could Indicate Additional Room for Gold Demand

China’s Money Supply Could Indicate Additional Room for Gold Demand

Strengths

  • Palladium followed by platinum was the best performing precious metals this week, up 2.87 percent and 2.23 percent, respectively.  The platinum group metals responded positively to news that automobile demand continues to be strong globally, boosting platinum and palladium prices. The European Automobile Manufacturers Association reported over 1 million more car listings in November. The number of vehicle sales in China rose nearly 20 percent.
  • It seems that bullish gold investors may be able to breathe a little easier after the Fed finally made its decision to raise rates 25 basis points earlier this week. Bob Haberkorn, a senior market strategist at RJO Futures in Chicago, commented that sentiment has shifted, and traders are seeing less downside potential in the gold price.
  • Goldcorp CEO Chuck Jeannes also said that he thinks the increase in rates will be a net benefit for the gold mining company, now that the uncertainty around the Fed’s action is behind us.  Newsletter writer Dennis Garman was interviewed by ETF.com and he opined that we have likely seen the low in gold prices now.

Weaknesses

  • With the hike in interest rates and the ensuing strength in the dollar the next day, it is not too much of a surprise that gold came in at the bottom in terms of price performance this week.  What is nice is that this is the third Fed meeting in row that gold was stronger on the day of the announcement.  Absent was the manipulative middle of night plus $1 billion dumping trades of gold bullion to push gold down on the Fed meeting dates.  Fortunately for the perpetrators, the regulators were asleep.
  • More rate hikes could be on the way, warn some analysts. Macquarie analyst Matthew Turner said that if the economy continues to strengthen after this rate increase, then the Fed may go ahead with further tightening. Historically, gold doesn’t perform well in periods of tightening monetary policy with rising real interest rates.
  • Gold is headed for the third annual loss, according to BloombergBusiness. Societe Generale’s Alain Bokobza said bullion will likely drop to $955 per ounce by the end of the year.

Opportunities

  • Klondex Mines announced this week its acquisition of the Rice Lake Mine near Bissett, Manitoba. For the total purchase price of $32 million, Klondex is acquiring a fully operational mine, mill and fleet of equipment that was recently put on care and maintenance as the property went into receivership earlier in the year.  Over $375 million of capital improvements have been made on the property since 2007 and the mobile equipment fleet was appraised at close to $20 million. Klondex plans to calculate a new resource for the operation and design a new mine plan for developing the ore in a profitable manner.  It will likely be fourth quarter of 2016 before they start production back up.  In our opinion, the prior operator had oversized the mill and dropped the cutoff grade to try and grow the number of ounces produced.  To accomplish this they also got overextended on the debt side.   Klondex has a great opportunity here to do the proper work and right size the operation so it can be profitable.  Klondex Mines still offers investors an attractive opportunity to participate in the turnaround of Rice Lake.
  • According to research from Cornerstone Macro, the dollar has historically appreciated before the first hike and typically has depreciated afterwards. If the historical pattern is any indication, the dollar will not strengthen further as many of the flapping mouth airheads have pontificated, of course without looking at the facts.
  • China’s money supply far exceeds that of other developed nations. Bloomberg Intelligence noted this presumed spending power seems to indicate that China still has plenty of room for additional gold demand.

Threats

  • Commodity headwinds continue, as the Bloomberg Commodity Index closed at the lowest level in 16 years on Monday. The slowing commodities demand from China continues to affect the diversified mining companies, as China shifts to a service-driven economy.
  • Former U.S. Treasury Secretary Lawrence Summers and economist Nouriel Roubini said earlier this week that the Fed policymakers may be making a mistake if the rate hike was premature. There is still much uncertainty in the global markets about the prospects of growth and stalling growth rates in the U.S.
  • Deutsche Bank views gold miners as a possible hedge against global uncertainty. DB notes that the combination of deficit spending, poor merger & acquisition decisions and the China commodity demand slowdown have resulted in “toxic” levels for balance sheets. Markets have been watching these disturbing credit conditions, as Goldman Sachs noted that “U.S. corporate credit quality has deteriorated to the weakest level in a decade.” In this environment, DB favors a defensive posture in companies with stronger balance sheets and non-integrated names.

 

 

Courtesy: Frank Holmes

Why Did The U.S. Silver Market Break From Its Normal Market Dynamics

Something Broke In The U.S. Silver Market

Something Broke In The U.S. Silver Market

After looking over all the figures, it seems as if something broke in the U.S. Silver Market this year.  By that, I mean the normal supply and demand forces no longer make sense.  I believe this stemmed from the massive amount of physical silver investment demand beginning in June as financial and geopolitical events pushed the retail silver market into severe shortages.

To start off, the United States has been the largest importer of silver in the world for many years.  Even though India has imported more silver recently, its annual amount has fluctuated widely, while the U.S. has been more consistent.

For example the U.S. silver imports have ranged between 4,500-6,000 metric tons (mt) a year, while India imported between 2,000-7,000 mt.  Overall, the U.S. is the clear winner by importing a total of 39,500 mt of silver from 2007 to 2014, while India totaled 31,700 mt.

To put these metric ton figures into perspective… look below:

Total U.S. Silver Imports 2007-2014 = 1.27 billion oz

Total India Silver Imports 2007-2014 = 1.02 billion oz

The reason the U.S. imports so much silver is due to its large industrial silver manufacturing industry.  Here were the top five industrial silver fabricators in 2014, according to the 2015 World Silver Survey:

China = 5,788 mt

U.S. = 3,902 mt

India = 1,470 mt

Germany = 652 mt

S. Korea = 652 mt

While China is the largest industrial silver fabricator in the world, it also produces a lot more domestic silver than the U.S.  In 2014, China produced 3,568 mt of silver, while U.S domestic mine supply was only 1,169…. three times less.  So, the U.S. must import more silver than China to meet its total fabrication needs. 

Furthermore, the U.S. Mint has been producing more Silver Eagles each year, which requires additional imports of the metal.  Now, with that basic ground work, let’s look at why the U.S. Silver Market dynamics were altered this year.

Something Changed In The U.S. Silver Market

As I mentioned in several articles, U.S. silver imports surged at the beginning of the year.  This continued with another whopping 533 mt of silver imported in September for a total of 4,476 mt for the first three-quarters of the year:

U.S.-Silver-Imports-Q1-Q3-2014-vs-2015

Thus, total U.S. silver imports are up 798 mt from the 3,678 mt imported last year during the same time period.  Which means, the U.S. imported an extra 25.6 million oz (Moz) of silver this year over last.  That’s a lot of silver.

NOTE:  These U.S. silver imports are bullion and dore bars.  Silver bullion is high quality bullion ready to be used as investment or fabrication, while dore bars are semi-pure bars poured at the mines needing further refinement.

Why all this extra silver?  Was it due to industrial demand?  Well, let’s take a look.  These next two charts show the change in U.S. industrial silver imports and exports (Q1-Q3) compared to last year:

U.S.-Industrial-Silver-Imports-2014-vs-2015

According to the USGS, the U.S. imported more silver waste silver scrap (4,710 mt vs 3,690 mt), semi manufactured forms (795 mt vs 252 mt) and powdered silver (664 mt vs 436 mt) in the first three-quarters of 2014 compared to 2015.  The total silver imports of these three industrial categories was 29% lower this year compared to 2014.

Okay, how about U.S. industrial silver exports:

U.S.-Industrial-Silver-Exports-2014-vs-2015

Here we can see the same trend.  The U.S. exported less silver waste scrap, semi manufactured forms and silver powder this year to date compared to the same period in 2014.

NOTE:  There are two other categories of industrial silver imports-exports, however I did not include them as their total figures were much smaller than the three listed above.   In addition, even though total U.S. silver waste scrap tonnage is significant (11,000 mt ytd), it turns out to be only worth 33 cents an ounce.

Now, if we take the net change for Q1-Q3 2014 vs 2015, this is the result:

U.S.-Silver-Market-Dynamics-2014-vs-2015

As we can see in the chart above, the U.S. imported 798 mt of silver bullion and dore bars Q1-Q3 compared to last year, but industrial silver imports (silver powder & semi manufactured forms) were down an astonishing 771 mt and industrial silver exports were down 353 mt.

When I made the chart above, I only included the two fabricated silver components of semi manufactured forms and silver powder.  So, as total silver imports surged, industrial silver imports plummeted while industrial silver exports declined significantly.

Again, why did the U.S. import so much more silver this year if industrial silver supply and demand were down considerably compared to last year.  If U.S. silver imports continue to be strong for the remainder of the year, it could reach over 6,000 mt.  The last time the U.S. imported that much silver was in 2011.

I went back and looked at the data for 2011 and found some surprising results.  If we compare U.S. silver supply and demand for the first three-quarters of 2015 vs 2011, this is the outcome:

U.S.-Silver-Market-Dynamics-2011-vs-2015

Even though the U.S. imported 284 mt more silver bullion and dore bars during the first three-quarters of 2011 than during the same period this year, industrial silver imports were 161 mt higher and industrial exports a staggering 1,150 mt larger.  So, it made sense for the U.S. to import 6,300 mt of silver in 2011.

However, this wasn’t the case this year.  So, again… where did this silver go?  Maybe some of it went into the surging physical investment demand.  If we look at the next chart, we can see that U.S. Silver Eagle sales hit a record 47 Moz this year:

Silver-Eagle-Sales-vs-Avg-Annual-Price

While total Silver Eagle sales were 7 Moz higher this year versus 2011, the Comex silver inventories also fell from a high of 184 Moz in the beginning of July down to 158 Moz currently:

COMEX-Silver-Inventories-DEC-18-2015

To sum this all up, the U.S. has imported 20% more silver in the first three-quarters of 2015 compared to last year while industrial demand has fallen considerably and the COMEX silver inventories declined 26 Moz from its peak.

So, for whatever reason… there is more silver coming into the U.S. than the market dictates.  Of course, physical silver investment demand is much higher this year, but it doesn’t account for all the extra silver imports.  Thus, some large entities must be acquiring silver off the radar.

Why Did The U.S. Silver Market Break From Its Normal Market Dynamics

According to the USGS silver import-export data, the U.S. Silver Market is behaving much different from previous years.  As I stated, U.S. silver bullion and dore bar imports hit a record 6,000 mt in 2011.  However, this was due to elevated industrial silver demand and exports.

This year, the U.S. is on track to import 6,000 mt, but industrial silver supply and industrial exports are down considerably.  Which means, the huge increase in U.S. silver imports must be due to physical silver investment demand.  This doesn’t make sense as the price of silver is trading at a four-year low.

As I mentioned, there was a large decline of silver inventories at the COMEX this year.  Furthermore, according to the 2015 Silver Interim Report by the GFMS Team at Thomson Reuters, they show a 17.1 Moz net decline of Global Silver ETF inventories, while physical bar and coin demand rose to 206.5 Moz this year.

Looking at the following chart from my article, DEATH OF PAPER GOLD & SILVER: The Data Proves It,

Silver-ETF-Build-vs-Coin-Bar-Demand

we can see the drastic change of investor sentiment for physical silver bar and coin over Global Paper Silver ETFs.  In over the past five years, Global Silver ETF inventories experienced a net build of 18.2 Moz compared to 994 Moz of physical silver bar and coin demand.  Moreover, that figure is conservative due to the fact that the GFMS Team at Thomson Reuters does not include private silver rounds (bars) in their data.

Again, something broke in the U.S. Silver Market this year.  I believe it had to do with the beginning shock of a possible Greek Exit of the European Union and continued by the threat of a U.S. and broader stock market collapse.  Even though the Fed and Central Banks continue to prop up highly inflated over-leveraged Bonds & Stocks, this is not a long-term sustainable economic policy.

At some point, investors (especially wealthy investors and institutions) will start buying physical gold and silver to protect wealth before the collapse of the Greatest Ponzi Scheme in history begins in earnest.  It will only take a small percentage increase of new buyers, say 2-3%, to totally overwhelm the precious metal market.  When I say 2-3% new buyers, I am referring to those currently invested in paper assets.

The U.S. Silver Market broke a trend this year which I believe is significant going forward.  While precious metal investors may be frustrated by the low paper price of gold and silver.. the fundamentals for owning the metals are stronger than ever.

 

 

Courtesy: SRSroccoreport

7 Reasons Why Oil Could Fall Even Lower Before Christmas

7 Reasons Why Oil Could Fall Even Lower Before Christmas

7 Reasons Why Oil Could Fall Even Lower Before Christmas

Seventy-eight years after Walt Disney released the first full-length animated feature, and seven factors in today’s crude complex are dwarfing crude oil prices.

