Commodity Trade Mantra

Gold, Investor Optimism & Price Inflation Outlook for 2017

Gold, Investor Optimism & Price Inflation Outlook for 2017

Gold, Investor Optimism & Price Inflation Outlook for 2017

We exit 2016 on a tide of investor optimism. At long last, there will be a businessman in charge of the US economy in the form of a new president, and the stimulation he will provide is of tax cuts and infrastructure spending.

If interest rates must rise a tad, who cares? More important for equity-driven investors is the improved outlook for corporate profits from a combination of fiscal stimulation and a business-friendly administration.

If the recent performance of equity and bond markets is any guide, this view dominates investor thinking. Since the financial crisis eight years ago, the rise in equity markets had been driven by ZIRP and the expansion of credit aimed at financial assets. Now equities are on firmer ground, but this is a view that completely ignores the monetary flows upon which asset values depend. The reason asset values are at current levels is because there has been an excess of monetary inflation over that absorbed by the non-financial economy. Furthermore, demand from non-financials has been constrained by the continuing wealth-transfer effect of monetary inflation from ordinary people, benefitting the banks and the earlier recipients of the new credit created. This devaluation of earnings and savings is under-recorded by government inflation statistics, but the large majority of people in ordinary occupations outside financial centres have been progressively impoverished, relative to the minority benefiting from the inflation of financial assets prices. No wonder the economy stagnates.

The emphasis is now due to swing from monetary towards fiscal stimulation. Instead of money being bottled up in financial assets, it will begin to flow out of them into spending and employment in non-financial sectors, as well as into government, whose budget deficit will rise. The consequences of these monetary flows cannot be emphasised enough, leading to selling of financial assets in favour of financing non-financial activities. I covered this important point in a recent article, which yielded surprisingly little comment from regular readers. That analysis postulates that despite the improved outlook for the economy, equities and residential property prices are at or close to their peak, based on monetary flows. I urge all investors to read it if they have not already.

The price inflation killjoy

The effect of redirecting monetary resources previously inflating financial assets into non-financial sectors will be to increase consumer prices. Price inflation shifts, deflating assets and inflating consumer prices, developing a momentum of its own. We have already seen significant increases in dollar prices for industrial materials and energy in 2016. To this we must add the marginal price effect of increased demand for goods and services in a capacity-constrained economy. As products become relatively scarce compared with freely available money, the underlying price dynamics will become dramatically apparent.

The effect of price inflation is not, as commonly supposed, to drive up prices. Instead, it drives down the purchasing power of expanding government-issued currency. And in addition to these supply and demand considerations, there is the added dynamic of changes in consumers’ overall desire to retain money balances, relative to owning goods. Deteriorating public confidence in money is ultimately the greatest destructive force any fiat currency faces, and is the reason unsound money eventually collapses into uselessness.

Fortunately for all governments bent on monetary debasement, the public’s understanding of money is limited to it being the objective element in any transaction, and in consequence all populations are reluctant to even consider the possibility that government-issued currency might not be worth today what it was yesterday. Awareness that money is losing purchasing power only dawns on the public late in the price inflation process.

The dollar’s accelerating loss of purchasing power could become a significant danger in future, because the Fed is predisposed to maintain interest rates on the low side, and raising the Fed Funds Rate to only 2.5% or so could be enough to trigger a debt crisis. The Fed is tasked with preventing financial and banking crises, and protecting the dollar’s purchasing power is a secondary consideration.

And that’s the problem. Mindful of the debt overhang, unless it is prepared to collapse the economy, the Fed cannot raise rates by much, perhaps 2% from current levels at most. If inflation measured by the CPI goes to over 4%, the general level of prices will almost certainly be rising by well over 10%, because the CPI statistic is designed to under-record price inflation by a considerable margin. While the rate of price increases is stable, it has not been an issue, but if it begins to rise, markets are likely to begin discounting higher rates of price inflation and become increasingly aware that the Fed is powerless to act.