Happy – Let’s start off with the good news: retail gasoline prices have dropped below $2/gallon on the national average. Prices have broken below the lows seen earlier in the year, and are now at their lowest levels since early 2009.

While unplanned maintenance in California is causing oil prices to see a little bit of a bump higher, Texas – the second largest consumer behind California – is seeing prices below $1.80/gallon:

Dopey – News flow on the economic data front is particularly sedate today, with German producer prices the main release out of Europe. (They were down -2.5 percent YoY for November, in line with expectations). Tomorrow sees a return to form in the U.S., with a variety of releases, from a GDP revision to housing data, but for now…all is in slumber.

Bashful – While OPEC has been reticent and reluctant to defend its oil production levels this year, Russia has been unabashedly boosting exports after six years of declines. As refinery improvements have caused less domestic crude oil demand, this has opened up a window of opportunity for the country to export more.

Crude oil production has seen a similar trend: Russia has spent much of the year pumping at near-record levels, in an effort to keep its revenues elevated amid an oil price collapse. Azerbaijan has just announced it is abandoning its currency peg, after burning through half of its foreign exchange reserves this year defending its currency, the manat. (Azerbaijan relies on oil for 90 percent of its export revenues). Russia, however, has been able to mitigate some of the pain of falling crude oil prices by having the ruble weakening at a similar pace:

Grumpy – A WSJ article today highlights how the S&P500 Energy index has lost $408 billion from its market capitalization this year – approximately one-quarter of its total value. This miserable move has only accelerated in the last week or so: the index has fallen more than $48 billion since December 16.

Doc – In a show of solidarity, much of commodityland™ this year has sold off with the crude complex. Of these commodity cohorts, Dr. Copper has perhaps been the most faithful. Similar to crude, copper prices are kicking around six-and-a-half year lows, as supply continues to overwhelm demand.

Nine leading copper smelters in China are weighing up deeper production cuts in an effort to bring some balance to the market. Nonetheless, some Chinese importers have already reduced bookings of term shipments on the expectation of lackluster demand next year.

Sneezy – The old adage that ‘when the U.S. sneezes the world catches a cold‘ seems these days to be just as applicable to the world’s second largest economy, China. Chinese leaders have just approved an economic blueprint for next year which places emphasis on fixing industrial overcapacity and the current property glut, amid their acknowledgement that China is heading for a potentially prolonged slowdown.

Sleepy – As we approach the lifting of Iranian sanctions in the coming months, its oil industry is set to awaken once again from its recent slumber. This is typified by an apparent deal just made between Iran and India, in which Iran will supply oil to India at a steep discount, as well as offering other buying incentives, as it looks to rebuild its market share from its recent stymied levels.

 

 

 

Courtesy: Matt Smith

Gold And Silver Are A “Gift” At Current Levels

Gold And Silver Are A “Gift” At Current Levels

Gold And Silver Are A “Gift” At Current Levels

It really matters little what the charts are saying about the paper futures for gold and silver here, which we will get to shortly.  The focus needs to be kept on a few facts that are inescapably true:  fiat currencies throughout the history on this planet have always, always failed, without exception, 100% of the time.  There are few situations for which such a statement of guaranteed [failed] performance can be made.

It is any different this time?  Yes and no. No, because all fiats have failed, plain and simple.  Yes, because the extent to which there is no reasonable reality in the relationship between paper and physical has never occurred to the current degree, ever.

In times past, gold and silver were used as a form of money somewhere in different parts of the world, but not today.  The Rothschild system of controlling the supply of “money” has been honed to [im]perfection where the world is dominated by the moneychangers, the entire world.  It is fiat, fiat, fiat.  No country trades using gold or silver as true money.  The moneychangers, the globalists have driven gold and silver out of everyday existence, physically, to a large degree, psychologically to an even greater degree.

In 2013, those calling for a change in the price direction for gold and silver for that year or at least into 2014, were proven wrong.  If not by 2014, then surely big changes would occur in 2015.  These expectations were being made by some of the smartest and most respected individuals in the PMs community.

Surely the reality of shrinking supply and unabated demand would prevail over the specter of unimaginable fiat production and phony central banker QE-to-infinity measures would mark 2015 for much-needed change in the failing world-wide financial system predicated on the privately controlled and managed Federal Reserve Note, commonly and mistakenly called the “dollar.”  One can legitimately question if any change will occur in 2016, at this rate.

The two things guaranteed in life have been death and taxes.  We add a third, the guaranteed failure of paper fiat.  When!  When!  When will the current fiat fail?  There is no known answer for that.

When will your life end?  There is also no known answer for that, either, other than the guarantee that it will.  Knowing you will one day die, does it stop you from living each day, each year as though life will continue?  It seems most people live their life that way.  While tomorrow is promised to no one, few expect that promise to arrive today or tomorrow, although it happens regularly throughout the world as people die every day.  Many make plans for their eventual death, in a variety of ways, family planning, estate planning, etc, but the hope is almost always that life will be extended for as long as possible.

This is the best analogy we can give for when the current fiat will fail, and it seems to be an apt one, just in reverse.  People want to see the death of the “dollar,” indeed all fiats, in favor of returning to some kind of gold standard.  When that happens,  those who have been buying and holding gold and silver over the years will see an increase in their wealth holdings.

You know death is inevitable, but you endeavor to live life to the fullest as best you can.  In the same vein, you know fiats fail, but not knowing when is less acceptable in that realm of the inevitable than not knowing when death will inevitably occur in life.  Still, one must plan for the purchase of physical gold and silver regardless of when the fiat will fail, as it will, and the current extraordinary circumstance, where the reality of supply and demand ceases to function, makes the ongoing purchase and holding of PMs more important than ever.

It is possible gold can still decline to 1,000 to 865, and silver to 12.50 to 11.70.  The probability remains greater than not, but a decline to those levels is no more a guaranty than death or taxes.  When the value of PMs do turn around and attain higher prices, more reflective of reality in the “unreal” world of fiat in which we live, having paid $1,800/oz, $1,200/oz, or $900/oz for gold, $50/oz, $35/oz, or $10 oz for silver will not be of much consequence if the pricing for gold and silver should reach 5 or tenfold multiples, or more, from current levels.

Those who already own gold and silver will stop complaining at those higher price levels.  That means anyone purchasing gold and silver at current prices, even if price continues lower over the next year, will be owning one of the world’s most reliable wealth assets at extraordinary prices.  Remember, price is a captive symptom of a highly irregular cause that is destined to fail.  Count on it.

There has been talk of a $20 handle for crude oil, and it is more than within the realm of probability.  If that turns out to develop, that weak rallies to the 50-60 area can be sold.

CL W 19 Dec 15

There is no visible strength in gold, currently.  The reaction rally off the October swing low has been very weak, easily holding under the 1,100 level.  The fact that price has moved sideways for the past 6 weeks and has not been able to decline to the lower portion of the channel suggests a reaction rally could develop, but it would be normal activity within an established trend to the downside.

GC W 19 Dec 15

While there can be an argument made for some kind of reaction rally to the upside, it is of less important than knowing that gold has not made a showing of a possible bottom, even while it is possible one could be forming.  It is not unusual for a bottom to take several weeks, sometimes a month or longer, to confirm itself, so patience is required to let the market do what is will do, regardless of personal sentiment or expectation.

GC D 19 Dec 15

The chart comments contrast strong bullish fundamentals with the more reliable reality of price, price being the final arbiter.  One has to understand that the market is fully aware of all bullish supply/demand considerations, yet despite the overwhelmingly bullish read of the fundamental picture, price says otherwise, and ultimately, one can never argue with price.

Simply stated, the down trend has not yet run its course, at least in the gold and silver paper market, which is what the charts reflect.

SI W 19 Dec 15

Given how trends serve as important information, and one should never position against one, there appears to be little need to be long in the paper market until there is more concrete evidence of a market turn.

SI D 19 Dec 15

 

 

 

Submitted by: Edgetraderplus

Gold Might Be Down, But Here’s Why You Shouldn’t Frown!

Gold Might Be Down, But Here’s Why You Shouldn’t Frown!

Gold Might Be Down, But Here’s Why You Shouldn’t Frown!

Welcome to December and the last few weeks of 2015.

Gold wise, it’s been a disappointing year — and that in and of itself is a strange, curious phenomenon, as I’ll address in a moment.

First the facts, though. The price of gold is down about $100 from January 2015 to now. Gold prices are down about $200 over the past two years, since January 2014. The numbers are what they are. We’re on a steady decline curve, as you can see from the (green) 200-day moving average in the price chart.

ChartingTwo

There’s an old saying that nobody rings a bell at the top of a market. It’s equally true that nobody bangs a drum at the bottom either. Is it time for a turnaround? Or should we anticipate more of the same, moving ahead? Let’s review the “negative” case for gold, which is what we see playing out in the chart.

For example, here are several standard reasons why many people warn against holding gold:

1. Strong dollar. We certainly have a strong U.S. dollar now, for many reasons — monetary, fiscal, macroeconomic, geopolitical. The point is that as the dollar strengthens, it’s harder and harder for overseas buyers to justify buying and accumulating gold. That is, as our dollar increases in value, foreign currencies weaken by comparison, so it takes more foreign currency to buy dollar-denominated gold.

2. U.S. Interest Rates. Even after yesterday’s interest rate decision, there are still a lot of questions in the air which leaves 2016 expectations a mystery for analysts.  Higher interest rates are theoretically bad for gold, because as gold critics like to note, “gold pays no interest.” (As if 0.25% interest, one way or the other, should control the environment for gold investment, too — very strange)

3. Gold Mining Companies. Oh, my… where to begin? The enemy of higher gold prices may well be gold mining companies. Miners large and small are burdened with debt and must continue to mine and sell output just to keep up cash flow. Many miners are actually “high-grading” their mines in a time of low prices — meaning they mine the richest sections of ore, simply because that’s what pays. They bypass lower grades of ore, which in the future may never get mined. Thus does ongoing mine supply depress prices.

4. Fund Redemptions. We’re well into a long-term period of sell-down by major funds such as the SPDR Gold Trust (GLD: NYSE). Indeed, just this one particular source sold down about $7 billion worth of gold assets in a recent month. This exerts a strong negative force on gold trends.

5. “Central Banks Hate Gold” Thinking. That is, we have many and varied conspiracy theories along the lines that Western central banks want to keep the price of gold relatively low, because rising gold prices showcase the economic mismanagement of economies by the political and banking classes.

Each of the aforementioned “negatives” for gold makes a point. Indeed, it’s easy to absorb the point, nod your head and think, Yep, that’s right. Yet each negative argument also forms the basis of a story for why the decline in gold prices ought to turn around.

For example, I’ve seen reports from large miners to the effect that a number of older, legacy mines are due to close due to high costs and low productivity. This is particularly the case in South Africa, which is home to many deep, expensive old mines. It’s also the case across the ocean in South America, where copper mines are closing in Chile, meaning that significant streams of gold and silver — byproducts of copper mining — are vanishing from the supply chain.

When mines close, by definition, we’ll see less gold in the marketplace. Prices ought to tighten on that alone. Long story; not just now.

Then we have funds like GLD selling physical gold holdings. OK, so they sell… and then what? Does someone take the gold bars out to the deepest part of the ocean and toss them overboard? Nope.

In fact, much of the gold sold by funds like GLD flows out of London or Switzerland, and thence straight to China, India, the Middle East and even (for all its other troubles) Russia. This makes for many long stories; again, not here. The point is that when Western funds sell physical gold, the metal goes somewhere. The actual geography and logistics are that the gold goes “away” from the West, where the high-level political and economic consensus doesn’t appreciate it. Gold moves to vaults in the East. It’s that simple.

Another way of saying this is that history shows gold moves to where it’s valued. Eventually, all this weight of physical gold will create a new international monetary dynamic. Eventually, perhaps; not just now. But when the dam breaks? Well… think about that analogy. Dams don’t break slowly, right? When dams break, they break fast and you tend to know it.

Danger of Unpayable Debt

I could go on and argue with all of the above-noted points about what’s “wrong” with gold. Instead, I’ll mention that not long ago, a savvy acquaintance of mine made an excellent point that covers the bases.

“Six years ago,” said my friend, “the U.S. had a GDP of $16 trillion, national debt of $11 trillion and unfunded national liabilities of about $60 trillion. Today, the U.S. has an $18 trillion GDP, $18 trillion national debt and unfunded liabilities of over $100 trillion.”

Then this fellow asked the next logical question, “How can this ever end well?” Meaning how can all this debt ever get repaid? The basic answer is that it can’t get repaid. It’s unpayable.

Think about that. The U.S. carries $18 trillion of debt against annual GDP of $18 trillion. If the country worked for “free” for over a year, it might be possible to pay off the debt, in theory. But can any country work for “free”? It’s not going to happen.

Another way to say it is that U.S. debt is certainly “unpayable” by means of the current systems of currency and exchange. There’s not enough productivity in the world for governments — U.S. or any other — to tax and repay all the debt. There are not enough dollars (or euros, yen, pounds, etc.) in the world to wallpaper over this debt, absent massive inflation or an earth-shaking default.

At some point, we’re going to hear senior political and monetary figures say, “We can’t pay that. There’s not enough money.”

Thus, the current monetary system cannot end well. Which brings us to gold and silver, metals positioned to retain wealth over the long haul — during the “transition,” when it arrives, as it surely must.

In the present, we must live with the price chart I showed you above. We must live with pricing doldrums for gold. We must live with the general price decline over the past few years. Sure, it would be great if gold prices firmed up and stayed firm. Hey, what’s wrong with those silly markets, right? Don’t they get it?

All I can say is… sooner or later, sooner or later. Our global economy will — sooner or later — have to reset in an ongoing environment of unpayable debt.

What then? Well, that’s when precious metals become the “transition elements” — in a nonchemical sort of way (meaning that I don’t want to get into the quantum chemistry of what it means to electron orbitals to be a “transition” element).

Bottom line is that precious metals will help the world transition in phase from a previous, failing/failed monetary and currency system into something new, something that works.

That’s all for now. Have a great week, and be sure to get your Christmas shopping done ahead of time!

 

 

 

Courtesy: Byron W. King

Silly Myths about Gold during Rising Interest Rates

Silly Myths about Gold during Rising Interest Rates

Silly Myths about Gold during Rising Interest Rates

The Fed finally acted this week – upping its benchmark Federal Funds rate by 0.25%. Now that the speculation over whether the Fed will hike has been put to rest, analysts are busily speculating about what the Fed’s move means for the economy and markets.

Many of these speculations are unfounded. It’s time to bust some silly myths.

Much of what’s spewed out in the financial media concerning interest rates is flat-out wrong, especially when it comes to their impact on precious metals markets. Since gold and silver are small markets compared to bonds and equities, some “analysts” apparently think they don’t need to do actual research on precious metals markets before commenting on them. It’s easier to regurgitate oft-repeated myths about rising rates being bad for gold than it is to actually check the data.

Ahead of the Fed’s decision, the Wall Street Journal naively reported that “a shift to higher rates is expected to hurt gold, which doesn’t pay interest and costs money to hold.”

Setting aside the fact that not everyone who holds gold incurs storage fees (it costs you nothing to keep gold coins in your own house), let’s consider the core assertion that higher rates hurt gold. Recent history shows that assertion to be utterly false.

The Fed’s last rate-raising campaign occurred from June 2004 to June 2006. Over that period gold wasn’t “hurt” at all. In fact, gold prices rose from under $400 an ounce in June 2004 to over $700 by May 2006.

Effective Federal Funds Rate

The historic run-up in gold and silver prices during the late 1970s coincided with the most aggressive rate-hiking effort in the Federal Reserve’s history. By the time gold and silver prices peaked in January 1980, the effective Federal Funds rate stood at 13.8%!

The myth of rising rates being bad for hard assets persists in spite of data that show the exact opposite is true.

During periods when the Fed tightens, the best performing asset class by far is commodities. According to Allianz Global Investors, commodities have produced average gains of more than 25% when rates were rising, based on data going back to 1983.

What Happens to Gold When Interest Rates Rise

Anyone who suggests that rising nominal interest rates make hard assets unappealing as investments hasn’t looked at recent history and doesn’t grasp that what matters are real (not nominal) interest rates.

When the nominal rate set by the Fed is lower than the rate of inflation, then real rates are negative. In an environment where the Fed funds rate shot up to 10%, but price inflation was running at 15%, then “doesn’t pay interest” gold would be fundamentally more attractive than cash at a -5% real rate.

But if at some point investors start expecting inflation rates to fall below nominal interest rates (real rates to turn positive), then investors might flee gold for interest-bearing instruments.

Recently, government-reported consumer price inflation rates have been extraordinarily low. The November reading on the Consumer Price Index showed price levels rising at an annual rate of just 0.5%.

The Fed’s 0.25% hike won’t in itself change much in the real economy. But it may get investors thinking about the possibility of inflation rates emerging from these lower levels. In the Federal Open Market Committee’s Statement following its decision to hike this week, the FOMC stated it was “reasonably confident that inflation will rise, over the medium term, to its 2 percent objective.”

The Fed noted that “monetary policy remains accommodative.” It vowed to continue reinvesting principal payments and rolling over its holdings of Treasuries, agency debt, and mortgage-backed securities. Its $4.5 trillion balance sheet won’t be shrinking anytime soon. Overall, the Fed’s Statement was widely interpreted as dovish.

Gold and silver prices both advanced on Wednesday following the Fed’s decision and then fell on Thursday. All the noise aside, there is plenty of fundamental support for the case that the metals are at or near a turning point.

Demand for gold and silver coins will set a record this year. Meanwhile, spot prices have traded below mining production costs for much of the year – presaging supply destruction in the months ahead. That is a far more important development in the outlook for precious metals markets than anything the Fed did or said this week.

 

 

Submitted by: Stefan Gleason

WTI Slides As Goldman Warns $20 Crude Oil Looms

WTI Slides As Goldman Warns $20 Crude Oil Looms

WTI Slides As Goldman Warns $20 Crude Oil Looms

Despite spoiradic algo-crazed ramps, crude oil prices continue to slide back towards a $34 handle (in Jan ’16 contract) this morning following a reiterated downbeat note from Goldman warning that storage levels are “too full for comfort,” that positioning is not as stretched short as some believe, and confirming that this will not end until prices near cash costs to force production cuts, likely around $20/bbl.

Positioning still not stretched short

The move lower was amplified by positioning, with short covering and new ETF long positions ahead of the OPEC meeting providing sufficient ammunition to push prices to new lows. This move was also likely exacerbated by a negative gamma effect around the large WTI Jan-16 $40/bbl strike option open interest. With Brent positioning still off its lows, continued weak oil fundamentals can still push prices lower. Beyond oil, it is also important to note that oil net speculative short positions have tracked dollar long positions closely this year…

OPEC and storage concerns weighing on oil prices

The decline in oil prices has resumed, driven by the aftermath of the OPEC meeting, renewed weakness in distillates and exacerbated by positioning. Although prices are now below our 3-mo $38/bbl WTI forecast, we still see high risks that prices may decline further, as storage continues to fill.

In further confirmation of these concerns, Genscape data saw a 1.4 mm barrell build at Cushing.

The canary in the coal mine

For now, the European distillate market is showing the most acute symptoms of nearing storage capacity with gasoil timespreads, cracks and cash basis falling sharply.

Tank tops not our base case, but too close for comfort

Our oil price forecast remains anchored by the view that high producer financial stress and shut funding markets near $40/bbl can halt the oil surplus by 4Q16, mainly through declining US production. Our base case remains that the global oil stock build will on aggregate remain shy of storage capacity, although the storage buffer has once again narrowed, to 340 kb/d on average for 2016. But this rebalancing is far from achieved:

(1) the US rig count and E&P guidance remain too high to achieve the required supply decline,

 

(2) we see risks to our OPEC production forecast of 32 mb/d next year as skewed to the upside (Iran),

 

(3) storage continues to fill with the odds of hitting storage constraints by the spring rising.

As a result, we reiterate our concern that “financial stress“ may prove too little too late to prevent the market from having to clear through “operational stress” with prices near cash costs to force production cuts, likely around $20/bbl.

 

 

Courtesy: Zerohedge

Copper Price Forecast 2016: Producers Under Pressure

Copper Price Forecast 2016: Producers Under Pressure

Copper Price Forecast 2016: Producers Under Pressure

At the end of 2014, analysts were not expecting much from copper prices.

Many were suggesting that a turnaround was a few years down the road, and Stefan Ioannou of Haywood Securities predicted that things could get a bit worse — he said copper could very easily dip below $3 per pound for “some period of time” in 2015.

That copper price forecast certainly rang true. Copper prices did indeed stay below $3 for most of 2015, and even threatened to dip below $2 at one point. Overall, spot copper prices are down 28 percent so far in 2015, currently trading at $2.11 per pound.

This chart from Kitco provides a helpful visual of how copper prices have performed this year:

Copper price chart courtesy of Kitco

A tough year for metals in 2015

A stronger US dollar and slower-than-expected growth in China have weighed on copper prices in 2015, but for many investors, the extent of the shift downward still came as a surprise. “I think obviously we entered the year expecting it to be a relatively flat to weaker year, but most investors were surprised to see the copper price slip as low as $2 through the latter half of the year,” Ioannou said in conversation with the Investing News Network.

Beyond that, a broader rout in commodities prices has led to weaker investor sentiment in the overall metals space. Ioannou agreed that this overall shift in sentiment has had an impact on copper.

The overall sentiment across the commodities space in general had an impact on copper investments as well,” he said. “An average retail investor looking to invest is seeing a lot of negative headlines for commodities in general, and copper is one of the main ones. It’s definitely taken the shine off investing in resource stocks, let alone copper-specific stocks,” he said. 

Copper production under pressure in 2016

Ioannou also pointed out that with copper at $2, roughly 20 percent of the world’s production is not economic on a C1-cash-cost basis. Producers have been able to hang on thus far, but if low prices persist, there could be further production curtailments and mine shutdowns down the road. “Hopefully that will be a catalyst that will help prices move higher over the medium term,” Ioannou said.

There have already been cutbacks in the zinc space, with Glencore (LSE:GLEN) curtailing productionand Nyrstar (EBR:RYR) putting its Middle Tennessee mines on care and maintenance. “The stage is set for copper to follow suit,” Ioannou said. To be sure, Glencore has also announced cuts to its copper production, while Freeport-McMoRan (NYSE:FCX) is planning to cut its copper output by 250 million pounds next year.

Going into 2016, Ioannou stated that he expects prices to moderate around the levels they’re currently at, with things not looking up until the medium to longer term. However, he advised keeping an eye out for 2015 year-end financials from copper companies as they start to come out next year.

“There’s a lot of concern right now that within the producer space there are balance sheet issues,” he said. “It’s a bit of a black box right now, but once we get the year-end financials … with that we’ll have a much better idea about how the first part of 2016 is shaping up with regards to copper price. I think you’re going to see a lot of guys start to either see the light at the end of the tunnel or hit the panic button.”

Interestingly, Ioannou also suggested watching out for wildcards on the exploration side. “A high-grade discovery in any of the metals could really spark a turnaround in the resource industry. We’ve seen it happen in the past. It would have to be a world-class, high-grade discovery, but that’s sort of always a wildcard that’s sitting in the background,” he said.

Copper companies to watch in 2016

Certainly, it’s a tough time to be investing in metals. Ioannou said that it may even be worth waiting for a definitive positive move in copper prices before investing in the space.

Still, for those who want to get into copper now, he suggested looking at companies with established production profiles and strong balance sheets that are operating well despite the current market. “Some that provide some safety at current levels would be Lundin Mining (TSX:LUN), Hudbay Minerals (TSX:HBM) and Nevsun Resources (TSX:NSU),” he said.

On the junior side of things, Ioannou didn’t mention any companies specifically, but did note that there are juniors that have managed to sign joint venture agreements with major mining companies. “These are juniors that are still going to have exploration results coming out,” he said. “It’s not coming out of their own pocket. And those would be the ones to watch, because there’s not as much concern about them running out of money to have meaningful advancement on their projects.”

That idea certainly appears to line up with what investors are thinking. Taking a look at some of the top-performing copper companies on the TSX Venture this year, all have large partners for their projects. For example, Arena Minerals (TSXV:AN) has a US$16-million option agreement with Japan Oil, Gas and Metals National for its Atacama copper project, while Quaterra Resources(TSXV:QTA,OTCMKTS:QTRRF,FWB:QR2) is partnered with Freeport-McMoRan Nevada for a number of copper deposits in Yerington, Nevada.

 

 

Courtesy: Teresa Matich

Paper Money Versus The Gold Standard

Paper Money Versus The Gold Standard

Paper Money Versus The Gold Standard

We are living in a time that can only be considered monetary chaos. The U.S. Federal Reserve has manipulated key interest rates down to practically zero for the last six years, and expanded the money supply in the banking system by $4 trillion dollars over that time. And with the true mentality of the monetary central planner, the Fed Board of Governors are now planning to manipulate key interest rates in an upward direction that they deem desirable.