In addition to the monetary flow problem discussed above, rising interest rates will therefore become an additional negative factor bearing down on asset values. We can expect the yield curve to steepen as well, and for the long bond to head towards 5% yields and more. Equities and property prices cannot rise in this environment, and must fall.

Gold

This year, bulls of precious metals have ridden a roller-coaster of hope followed by disillusionment. Much of the frustration has been due to the bullion banks seizing the opportunity presented by a strong dollar to force closure of their short positions on Comex. Meanwhile, for hedge funds, short-term positioning in gold has been an easy way to play the strong dollar, which is why money-managers morphed from earlier bulls to a mixture of bears and don’t-knows. Next year is shaping up to be an entirely different matter.

As discussed above, the defining economic feature of 2017 is almost certain to be increasing rates of price inflation and interest rates that are unlikely to rise by enough to stop it, without triggering a debt crisis. These are precisely the conditions that will disfavour government currencies, measured in gold, and have actually been in place to a greater or lesser extent for a considerable time. The chart below shows how the four major currencies have lost purchasing power since December 1969, indexed to 100.

WGC currencies 1969 2009

Since December 1969, even a strong yen has lost over 90% of its value measured in the one form of money which is no one’s liability. The worst performers have been sterling at -98.45% and the euro – including its components prior to 2002 – at -98%. What is shocking about currency debasement is so few people realise the extent to which it has happened.

Bear in mind that in a sound-money environment the general price level will tend to fall, reflecting the rising living standards resulting from economic progress. Putting short-term volatility to one side, gold is therefore a far better measure of currencies’ loss of purchasing power than government inflation measures, even if they could be truly accurate.

The 1970s was the worst decade for currency debasement, and the conditions that prevailed at that time look like being repeated now. The principal difference is there was less debt in the private sector, and it needed a large hike in interest rates to swing consumer preferences back into holding government-issued money. The next chart shows Volcker’s inflation-killing interest rate hike at the end of that decade, followed by the subsequent interest rate peaks that were required to stop credit cycles from degenerating into escalating price inflation.

Fed Funds Rate 1980 2015

The dotted line, which marks the Fed Funds Rate at the declining peaks of US credit cycles, is currently at an FFR of 2.5%, which has fallen from 5.3% in the first half of 2007, when the last financial crisis began. By the end of 2017 it will be at 2.25%. The reason the line is declining is that total debt outstanding is continuing to escalate, with a growing proportion of it unaffordable at not much above current rates. The dotted line is telling us that at anything over 2%, the FFR is likely to tip the US economy into another financial crisis.

These strains are also acute in Europe, where the banks are less adequately capitalised and face regional crises, such as the current one in Italy. Bond yields have risen in Euroland as well as in the US, and it is quite likely the Eurozone banking system will succumb before the FFR reaches 2%, because the banks face catastrophic bond losses on their under-capitalised balance sheets.

The central banker’s response to the inevitable forthcoming crisis, wherever it arises first, is certain: throw yet more money at the problem. After all, it worked following Lehman, there is no alternative solution, and the central banks’ overriding priority is to keep the show on the road.

In 2008/09, the financial crisis was initially confined to identifiable banks and institutions in the US housing market. Next time, when a financial crisis occurs, the problems will be more widespread, encompassing bond markets, property, equities and governments themselves. It will be ebola compared with a flesh wound. There will be no option other than to rapidly expand the quantity of money on a global basis, with central banks buying up government debt, ultimately fuelling price inflation even further. Therefore, physical gold will not only afford protection against the escalating price inflation that few investors are expecting, but also against the risks and consequences of global systemic failure. Such a crisis may not occur in 2017, but we can see the direction of drift.

These are not forecasts, but an expectation of how events will unfold. Anyone who makes financial and investment forecasts fails to understand the nature of money, money flows and prices. But I can come up with my current expectations for 2017, on the understanding that my expectations today will evolve as events unfold. With that caveat, the following table summarises how I currently see things developing in 2017.

expections for 2017

It could turn out worse. The conditions faced by America today have many parallels with those faced by the UK in 1972, too many for comfort. At that time, equities peaked and subsequently fell over 70%. From equity peak to financial crisis took nineteen months and the bear market in equities lasted 31 months. The Bank of England was forced to raise its base rate from 5% to 13% by late-1973, which triggered the commercial property crisis. The effect on sterling is recorded in the first chart in this article.