The European Central Bank (ECB) has instituted a conscious policy of “negative” interest rates and planned an additional monetary expansion of well over a trillion Euros over the next year. Plus, the head of the ECB has assured the public and financial markets that there is “no limit” to the amount of paper money that will be produced to push the European economies in the direct that those monetary central planners consider best.

We also should not forget that it was the Federal Reserve that earlier in the twenty-first century undertook a monetary expansion and policy of interest rate manipulation that set the stage for the severe and prolonged “great recession” that began in 2008-2009, in conjunction with a Federal government distorting subsidization of the American housing market.

The media and the policy pundits may focus on the day-to-day zigs and zags of central bank monetary and interest rate policy, but what really needs to be asked is whether or not we should continue to leave monetary and banking policy in the discretionary hands of central banks and the monetary central planners who manage them.

Central Banking as Monetary Central Planning

And make no mistake about it. Central banking is monetary central planning. The United States and, indeed, virtually the entire world operate under a regime of monetary socialism. Historically, socialism has meant an economic system in which the government owned, managed, and planned the use of the factors of production.

Modern central banking is a system in which the government, either directly or through some appointed agency such as the Federal Reserve in the United States, has monopoly ownership and control of the medium of exchange. Through this control the government and its agency has predominant influence over the value, or purchasing power, of the monetary unit, and can significantly influence a variety of market relationships. These include the rates of interest as which borrowing and lending goes on in the banking and financial sectors of the economy, and therefore the patterns of savings and investment in the market.

If there is one lesson to be learned from the history of the last one hundred years – during which the world and the United States moved off the gold standard and onto a government-managed fiat, or paper, money system – is the fundamental disaster of placing control of the money supply in the hands of governments.

Continual Government Abuse of Money

If is worth recalling that money did not originate in the laws or decrees of kings and princes. Money, as the most widely used and generally accepted medium of exchange, emerged out of the market transactions of a growing number of buyers and sellers in an expanding arena of trade.

Commodities such as gold and silver were selected over generations of market participants as the monies of free choice, due to their useful characteristics to better facilitate the exchange of goods in the market place.

For almost all of recorded history, governments have attempted to gain control of the production and manipulation of money to serve their seemingly insatiable appetite to extract more and more of the wealth produced by the ordinary members of society. Ancient rulers would clip and debase the gold and silver coins of their subjects.

More modern rulers – whether despotically self-appointed through force or democratically elected by voting majorities – have taken advantage of the monetary printing press to churn out paper money to fund their expenditures and redistributive largess in excess of the taxes they impose on the citizenry.

Today the process has become even easier through the mere click of a “mouse” on a computer screen, which in the blink of an eye can create tens of billions of dollars out of thin air.

Thus, monetary debasement and the price inflation that normally accompanies it have served as a method for imposing a “hidden taxation” on the wealth of the citizenry. As John Maynard Keynes insightfully observed in 1919 (before he became a “Keynesian”!):

“By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.”

It is the corrosive, distortive, and destructive effects from monetary manipulation by governments that led virtually all of the leading economists of the nineteenth century to endorse the “anchoring” of the monetary system in a commodity such as gold, to prevent governments from using their powers over the creation of paper monies to cover their budgetary extravagance. John Stuart Mill’s words from the middle of the nineteenth century are worth recalling:

“No doctrine in political economy rests on more obvious grounds than the mischief of a paper currency not maintained at the same value with a metallic, either by convertibility, or by some principle of limitation equivalent to it . . . All variations in the value of the circulating medium are mischievous; they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious . . .

“Great as this evil would be if it [the supply of money] depended on [the] accident [of gold production], it is still greater when placed at the arbitrary disposal of an individual or a body of individuals; who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes; and who have at any rate a strong interest in issuing as much [inconvertible paper money] as possible, each issue being itself a source of profit.

“Not to add, that the issuers have, and in the case of government paper, always have, a direct interest in lowering the value of the currency because it is the medium in which their own debts are computed . . . Such power, in whomsoever vested, is an intolerable evil.”

The Social Benefits of a Gold Standard

Under a gold standard, it is gold that is the actual money. Paper currency and various forms of checking and other deposit accounts that may be used in market transactions in exchange for goods and services are money substitutes, representing a fixed quantity of the gold-money on deposit with a banking or other financial institution that are redeemable on demand.

Any net increases in the quantity of currency and checking and related deposits are dependent upon increases in the quantity of gold that depositors with banking and financial institutions add to their individual accounts. And any withdrawal of gold from their accounts through redemption requires that the quantity of currency notes and checking and related accounts in circulation be reduced by the same amount. Under a gold standard, a central bank is relieved of all authority and power to arbitrarily “manage” the monetary order.

Many critics of the gold standard consider this a rigid and inflexible “rule” about how the monetary system and the quantity of money in the society is to be determined and constrained. Yet, the advocates of the gold standard have long argued that this relative inflexibility is essential to discipline governments within the confines of a “hard budget.”

A Gold Standard Can Limit Government Monetary Abuse

Without the “escape hatch” of the monetary printing press, governments either must tax the citizenry or borrow a part of the savings of the private sector to cover its expenditures. Those proposing government spending must either justify it by explaining where the tax dollars will come from and upon whom the taxes will fall; or make the case for borrowing a part of the savings of the society to cover those expenditures – but at market rates of interest that tell the truth about what it will cost to attract lenders to lend that sum to the government rather than to private sector borrowers, and therefore, at the social cost of private sector investment and future growth that will have to be foregone.

In other words, it prevents the government from “monetizing the debt” to cover all or part of its budget deficits. The borrowed sums cannot be created out of thin air through central bank monetary expansion. The government, under a gold standard, can no longer create the illusion that something can be had for nothing.

As Austrian economist, Ludwig von Mises, expressed it:

“Why have a monetary system based on gold? Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money’s purchasing power independent of the ambitions and machinations of governments, of dictators, and political parties, and pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called ‘sound money’.”

Milton Friedman’s “Second Thoughts” About the Benefits of Paper Money

It must be admitted that even some advocates of economic freedom and limited government have been advocates of paper money. The most notable one in the second half of the twentieth century was the Nobel Prize economist, Milton Friedman. Over most of his professional career he argued that maintaining a gold standard was a waste of society’s resources.

Why squander the men, material and machinery digging gold out of the ground to then simply store it away in the vaults of banks? It is better to use those scarce resources to produce more of the ordinary goods and services that can enhance the standard and quality of people’s lives. Control the potential arbitrary recklessness of central banks, Friedman proposed, by setting up a monetary “rule” that says: Increase the paper money supply by some small annual percent, with no discretion left in the hands of the monetary managers.

But it less well known is that in the years after Friedman won the Nobel Prize in Economics in 1976, he had second thoughts about this monetary prescription. In a 1986 article on, “The Resource Costs of Irredeemable Paper Money,” he argued that when looking over the monetary mismanagement and mischief caused by governments and central banks during the twentieth century, it was “crystal clear” that the costs of mining, minting and storing gold as the basis of a monetary system would have been far less than the disruptive and destabilizing costs imposed on society due to paper money inflations and the booms and busts of the business cycle brought about by central bank manipulations of money and interest rates.

In his 1985 presidential address before the Western Economic Association on “Economists and Public Policy,” Friedman said that Public Choice theory – the use of economics to analyze the workings of the political process – had persuaded him that it would never be in the long-run self-interest of governments or central bankers to manage the monetary system according to some hypothetical “public interest.”

Those in government or holding the levers of the monetary printing press will always be susceptible to the temptations and pressures of short-run political gains that monetary expansion can fund. He admitted that it had been a “waste of time” on his part to try to get governments and central banks to follow his idea for a monetary rule.

And in another article in 1986 (co-authored with Anna Schwartz) on, “Has Government Any Role in Money?” Friedman said that while he was not ready at that time to advocate a return to the gold standard, he did conclude that “that leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement.

Monetary Mismanagement versus Markets and Gold

But it is not only the political dangers arising from government mismanagement of paper money that justifies the establishment of a gold standard. It is also and equally the fact that monetary central planning is unworkable as a means to maintain economy-wide stability, full employment, and growth.

Especially since the 1930s, many economists and policy makers influenced by Keynes and the Keynesian Revolution have believed markets are potentially unstable and susceptible to wide and prolonged fluctuations in employment and output that only can be prevented or reduced in severity through “activist” monetary and fiscal policy.

But in reality, the causation runs the in the opposite direction. It is central bank manipulations of money, credit and interest rates that have generated the instability and periodic swings in economy-wide production and employment.

The fact is financial institutions and interest rates have important work to do in the market economy. Banks and other financial intermediaries are supposed to serve as the “middlemen” who bring together those who wish to save portions of their earned income with others who desire to borrow and invest that savings in profit-oriented productive ways that generate capital formation, technological improvements, and cost-efficient production of new, better and more goods and services to satisfy consumer demands in the future.

Market-determined interest rates are meant to bring those savings and investment plans into coordination with each other, so the amount of invested capital and the time-shape of the investment horizons undertaken are consistent with the available real savings to support them to maintainable completion.

Monetary expansion by central banks creates the illusion that there is more actual investable savings in the economy than really exists. And the false interest rate signals generated in the banking system by the monetary expansion not only misinforms potential investment borrowers about the amount of real savings available for capital projects, but creates an incorrect basis for determining the present value calculations that influence the time horizons for the investments undertaken.

It is these false monetary and interest rate signals that induces the misdirection of resources, the mal-investment of capital, and the incorrect allocation of labor among employments in the economy that sets the stage for an inevitable and inescapable “correction” and readjustment that represents the recession stage of the business cycle that follows the collapse of the artificial boom.

The monetary central planners can never be more successful in determining a “optimal” quantity of money or the “right” interest rates to assure savings-investment coordination than all other socialist planners were when they tried to centrally plan agricultural production or investment output for an entire society.

All such attempts at monetary planning and management by central bankers are instances of what Friedrich A. Hayek called in his Nobel Lecture a, “pretense of knowledge,” that they can know better and do better than the outcomes generated by competitive interactions of the market participants, themselves. And as Adam Smith warned, nowhere is such regulatory power “so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.”

There is no way of knowing the optimal amount of money in the economy other than allowing market participants in the competitive exchange process to decide what they want to use as money – which has historically been a commodity such as gold or silver. And there is no way of knowing what interest rates should be other than allowing the market forces of supply and demand for lending and borrowing to determine those interest rates through the process of private sector financial intermediation, without government or central bank interference or manipulation.

The Return to the Gold Standard as a Monetary Constitution

Finally, how do we return to a functioning and workable gold standard? Under the current government and central bank-controlled monetary system the simplest method might be for the monetary authority to stop creating and printing money and credit. Over a short period of time a fairly reasonable estimate could be made about the actual quantity of a nation’s currency and checking and related deposits that are in existence and in circulation. A new legal redemption ratio could be established by dividing the estimated total quantity of all forms of these money-substitutes into the quantity of gold possessed by the government and the central bank.

A country following this procedure would then, once again, be on the gold standard. Its long-run maintainability, of course, would require the government and the central bank to follow those “rules of the game” that no increase in the quantity of money-substitutes may be created and brought into circulation unless there have been net deposits of gold in people’s accounts with banking and other financial institutions.

Can we trust governments and central banks to abide by these rules of the game? The temptations to violate them will still remain strong in a political environment dominated by ideologies of wealth redistribution, special interest favoritism, and numerous “entitlement” demands.

It is why the real long-run goal of monetary reform should be the denationalization of money. That is, the separation of money from the state by ending of central banking, altogether. In its place would emerge private, competitive free banking – a truly market-based money and banking system.

But nevertheless, in the meantime, a gold standard can serve as a form of a “monetary constitution” setting formal limits and imposing restraints on those in government who would want to abuse the monetary printing press, similar to the way political constitutions, however imperfectly, are meant to limit the abuses of power-lusting monarchs and the plundering majorities in functioning democracies.

If it fails, it should not be for want of trying. And a gold standard can be one of the positive institutional reforms in the attempt and on the way to a fully free market monetary system.

 

 

Courtesy: Richard Ebeling via Zerohedge

How Oversupplied is the Oil Market Really?

How Oversupplied is the Oil Market Really?

How Oversupplied is the Oil Market Really?

As I see it we have an oversupply of two things right now; oil production and opinions offered by pundits for the oversupply of oil!  Tune into any financial media outlet and without fail you’ll hear someone talking about how much oil the global economy is producing.  The abundance of this narrative alone is enough to cause the price to drop.  Most recently, the markets have been harping on OPEC’s decision to not cut production last week, sending the price of WTI down another 15% to the lowest they’ve been in nearly a decade.

When the mid-2015 inventory figures from the International Energy Agency (IEA) were reported in July they showed global production of 96.4mm bbl/d versus demand of 93.1mm bbl/d, an oversupply of approximately 3.3mm bbl/d.

Paint me a skeptic but I don’t buy it and neither does David Pursell, an analyst from Tudor, Pickering, Holt and Co.(TPH) – one of the industry’s most savvy macro forecasters.  In a recent call, Purcell contrasts the IEA figures with the OECD inventory figures over that same three month period and comes up with much different numbers.  Inventory levels only showed a 90 million barrel add to inventory levels, which during a 90 day period would indicate an oversupply of only about 1 million barrels per day.  The IEA is an agency comprised of 28 cooperating governments worldwide that is almost laughably inaccurate when it comes to their reporting and notorious for revising past data long after it has relevance.

In fact, the IEA’s October reconciliation for those same mid-2015 figures increased demand by 800k bbl/d and lowered supply by 100k bbl/d- nearly a 1 million barrel per day swing!  This confirms our suspicions that their original data published in July was materially overstating reality.  But as the saying goes, there are three sides to every story; your side, their side and the truth.  My best guess is that the truth is somewhere between 1-2 million barrels per day which is a far cry from the 3.3mm bbl/d that the current price and narrative has been arm waving about.

Working off a new assumption of, say, 1.5mm bbl/day supply overhang, let’s start to extrapolate out two trends currently underway which I think are reasonably safe to expect will continue.

Firstly, production from the North American markets has finally started declining due to fewer oil wells being drilled and the natural decline curve of existing wells already in production tapering off.  As we know full well, the boom in drilling was fueled by high oil prices and the industry’s binge on cheap debt offered to them by a yield-starved financial sector.  That cheap capital has dried up as the oil price has fallen and we will simply not see a return to the drilling activity we witnessed at the peak in early 2014.

Estimates range from 500k to 1 million barrels per day drop in North American production for 2016.  Let’s err on the side of caution and call it a 500k bbl/d drop in production.

Secondly, with oil prices this low we’re seeing an uptick in demand that is expected to be about 1 million bbl/d in 2016.  North American SUV sales are up 10% year-over-year and GM’s largest growth market is China where SUV sales are up a staggering 230% y-o-y.  I had heard reports that the wealthy Chinese have developed a taste for larger autos in what appears to be a case of imitation being the highest form of flattery and these SUV sales figures would appear to confirm that.

The above assumes “all else equal” and that we don’t see a wildcard situation such as Iranian production coming to market or a major disruption of supply from an act of terrorism.  Black swans are impossible to predict with any accuracy but my inclination is that if there are any it lends itself to supply disruptions more than anything else.

There is a saying on Wall Street that “the price of oil is set at the margins.”  My conclusion is that this market is only marginally oversupplied and represents approximately 1.5% of the global oil market.  If the above assumptions prove accurate then we could very well see an oil market that is in equilibrium if not undersupplied by the end of 2016.  My guess is the price of oil begins to move higher long before that moment actually occurs.  Perhaps OPEC has a better handle of actual supply/demand fundamentals than we’re giving them credit for and feel that if they can hold out just a little longer these low prices will fix themselves.

Then again, we all tend to find data to support our own biases one way or another.  Perhaps Mr. Pursell and I are guilty of that too.  Only time will tell who was right.

We should be seeing the added downward pressure of tax-loss selling throughout the end of the year so December could prove to be a great buying opportunity for the investor who has a medium-longer term time horizon.

This Holiday Season I’m buying my clients, family and friends a basket of oil stocks.

 

 

Courtesy: Eric Angeli

Is Crude Oil Close To A Tradable Bottom?

Is Crude Oil Close To A Tradable Bottom?

Is Crude Oil Close To A Tradable Bottom?

By all accounts, the world is awash with oil: production remains high while demand is softening along with the global economy. This has led many observers to forecast further declines in oil from the current price (in USD) of around $35/barrel.

This Is Why $20 Oil Is A Possibility (Zero Hedge)

IEA Offers No Hope For An Oil-Price Recovery

Despite the downward pressure on oil, the devil’s advocate wonders: could oil be setting up a tradable bottom? By tradable bottom I mean a level from which oil might bounce. For example, oil reversed from the low $40s earlier in 2015 and climbed to about $60 before resuming its downtrend.

Put another way: if oil’s ultimate bottom is $20/barrel, it is likely to experience sharp rebounds/retraces along the way, just as it did early in 2015. These near-term lows are tradable bottoms rather than the final long-term low, which is anyone’s guess.

Consider the daily chart of WTI Crude Oil, which is tracing out a bullish descending wedge. The stochastic is also oversold. MACD is weak and bleak, but the punch through the lower Bollinger Band leaves the door open to an exhaustion move.

The weekly chart of WTI is also tracing out a bullish descending wedge. Interestingly, MACD has been diverging, rising even as oil has broken down to new lows. Oversold can stay oversold for a long time, but it is still worth noting the stochastic is approaching oversold levels.

One way to assess if an asset or commodity is at an extreme is to compare its price with the price of gold and oil. Over the long-term, these ratios tend to revert to the mean.

Consider this chart of the gold-oil ratio: it is now pushing 30, which means one ounce of gold buys 30 barrels of oil.

You can see that typically the ratio is between 10 and 20. When oil was almost $150/barrel, the ratio sank near 7–an extreme at the other end of the scale.

Gold to Oil Ratio Historical Chart

What would it take for the ratio to return to 15? Either oil must rise or gold must drop significantly. In a world in which phantom collateral and phantom assets are vanishing before our eyes, I don’t see gold declining much–rather, I see its current basing phase as setting up a long-term upward bias.

If gold doesn’t drop significantly, the only way the ratio can resume its historical average is for crude to go back up to $60-$70/barrel or more. This looks “impossible” at the moment, but if the gold-oil ratio has any relevance, it’s something to leave in the realm of the possible.


Courtesy: Charles Hugh Smith

Bitcoin Or Gold: What Is More Valuable?

Bitcoin Or Gold: What Is More Valuable?

Bitcoin Or Gold: What Is More Valuable?

Last Wednesday, we brought you the story of Craig Steven Wright who was “outed” by Wired and Gizmodo as Satoshi Nakamoto, the pseudonymous founder of bitcoin.

Hours after two articles pegged Wright as the man behind the myth, Australian authorities moved in, raiding the residence “Cold fish Craig” (as he was known in his neighborhood) rented with his wife and conducting searches and interviews at his businesses.

Apparently, Australian tax authorities had questioned Wright in the past and according to a number of sources (and documents obtained by Wired and Gizmodo), there appears to have been some manner of dispute over how his bitcoin holdings should be taxed. The attention accorded to Wright on the heels of the two articles published late last Tuesday might have prompted the ATO to move in once and for all, although authorities claimed at the time that there was no connection between the new “revelations” about Wright’s identity and the raids.

Now, we get the latest twist in what is already a fairly bizarre story, as The Australian says that in May of 2013, Wright attempted to buy some $85 million in gold and software from Mark Ferrier, who at the time was working on a deal whereby his MJF Mining would obtain 50% of the gold discovered by ASX-listed goldminer Paynes Find Gold.

Apparently, Paynes needed machinery which Ferrier – via MJF – was willing to provide in exchange for a claim on any future discoveries. According to the Australian, “Mr Ferrier is alleged to have told Mr Wright gold was good security in the event the ‘funny money’ of Bitcoin failed.” Here’s what supposedly happened next:

Mr Wright has alleged payments were made in August 2013 of $38.8m — then the equivalent of 245,103 Bitcoin — for Siemens software and gold from Paynes. He then claimed payments were made to Mr Ferrier of $20.3m — or 135,100 Bitcoin — in September 2013 for the “core software” from Al-Baraka. In September that year Mr Ferrier was arrested in Perth and the gold partnership with Paynes was discontinued.

In December 2013 Mr Wright filed actions in the Federal Court and NSW Supreme Court suing for his share of the gold, claiming the sum of $84.42m based on the market value of the alleged Bitcoin payments for the gold.

Paynes’ annual financial report for the year ending June 30, 2014 contains the following passage about the partnership:

The company terminated a mining services and profit sharing agreement with MJF on October 1, 2013. Mr. Mark Ferrier has lodged a statement of claim with the District Court of New South Wales, claiming an amount of $279,621 related to the loss of profits from the small scale mining.The company considers the claim to be completely false.

Here’s an excerpt from a transcript of an ATO meeting that tells part of the story (this is from a John Chesher, who was Wright’s accountant):

Craig Wright was speaking in a conference in Melbourne. He was giving a talk about Bitcoins and mining. He was then approached by a man by the name of Mark Ferrier and that was how they met. This was how the relationship was formed. They started talking. Craig Wright told Mark Ferrier that he wanted to start up a Bitcoin bank. They then started emailing. Mark Ferrier told him that he knew someone who could help him start up the bank. This was all done in early June 2013. Everything was done very quickly- most of it was done in one weekend. Craig Wright, with the help of Mark Ferrier, agreed to purchase banking software from Al Baraka. Mark Ferrier also convinced him to purchase gold ore.

He also offered Ian Ferrier’s services to Mark Ferrier. Ian Ferrier is Mark Ferrier’s father. Before engaging in Mark Ferrier’s services, Craig Wright had conducted lots of checks on him and everything came up clean. So in essence, Craig Wright wanted the banking software and Mark Ferrier wanted Bitcoins. Around mid-July/August,

 

Craig Wright released funds from an entity located in the UK to MJF Consulting. This was all going through a server located in Central West Africa. Mark Ferrier was then arrested in September 2013. Craig Wright then started to take action to protect his own rights. Your director, Des McMaster has informed us that ASIC documents show that Mark Ferrier was only put on as a director for one day. Craig Wright then contacted Pitcher Partners in Brisbane and asked them for an explanation. We found out that Mark Ferrier was never a director. The address that he had on ASIC was false as well. Craig Wright was able to get hold of the banking software and automation system. He has everything but not the gold ore. He was expected to receive the gold ore in 2015 but now that’s not happening as the gold can’t be delivered.

Craig Wright has also contacted Ian Ferrier. Ian Ferrier advised us that he has not spoken to Mark Ferrier for 2 years and wants nothing to do with him. We have a case against MJF Consulting with the Supreme Court of NSW and also the Federal Court. The case with the Federal Court is for deceptive conduct against Mark Ferrier personally as an individual.

 

Due diligence was conducted on Mark Ferrier before we engaged him. We have done all we could to protect ourselves. If you look at the transactions made, you will see that every transaction was pegged against the currency exchange rate at the time. Craig Wright has already advised you that the accounting method for this personal enterprise should be changed from cash to accruals. The accounts should be on accruals from the start of the 2013 income year. Craig Wright has previously informed the ATO of this. We have previously been dealing with ATO officers from different sites at first, e.g. some initial work was being conducted from the Hurstville office, Brisbane office etc. But then Des McMaster made a decision for all the audits to be done from Parramatta. The audits were then being conducted by Celso. I am uncomfortable with the fact that Des McMaster is looking after these audits. We have had past dealings with him in the previous audits. 

For those interested in attempting to get to the bottom of this, you can read more here (just use a word search for “Ferrier), and we’re sure they’ll be much, much more revealed as time goes on, unless of course the Craig Wright story goes the way of all other Satoshi Nakamoto discovery claims (see Newsweek).

What’s immediately interesting however is that while Ferrier might not have “actually wanted any Bitcoin,” (to quote Wright), it does seem clear that Wright did and still does, want gold.

The takeaway: if you believe Wright is Satoshi, then the founder of bitcoin is skeptical enough of his creation’s intrinsic value compared to hard assets that he was at one time willing to trade a sizeable portion of his cryptocurrency wealth for physical gold.

Trade – or “mine”, as it were – accordingly.

 

 

Courtesy: Zerohedge

The End of the Bubble Finance Era – Recession Looms

The End of the Bubble Finance Era - Recession Looms

The End of the Bubble Finance Era – Recession Looms

We are nearing a crucial inflection point in the worldwide bubble finance cycle that has been underway for more than two decades. To wit, the world’s central banks have finally run out of dry powder. They will be unable to stop the credit implosion which must inexorably follow the false boom.

We will get to the Fed’s upcoming once in a lifetime shift to raising rates below, but first it is crucial to sketch the global macroeconomic context.

In a word, we are now entering an epic deflation. Its leading edge is manifested in the renewed carnage in the commodity pits.

This week the Bloomberg commodity index, which encompasses everything from crude oil to soybeans, copper, nickel, cotton and livestock, plunged below 80 for the first time since 1999. It is now down nearly 70% from its all-time high on the eve of the financial crisis, and 55% from its 2011 recovery high.

BloombergCommodityIndex

Wall Street bulls and Keynesian apologists for the Fed want you to believe that there isn’t much to see here. They claim it’s just a temporary oil glut and some CapEx over-exuberance in the metals and mining industry.

But their assurances that in a year or so current excess supplies of copper, crude, iron ore and other commodities will be absorbed by an expanding global economy couldn’t be farther from the truth. In fact, this error is at the heart of my investment viewpoint.

We believe the global economy is vastly bloated with debt-based spending that can’t be sustained. And that this distortion is compounded on the supply side by an incredible surplus of excess production capacity. As well as wasteful malinvestments that were enabled by dirt cheap central bank credit.

Consequently, the world economy is actually going to shrink for the first time since the 1930s. That’s because the plunging price of commodities is only a prelude to what will amount to a worldwide CapEx depression — the kind of thing that has not happened since the 1930s.

There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. The boom of the last two decades essentially stole output from many years into the future.

So there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.

The crucial point, however, is that sharp curtailment of the capital goods industries has far more destructive implications for the macro-economy than a reduction in consumer appliance sales or restaurant and bar tabs.

Service operations have virtually no working inventories and the supply chains for durable consumer goods such as dishwashers and cars typically have perhaps 50 to 100 days of stocks on hand. So when excessive inventory investments accumulate, the destocking and resulting supply chain curtailments are relatively short-lived.

But when it comes to capital goods the relevant inventory measure is capacity in place. That’s where the bubble finance policies of the Fed and other central banks have done so much damage.

Prolonged periods of below market capital costs induce business customers to drastically over-estimate investment returns. And therefore to eventually accumulate years and years worth of excess capacity.

This is very different than your grandfather’s consumer goods recessions of the 1950s and 1960s. Those typically involved moderate production cutbacks and several quarters of inventory destocking. But this time the capital goods adjustment will take years, perhaps more than a decade.

Here’s why.

When iron ore mines are drastically overbuilt, for example, new orders for Caterpillars’ (CAT) big yellow mining machines can drop to nearly zero. That’s why CAT is already in the longest string of dealer sales declines — 35 straight months and running — in its 100 year history.

Caterpillar

That’s also why the coming global recession will be so prolonged and stubborn. When cheap credit generates a boom in long-lived and expensive capital goods, it gives rise to a pipeline of new capacity.

This pipeline is not easy to shut-off and often makes sense to complete — say containerships, steel plants or new field mines — even if pricing and profitability have already headed south. That’s known as the sunk cost problem.

Mining equipment orders are likely to remain deeply depressed for the rest of the decade. And this syndrome will be repeated in most other sectors such as heavy trucks, shipyards, oil drilling equipment etc.

This depression in the capital goods industries, in turn, means the disappearance of thousands of typically high pay, high skill jobs at companies like Caterpillar. The same will happen among their extensive chains of outsourced components, materials and service suppliers. And the cascade of those contractions down the economy’s food chain will further intensify and extend the deflationary dynamic.

The graph below give some hint of the massive downturn which lies ahead on a worldwide basis.

During the last 25 years CapEx spending by the publicly listed companies of the world grew by an incredible 500%. Much of this happened in China and the Emerging Market (EM) economies, and in the transportation and distribution infrastructure that connects them.

GlobalCapex

Yet this massive explosion of investment spending didn’t happen because several billion Asian peasants suddenly decided to save-up a storm of new capital.

Instead, this unprecedented construction and CapEx campaign was financed almost entirely by a massive issuance of printing press credit at virtually zero real interest rates.

That means capital was drastically underpriced and that waste, excess and inefficiency abounded.

At length, the global economy became dangerously unbalanced. And these adverse consequences of the false central bank credit boom, in fact, highlight the investment opportunity ahead.

Healthy capitalist investment based on market prices and savings set aside from current income can go on indefinitely, fueling rising efficiency, output and wealth.

But CapEx based on printing press credit only temporarily enabled the world economy to have its cake and eat it, too. Now it’s payback time.

Needless to say, during the expansion phase of central bank enabled bubble finance, optimism reigns and bulls and speculators insist that “this time is different.”

Yet the laws of sound finance and market economics never change. It often just takes an extended time for all the excesses to work their way through the system and finally reach the blow-off stage.

The graph below summarizes this great deformation.

Over the last two decades, global credit market debt outstanding has soared from $40 trillion to $225 trillion. This represents an incredible $185 trillion debt expansion. That eruption would be simply unimaginable without the help of money printing central banks.

By contrast, global GDP only expanded by $50 billion during the same period, and even that’s an overstatement. Much of that reported gain merely represented the one-time pass-through of fiat credit, not real savings put to work in efficient production.

Consequently, it is likely that the global economy accumulated more than $4 of new debt for every $1 of incremental GDP.

Not only is that self-evidently an unsustainable financial equation, it also means that when credit growth stops, the bottom will drop out of reported GDP. It wasn’t new wealth in the first place, just production stolen from the future.

GlobalDebt

And this gets us to the Fed’s upcoming move to raise interest rates for the first time in 10 years. It will amount to a sea-change that in due course will shatter the entire regime of bubble finance that gave rise to the false credit and CapEx boom depicted above.

As I have often said, the Fed has become addicted to the “Easy Button.” During more than 80% of the 300+ months during the last quarter century it has either cut rates or left them unchanged.

EasyButton

Accordingly, the professional gamblers in today’s Wall Street casino have no real experience of a time when the “Fed is your friend” adage failed to work. They have experienced essentially false one-way markets, knowing that the Greenspan/Bernanke/Yellen “put” under stocks and other risks assets would come to the rescue.

But here’s the thing. After 84 months of zero interest rates — and folks that’s pure lunacy by all historic standards — the Fed has run out of time and excuses.

If it doesn’t begin to normalize rates at last, and as repeatedly promised, its credibility will be shattered. And what it long has been deathly afraid of will happen. That is, the market will plunge into a hissy fit that will shatter confidence in what is essentially a giant credit-based Ponzi.

And the other major central banks of the world are in the same boat. Just last week we saw the ECB stopped short by its powerful Germany contingent that essentially said to Draghi that $1.3 trillion of money printing is enough.

Likewise, the People’s Bank of China (PBOC) has run out of dry powder, too. And that’s of monumental importance.

The epicenter of the global commodity, industrial and CapEx boom was in China. Thanks to the greatest money printing spree by the PBOC in recorded history, outstanding public and private debt there has exploded from $500 billion in 1994 to $30 trillion at present.

That’s a 60-fold gain. Is it any wonder that the commodity and CapEx charts shown above went nearly vertical during the peak of the global boom?

But now China is facing the collapse of its credit Ponzi, and capital is fleeing the country at a prodigious pace.

In the last 15 months alone, nearly $1 trillion has high tailed it for London, New York, Australia, Vancouver and other resting places for flight capital.

So the PBOC is being forced to stop its printing presses in order to prevent the Yuan exchange rate from collapsing and the capital outflow from getting totally out of hand.

Even in Japan, the Bank of Japan’s printing press is no longer accelerating. That because notwithstanding trillions of new money conjured from thin air during recent years, Japan is on the verge of its 5th recession in seven years. Even in Japan, bubble finance is losing its credibility.

So where is the investment opportunity in this epochal shift in the global credit cycle?

 

 

 

Courtesy: David Stockman for The Daily Reckoning

Problem, Reaction, Solution Does Not Apply To Gold And Silver

Problem, Reaction, Solution Does Not Apply To Gold And Silver

Problem, Reaction, Solution Does Not Apply To Gold And Silver

The Rothschild-now-globalist template for gaining control over all money, and now the world, has been create a Problem, let an adverse Reaction develop, then present the desired Solution.  On a grander scale, there was the US Civil War to divide the country, then the manufactured Roaring ’20s and the stock market bubble, burst when the money changers purposefully tightened the money supply creating massive margin calls and the Crash of 1929.

On a more recent level, we commented on the Arab refugee situation designed to weaken Europe, as a plan to further the New World Order.  The globalists created a Problem in the Middle East.  This created an [orchestrated] Reaction of fleeing  Arabs to escape the US-driven destruction in their countries, most recently in Syria.  The most recent offered Solution?  Eliminate borders between European nations and institute EU- controlled border guards, whether any country wants them or not.  Checkmate, Europe. Let the globalists take control over your borders.

Precious Metals, [PMs], have been exempt from that template.  Instead, the Problem has been singular:  keep a stranglehold on the price of gold.  It does not matter what the Reaction is, the Solution is to keep the Problem in place: the removal of gold and silver as a competitor to the globalist’s fiat money Ponzi scheme.

Look at the Fed’s fiat [make believe] “dollar,” nothing more than an instrument of debt, and we all know, or should know that debt cannot be money.  The globalists have won that mind game as the world believes a fiat Federal Reserve Note is actually a real dollar.  It is not, never was, and never can be, yet the Ponzi scheme thrives, nearing its point of self- destruction.

While there was a sizable correction in the fiat “dollar,” recently, a look at a monthly chart shows the Ponzi game is far from over.  Is a top in?  Not likely, from our perspective.  This could be the beginning of some topping activity, but tops take time to form and complete.  The “dollar” game will not be over until the globalists are ready to pull the “dollar” plug and replace it with their next Ponzi scheme, paper Special Drawing Rights, [SDRs], to include China’s blessings and participation, and Russia is also behind that scheme.

The game of bait-and-switch from West to East has been planned and in process for decades.  For as long as the scheme goes on, gold and silver will remain in the doldrums. The globalists will have it no other way.

DX M 12 Dec 15

Why has not gold and silver responded to the reality of overwhelming demand for physical gold from China, India, Russia by the tons, and unparalleled public participation by the ounces?  We include a chart on crude oil to help provide an answer.  When a decision has been made to control a market, the reality of the natural laws of Supply and Demand are thrown out the window and are of no consequence, to the consternation of most.

Gold and silver stackers are intimately familiar with this constant decline in price while demand soars.  Oil has been the latest misuse of power as the Saudis are out to destroy as much competition for its market share in oil as possible.  Where $70-$80 a barrel was thought to be important support, it was not even a temporary stopping point in the unabated slide from $100 down to $40, and now in the $30+ range.

The two horizontal lines show potential supports for crude oil, price just a few dollars away from the last major bottom in 2008.  The $25 area would be next should $30+ fail.  Does supply and demand matter to the Saudis [?], and we doubt they are acting independently from the globalists who plan for everything that takes place in their Problem-Reaction-Solution scheme for a one world currency, the SDR, [not gold-backed, by the way] and a one world government, enslaving people all over the globe.

CL M 12 Dec 15

The following comments may not be what one wants to hear, but charts tell what the reality is behind any market, and we are just the messenger delivering the chart-driven message.  It is one we have been saying for the last 4 to 5 years, with regard to not being on the long side in the paper futures market.  The simple but valuable premise is: never buck the trend.  Being long physical metals is a different story for very valid different reasons.

Can, will gold see glory days ahead?  This is a question not asked by many, now, and even fewer just a few years ago when gold was almost universally expected to surpass $10,000 per oz, at least within the PMs community.  The monthly chart is not a pillar of strength as price continues to recede lower and lower with no meaningful rally attempts that would reflect the reality of actual physical demand.

Had gold stayed above $1,500, the chart pattern for continuing higher would have remained a robust potential.  Just like crude oil is being driven to price levels almost no one thought possible, that has been the story for gold and silver for the past five years with no end in sight, currently.

The higher controlling pattern in the monthly chart shows no sign of an impending turnaround in the price of gold.  However deflationary [to one’s mind] this may sound to gold and silver enthusiasts, and we are among them, the alternative, fiat, now soon to be digital world currency, is even less appealing.  Time remains on the side of the globalists, for now.

GC M 12 Dec 15

The best read for price behavior moving forward is its overall past with an emphasis on its present developing market behavior, and that behavior does not show a break in pattern to the downside. So far, every encouraging rally has proven to be a blip in the overall malaise inflicted on gold and silver advocates by the moneychangers.

GC W 12 Dec 15

We keep looking for signs of a turnaround without seeing any.  Rallies have been weak. Note how far away a 50% retracement is on the chart.  Half-way retracements are used as a guide to gauge the character of a trend.  For as long as  a down trend can keep  rallies from extending past 50% of the last swing decline, the trend is in no danger of ending. When price cannot muster much beyond just a 25% reaction rally, the activity speaks for itself.

GC D 12 Dec 15

Silver has a slightly different structure to its down trend, but it remains entrenched in its trend lower.  The monthly shows no signs of encouragement that price has reached and/or is making a bottom.

SI M 12 Dec 15

When one continues to buy physical gold and silver, it is silver that will more than likely provide the best return on exchanged paper currency.  The gold:silver ratio is now around 77 to 1.  Every ounce of gold has an equivalent value of 77 ounces of silver.  Ten oz of gold would yield around 720 oz of silver, accounting for transaction costs.

The historic ratio between gold and silver is said to be around 15:1, even 25:1.  Should the ratio return to say 35:1, for the sake of argument, the 10 oz of gold exchanged for 720 oz of silver can now be reversed.  The 720 oz of silver can be exchanged for just over 20 oz of gold, say 19, after transaction costs.  The previous holding of gold, 10 oz, has now become 19 oz without ever having been out of holding PMs.

Food for thought.

It may take years for the ratio to rebalance from 77:1 to lower, but so what?  One’s holdings are still going up in value for little to no risk.  A thoughtful silver lining in the chart cloud.

SI W 12 Dec 15

A week ago prior Friday’s strong volume rally was a short-covering event evidenced by the fact that the rally could not sustain itself.  The 15.10 area would be a 50% retracement, and the market has shown an inability to mount any kind of meaningful rally over the past few months, despite a few falsely encouraging rallies intervening.

The message is no different in the daily silver chart.  Much more evidence is needed before one can entertain any thoughts for a change in trend.  The most positive aspect for silver is the fact that the gold:silver ratio now strongly favors buying/owning physical silver over gold.

Prices for gold and silver are cheap, and despite what some may construe as not so favorable an outlook for PMs, at present, which is exactly what the globalists want from people.  Get as many discouraged in their faith for buying/holding gold and silver as possible.  Create false fiat gods.  Destroy all beliefs that gold and silver will again be a storehouse for value.  Rinse and repeat.

Always remember, the globalists who want to instil that false paradigm are the same ones who are issuing trillions and trillions of worthless so-called money, and no regime, from the beginning of civilization, has ever escaped from the collapse of every Ponzi scheme, including the current one that has been extraordinarily stretched beyond imagination, let alone far beyond reality tolerance.

If you feel disheartened, it is three rotten cheers for the globalists.  If you want to take a stand against them, keep the faith.  Keep your precious metals.  The time for change has not yet come, but it will.  It is lunatics that are running the show.

“The paper holds their folded faces to the floor
And every day the paper boy brings more.”

SI D 12 Dec 15

 

Submitted by: Edgetraderplus

Why Gold Backed Money Doesn’t Bring Booms and Busts

Why Gold Backed Money Doesn’t Bring Booms and Busts

Why Gold Backed Money Doesn’t Bring Booms and Busts

According to popular thinking, not every increase in the supply of money will have an effect on economic activity. For instance, if an increase in supply is matched by a corresponding increase in the demand for money, we are told, then there won’t be any effect on the economy. The increase in the supply of money is neutralized, so to speak, by an increase in the demand for money, or the willingness to hold a greater amount of money than before.

What do we mean by demand for money? And how does this demand differ from demand for goods and services?

Now, demand for a good is not a demand for a particular good, as such, but a demand for the services that the good offers. For instance, individuals’ demand for food is on account of the fact that food provides the necessary elements that sustain an individual’s life and well-being. Demand here means that people want to consume the food in order to secure the necessary elements that sustain life and well-being.

Also, the demand for money arises on account of the services that money provides. However, instead of consuming money, people demand money in order to exchange it for goods and services. With the help of money, various goods become more marketable — they can secure more goods than in the barter economy. What enables this is the fact that money is the most marketable commodity.

Why People Demand Money

Take for instance a baker, John, who produces ten loaves of bread per day and consumes two loaves. The eight loaves he exchanges for various goods such as fruits and vegetables. Observe that John’s ability to secure fruits and vegetables is on account of the fact that he has produced the means to pay for them, which are eight loaves of bread. The baker pays for fruits and vegetables with the bread he has produced. Also note that the aim of his production of bread, apart from having some of it for himself, is to acquire other consumer goods.

Now, an increase in John’s production of bread, let us say from ten loaves to twenty a day, enables him to acquire a greater quantity and a greater variety of goods than before. As a result of the increase in the production of bread, John’s purchasing power has increased. This increase in the purchasing power does not necessarily translate into securing a greater amount of goods and services in the barter economy, however.

In the world of barter, John may have difficulties to secure by means of bread various goods he wants. It may happen that a vegetable farmer may not want to exchange his vegetables for bread. To overcome this problem John would have to exchange his bread first for some other commodity, which has much wider acceptance than bread. John is now going to exchange his bread for the acceptable commodity and then use that commodity to exchange for goods he really wants.

Note that by exchanging his bread for a more acceptable commodity, John in fact raises his demand for this commodity. Also, note that John’s demand for the acceptable commodity is not to hold it as such but to exchange it for the goods he wants. Again the reason why he demands the acceptable commodity is because he knows that with the help of this commodity he can convert the bread he produced more easily into the goods he wants.

Now let us say that an increase in the production of the acceptable commodity has taken place. As a result of a greater amount of the acceptable commodity relative to the quantities of other goods the unitary price of the acceptable commodity in terms of goods has fallen. All this, however, has nothing to do with the production of goods. The increase in the supply of an acceptable commodity is not going to disrupt the production of goods and services. Obviously if the purchasing power of the commodity were to continue declining then people are likely to replace it with some other more stable commodity.

Historically, in many societies, through a process of selection, people have settled on gold as the most accepted commodity in exchange. Gold has become money.

Real Money versus Money “Out of Thin Air”

Let us now assume that some individual’s demand for money has risen. One way to accommodate this demand is for banks to find willing lenders of money. With the help of the mediation of banks, willing lenders can transfer their gold money to borrowers. Obviously, such a transaction is not harmful to anyone.

Another way to accommodate the demand is, instead of finding willing lenders, the bank can create fictitious money — money unbacked by gold — and lend it out.

Note that the increase in the supply of newly created money is given to some individuals. There must always be a first recipient of the newly created money by the banks.

This money, which was created out of “thin air,” is going to be employed in an exchange for goods and services (i.e., it will set in motion an exchange of nothing for something). The exchange of nothing for something amounts to the diversion of real wealth from wealth to non-wealth generating activities, which masquerades as economic prosperity.

In the process, genuine wealth generators are left with fewer resources at their disposal, which in turn weakens the wealth generators’ ability to grow the economy.

Will More “Demand for Money” Save Us?

Could a corresponding increase in the demand for money prevent the damage that money out of “thin air” inflicts on wealth generators?

Let us say that on account of an increase in the production of goods, the demand for money increases to the same extent as the supply of money out of “thin air.” Recall that people demand money in order to exchange it for goods. Hence at some point the holders of money out of “thin air” will exchange their money for goods. Once this happens an exchange of nothing for something emerges, which undermines wealth generators.

We can thus conclude that irrespective of whether the total demand for money is rising or falling what matters here is that individuals employ money in their transactions. As we have seen, once money out of “thin air” is introduced into the process of exchange, this weakens wealth generators and this in turn undermines potential economic growth. Clearly then, the expansion of money out of “thin air” is always bad news for the economy. Hence, the view that it is harmless to have an increase in money out of “thin air” — if fully “backed by demand”— doesn’t hold water.

In contrast, an increase in the supply of gold money is not going to set an exchange of nothing for something. Also, an increase in the supply of commodity money doesn’t set boom-bust cycles.

We can further infer that it is only the increase in money out of “thin air” that is responsible for the boom-bust cycle menace. This increase sets the boom-bust cycle irrespective of the so-called overall demand for money.

Does Gold Cause Boom-Bust Cycles?

According to most economists however, in an economy with a gold standard, an increase in the supply of gold generates similar distortions that money out of “thin air” does.

This is not the case.

Let us start with a barter economy. John the miner produces ten ounces of gold. The reason he mines gold is he believes there is a market for it. Since people demand it, we know that gold contributes to the well-being of individuals. John exchanges his ten ounces of gold for various goods such as potatoes and tomatoes.

Now people have discovered that gold, apart from being useful in making jewelry, is also useful for some other applications. They now assign a much greater exchange value to gold than before. As a result John the miner could exchange his ten ounces of gold for more potatoes and tomatoes.

Should we condemn this as bad news because John is now diverting more resources to himself?

No, because this is just what happens all the time in the market. As time goes by people assign greater importance to some goods and diminish the importance of some other goods. Some goods are now considered as more important than other goods in supporting people’s life and well-being. Now people have discovered that gold is useful for another use such as to serve as the medium of the exchange. Consequently they lift further the price of gold in terms of tomatoes and potatoes. Gold is now predominantly demanded as a medium of exchange — the demand for other services of gold such as ornaments is now much lower than before.

Let us see what is going to happen if John were to increase the production of gold. The benefit that gold now supplies people is by providing the services of the medium of the exchange. In this sense it is a part of the pool of real wealth and promotes people’s life and well-being. One of the attributes for selecting gold as the medium of exchange is that it is relatively scarce.

This means that a producer of a good who has exchanged this good for gold expects the purchasing power of his effort to be preserved over time by holding gold. If for some reason there is a large increase in the production of gold and this trend were to persist the exchange value of the gold would be subject to a persistent decline versus other goods, all other things being equal. Within such conditions people are likely to abandon gold as the medium of the exchange and look for other commodities to fulfill this role.

As the supply of gold starts to increase its role as the medium of exchange diminishes while the demand for it for some other usages is likely to be retained or increase. So in this sense the increase in the production of gold is not a waste and adds to the pool of real wealth. When John the miner exchanges gold for goods he is engaged in an exchange of something for something. He is exchanging wealth for wealth.

Contrast all this with the printing of gold receipts (i.e., receipts that are not backed 100 percent by gold). This is an act of fraud, which is what inflation is all about, it sets a platform for consumption without making any contribution to the pool of real wealth. Empty certificates set in motion an exchange of nothing for something, which in turn leads to boom-bust cycles. The printing of unbacked-by-gold certificates divert real savings from wealth generating activities to the holders of unbacked certificates. This leads to the so-called economic boom.

The diversion of real savings is done by means of unbacked certificates (i.e., unbacked money). Once the printing of unbacked money slows down or stops all together this stops the flow of real savings to various activities that emerged on the back of unbacked money. As a result, these activities fall apart — an economic bust emerges.

In the case of the increase in the supply of gold no fraud is committed here. The supplier of gold has simply increased the production of a useful commodity. So in this sense we don’t have an exchange of nothing for something. Consequently we also don’t have an emergence of bubble activities. Again the wealth producer on account of the fact that he has produced something useful can exchange it for other goods. He doesn’t require empty money to divert real wealth to himself. Note that a major factor for the emergence of a boom is the injections into the economy of money out of “thin air.” The disappearance of money out of “thin air” is the major cause of an economic bust. The injection of money out of “thin air” generates bubble activities while the disappearance of money out of “thin air” destroys these bubble activities.

On the gold standard — a true gold standard without central bank manipulation — this cannot take place. Consequently on the gold standard, money cannot disappear since gold cannot disappear. We can thus conclude that the gold standard, if not abused, is not conducive of boom-bust cycles.

 

 

Courtesy: Frank Shostak

Silver: Until Paper Currencies Stop Losing Value

Silver: Until Paper Currencies Stop Losing Value

Silver: Until Paper Currencies Stop Losing Value

Alasdair McLeod wrote an excellent article in which he said,

“So if anyone asks you when you might take your profits in gold and silver, smile sweetly and just say, ‘When paper money stops losing its value.’”

When will paper money stop losing its value? I submit that unbacked fiat paper money will, based on history, never stop losing value – as long as it is backed by dodgy sovereign debt issued by governments descending deeper into debt ever year. A viable alternative is currency backed by gold and silver, but even though precious metals have been used successfully as money for centuries, there is far more profit for TPTB when they use the paper stuff. Consequently paper and digital currencies will not disappear anytime soon.

But given that we are stuck with the paper stuff… and given that we erroneously believe that the paper stuff is an adequate measuring tool… and given that we live our daily lives within the universe of paper currencies… and given that we need silver (and gold) to compensate for the loss of value in paper currencies… THEN:

The critical question is: Is silver inexpensive now? Consider silver ratios to the S&P 500 Index, the official US national debt, and others.

Examine the following ratio of (1000 times paper COMEX) silver to the S&P 500 Index. Silver is at the low end of its long-term range indicating that the S&P has been levitated by QE and central bank policies while paper silver prices have been crushed. Massive profits came from levitating the S&P so this is sensible, but the ratio indicates that silver is likely to substantially increase in price over the next several years.

O-SI-SP Ratio

Examine the following ratio of (1 trillion times paper COMEX) silver to official US national debt. Silver is at the low end of its long-term range indicating that silver prices are low compared to the national debt, which has increased consistently for a century. The ratio indicates that silver is likely to substantially increase in price over the next several years.

o-SI-ND ratio

O-Si-NatDebt

Examine the following graph of monthly paper COMEX silver prices on a log scale back to 1988. Note the following:

  1. The red vertical lines are spaced 83 months apart. I have circled major lows (1995, 2001, 2008, and 2015) in green. Paper silver prices have currently descended into a seven year cycle low.
  2. Note that silver has fallen hard in the past 4.5 years and has returned to its 200 month moving average – the green line – which is a severe correction.
  3. Silver prices are erratic but on average they rise along with national debt, government spending, and currency in circulation.
  4. It is difficult to quantify but I think we can safely assume that silver prices will also rise based on increasing warfare in the Middle-East, increasing fiscal and monetary insanity, and increasing foreign policy stupidity.

O-silver

CONCLUSIONS:

  1. Silver price ratios (paper COMEX) are near historical lows compared to both the S&P 500 Index and the official US national debt.
  2. Central banks are aggressively devaluing their currencies and trying to inflate consumer prices. They will probably succeed since they own the legal “printing presses” and consequently we should expect erratically higher gold and silver prices in the relatively near future.
  3. Politicians will continue spending and descending further into a devastating pit of debt, and central banks will not voluntarily reduce debt and currency in circulation. A deflationary accident may occur but we should assume central banks will fight it with a flood of global “printing press” currencies. Think Japan, “helicopter drops,” a war on cash, negative interest rates, more QE, and “bail-ins.”
  4. It is relatively easy to increase debt, increase currency in circulation, devalue currencies, and spend more on warfare and welfare. It is difficult to increase silver and gold reserves. The prices for silver and gold will eventually reflect their scarcity, their high demand, and the ease with which central banks can devalue their currencies.
  5. Read Steve St. Angelo’s article on silver coin demand.
  6. Paper Dies, Silver Thrives!

 


Courtesy: Gary Christenson – The Deviant Investor

Commodity Crash Warns Of Imminent Deflationary Financial Crisis

Commodity Crash Warns Of Imminent Deflationary Financial Crisis

Commodity Crash Warns Of Imminent Deflationary Financial Crisis

If we really are plunging into a deflationary global financial crisis, we would expect to see commodity prices crash hard.  That happened just before the great stock market crash of 2008, and that is precisely what is happening once again right now.  On Thursday, the Bloomberg Commodity Index closed at 79.1544.  The last time that it closed this low was 16 years ago.  Not even during the worst moments of the last recession did it ever get so low.  Overall, the Bloomberg Commodity Index is down more than 28 percent over the past 12 months, and it has plummeted by more than half since mid-2011.  As a result of this stunning commodity collapse, extremely large mining companies such as Anglo American are imploding, giant commodity trading firms such as Glencore and Trafigura are in full-blown crisis mode, and huge portions of the global financial system are in danger of utterly collapsing.

In recent days, I have been trying to stress that many of the exact same patterns that we witnessed just prior to the great stock market crash of 2008 are happening once again.  This includes the staggering crash of commodity prices that we are currently witnessing, and even CNN acknowledges that there are parallels to what we experienced seven years ago…

The last time raw materials like copper and oil were this cheap, an economic depression loomed just around the corner.

It’s no secret that commodities in general have had a horrendous 2015. A nasty combination of overflowing supply and soft demand has wreaked havoc on the industry.

But prices for everything from crude oil to industrial metals like aluminum, steel, copper, platinum, and palladium have collapsed even further in recent days.

As I mentioned above, this crash in prices is hitting mining companies really hard.  Just this week, the fifth largest mining company in the entire world announced a massive restructuring and will be laying off tens of thousands of workers…

In the latest example of just how bad things have gotten, Anglo American–the world’s fifth largest miner–just kitchen sink-ed it, announcing a sweeping restructuring, a massive round of layoffs, and a dividend cut. The company will reduce its assets by some 60% while headcount will be cut by a whopping 85,000 or, nearly two-thirds. 

Overall, the U.S. has lost approximately 123,000 good paying jobs from the mining sector since the end of 2014.  And if commodity prices stay low, this sector is going to continue to bleed good paying jobs.

Meanwhile, investors have been dumping the debt of any companies that have anything to do with commodities.  This has significantly contributed to the emerging junk bond crisis that I discussed in my last article.  As I write this, a high yield bond ETF known as JNK has fallen all the way down to 34.31, which is the lowest that it has been since the last recession.  For much more on the junk bond implosion, I would encourage you to read an article that Wolf Richter just put out entitled “Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck“.

So why are commodity prices falling so rapidly?

Many analysts are pointing to the economic slowdown in China as the primary reason.  For years, the Chinese economy voraciously gobbled up commodities from sources all over the planet, but now things are changing.  The Chinese economy is really, really slowing down, and some recently released numbers give us some clues as to the true extent of that slowdown…

-Chinese exports fell 6.8 percent in November on a year over year basis after being down 6.9 percent on a year over year basis in October.

-Chinese imports were down 8.7 percent in November on a year over year basis.

-Chinese manufacturing activity has been contracting for nine months in a row.

-Last week, the China Containerized Freight Index plummeted to 718.58 – the lowest level ever recorded.

And of course it isn’t just China.  Goldman Sachs says that the seventh largest economy on the entire planet, Brazil, has plunged into a “depression“.  And as I pointed out the other day, of the 93 largest stock market indexes in the entire world, an astonishing 47 of them (more than half) are down at least 10 percent year to date.

Even though stocks slid in the U.S. this week, the major indexes still seem somewhat stable.  But this is a bit of an illusion.  Yes, the biggest names on Wall Street are still flying high for the moment, but shares of a multitude of smaller and mid-size firms have been plummeting.  At this point, nearly 70 percent of all U.S. stocks are already below their 200 day moving averages.  This is yet another thing that we would expect to see just before the bottom falls out for stocks.

Everything that I have been writing about this week (see here and here) is perfectly consistent with all of my warnings from earlier this year.

We are plunging into a deflationary financial crisis in textbook fashion.  And if the Federal Reserve actually does decide to go ahead with an interest rate hike next week that is just going to make things even worse.

But most people are not patient enough to watch a process play out.  Most people that write about “the coming economic collapse” hype it up like it is going to be some sort of big Hollywood blockbuster that is going to happen over a week or a month and then be over.  That is definitely not the way that I see things.

To me, “the economic collapse” is something that has been happening for decades, that is still in the process of happening right now, and that will continue to happen as we move forward into the future.  The long-term trends that are ripping our economy to shreds continue to intensify, and our leaders are not doing anything to fix our underlying fundamental problems.

And the financial crisis that I warned would start during 2015 and accelerate in 2016 has already begun.  More than half of all major global stock market indexes are down by at least 10 percent year to date, and some of them have plummeted by more than 30 or 40 percent.  Trillions of dollars of wealth has been wiped out around the globe, and this is just the beginning.

All of the numbers tell us the same thing.

Big trouble is ahead.

My job is to inform you of these things.  What you choose to do with this information is up to you.


Courtesy: Michael Snyder

Understanding the Death of the US Dollar

Understanding the Death of the US Dollar

Understanding the Death of the US Dollar

In spite of our dismal investment landscape, financial cheerleaders still wave their pom-poms and urge you to buy stocks and bonds ‘for the long run’. You only need to look at bond markets to see what I mean.

Short term Treasuries have almost no yield. Long-term Treasuries offer 2% if an investor is prepared to bet on no inflation for 10 years.

High-yield corporate debt is loaded with credit risk at this stage of the cycle. The defaults are going to pile up as we enter a global growth recession in early 2016.

Yet you’re urged to blindly enter this market. Based on assurances that all is well and the next 20 years will echo the past 20 years.

Meanwhile, the financial foundation built on the dollar is rotting away.

The historical precedent for the slow loss of reserve currency status is the strange case of sterling. The story begins with a geopolitical event far removed from the counting rooms of London — the assassination of Archduke Franz Ferdinand, heir to the throne of the AustroHungarian Empire, by a Serbian terrorist in Sarajevo on 28 June 1914.

When the First World War began on 28 July, one month after the assassination of the Archduke, all of the major belligerents immediately suspended the conversion of their currencies into gold except the UK. The conventional view was that countries needed to hoard gold and print money to pay for the war, which is why they suspended convertibility.

The UK took a different approach. By maintaining the link to gold, London maintained its credit standing. This enabled the UK to borrow to pay for the war. It was John Maynard Keynes who convinced the UK to remain on the gold standard. It was Jack Morgan, son of JP Morgan, who organised massive loans in New York to support the British war effort.

Initially there were huge outflows of gold from the US to the UK. Even though the UK remained on the gold standard, investors sold stocks, bonds and land in the US, converted the proceeds into gold, and then shipped the gold to the Bank of England.

In November 1914, the flow of gold suddenly reversed. The British needed US exports of food, wool, cotton, oil, and weapons. All of this had to be paid for either in gold or pounds sterling that could be converted into gold. The gold that had flowed east from New York to London now began to flow west from London to New York.

From November 1914 until the end of the war in November 1918, there were massive gold inflows to the Federal Reserve Bank of New York and its private member banks. It was at this stage that the dollar emerged as a new global reserve currency to challenge the supremacy of sterling.

The process of the dollar replacing sterling began in November 1914, but there was no immediate or sudden collapse of sterling. Throughout the 1920s, the dollar and sterling competed side-by-side for the role of leading reserve currency. Scholar Barry Eichengreen has documented how the dollar and sterling took turns in the leading role with the lead shifting back-and-forth several times.

But by 1931, the race was becoming one-sided. The dollar was starting to pull away. Winston Churchill had blundered by pegging sterling to gold at an unrealistic rate in 1925. The super strong sterling that resulted decimated UK trade, and put the UK in a depression three years before the rest of the world. UK trade deficits caused Commonwealth trading partners such as Australia and Canada to get stuck with huge unwanted reserves in sterling.

The rise of the dollar, and the steady decline of sterling continued through the 1930s until the start of the Second World War in 1939. At that point, the UK suspended the convertibility of sterling into gold. The international monetary system broke down for the second time in 25 years. Normal trade, currency exchange, and gold convertibility remained suspended until the international monetary system could be reformed.

This reform took place at the Bretton Woods international monetary conference held in New Hampshire in July 1944. That conference marked the final ascendency of the dollar as the leading global reserve currency.

From 1944 to 1971, major currencies, including sterling, were pegged to the dollar. The dollar was pegged to gold at US$35.00 per ounce. Bretton Woods was the definitive end to the role of sterling as the leading reserve currency. The conference enshrined the dollar in the leading reserve currency role — a position it has held ever since.

The point of this history is to show that the replacement of sterling by the dollar as the leading reserve currency was not an event, it was a process. The process played out over 30 years, from 1914 to 1944. It involved a seesaw dynamic in which sterling would try to reclaim the crown only to lose it again.

With hindsight it is possible to see that the turning point took place in November 1914 when gold outflows from the US reversed and became inflows. Those inflows continued until 1950 despite two world wars, and the Great Depression.

Yet, no one saw the collapse at the time.

From the Bank of England’s perspective, November 1914 may have seen gold outflows, but no one believed the process of decline was inevitable or irreversible. The belief in London was that Britain would win the war, maintain the empire, and preserve sterling’s position as the most valued currency in the world.

Britain did win the war, but the cost was too great. They lost the empire and sterling lost its role as the leading reserve currency. The issue for investors today is whether the US dollar already had its November 1914 moment.

Is it possible that the collapse of the US dollar as the leading reserve currency has already begun? The answer is ‘yes’.

Looking at the massive flows of gold to China, the rise of a dollar competitor in the form of the SDR, and the coming inclusion of the Chinese yuan in the SDR basket, it is difficult not to conclude that the dollar collapse has already begun.

Yet, like the collapse of sterling a century ago, the decline of the dollar will not necessarily happen overnight.

It will be a slow, steady process.

 

 

Courtesy: Jim Rickards

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