Happy Christmas to one and all, and may we all survive 2017 without too much financial distress.

 

 

 

Courtesy:  Alasdair Macleod

Buy Gold – Dump Treasuries: A Strategic Geopolitical Move, not a Day Trade

Buy Gold - Dump Treasuries: A Strategic Geopolitical Move, not a Day Trade

Buy Gold – Dump Treasuries: A Strategic Geopolitical Move, not a Day Trade

Now is the time to keep your eyes on the monetary endgame. Not the daily mark-to-market in paper gold. This endgame is an all-out attack on the status of the US dollar as the benchmark global reserve currency. Numerous players have an interest in ending the dollar’s role for reasons ranging from climate change (global problems require global money solutions), to geopolitics (Russia and China both have regional hegemonic ambitions in Eastern Europe and East Asia respectively). As investors with longer horizons and patience, we see ways to profit from these global macro trends.

We’ve done the deep-dive you need to see the big picture. All indicators show this is an excellent time to accumulate a position in gold, if you haven’t put 10% of your investable assets in gold and physical metal already (which is what I recommend).

Whenever a new president is elected, think tanks in Washington get to work writing transition papers for the new administration. These are compilations of policy advice from subject matter experts for the benefit of the president-elect’s transition team.

I was invited to contribute to a transition paper on national economic security. This is the policy area with geopolitics and global capital markets converge. I was invited by a non-partisan institute called Center on Sanctions and Illicit Finance, part of the prestigious Foundation for the Defense of Democracies. It was founded by Jack Kemp and Jeane Kirkpatrick and other patriotic Americans concerned about the rise of authoritarianism, and the decline of freedom and liberty.

The final national economic security paper has not yet been published as of this writing, but here’s an advance preview of a section I wrote on what I called the Axis of Gold:

A major blind spot in U.S. strategic economic doctrine is the increasing use of physical gold by China, Russia, Iran, Turkey and others both to avoid the impact of U.S. sanctions and create an offensive counterweight to U.S. dominance of dollar payment systems.

Currently US dollar-denominated instruments and transactions constitute about 60% of global reserves, and 80% of global payments respectively. The U.S. monopoly of power over dollar payment channels gives the U.S. unrivaled dominance over the international monetary system and the economic well-being of every nation on earth. Adversaries naturally chafe at this immense power especially in light of U.S. imposed sanctions that are considered overbearing and unjustified by the targets. Those adversaries do not issue currencies that are potential alternatives to the dollar because of inadequate rule-of-law, immature bond markets, primitive capital markets infrastructure, or all three. The only feasible alternatives to dollar dominance are special drawing rights (SDRs) issued by the IMF, and gold.

To prepare for a physical gold alternative to the US dollar, Russia increased its gold reserves 280% from the first quarter of 2006 to the second quarter of 2016 (from 386.5 metric tonnes to 1,498.7 metric tonnes), while China increased its gold reserves 203% in the same period (from 600 metric tonnes to 1,823.3 metric tonnes). China has been consistently non-transparent about its activities in the gold market.

Based on China’s mining output and reliable data on gold exports from Hong Kong and Switzerland to China, there is good reason to conclude that China’s actual gold holdings are nearer 4,000 metric tonnes, (a 567% increase since 2006). The comparable increase for Turkey is 308%. Reliable data is not available for Iran, however, exports from Turkey and Dubai to Iran are significant, and there is good reason to conclude that Iran is also a rising gold power relative to the size of its economy. Russia, China, Turkey, and Iran constitute a new “Axis of Gold” prepared to undermine confidence in the US dollar.

Gold offers adversaries significant benefits in a world of U.S. imposed dollar-based sanctions. Gold is physical, not digital, so it cannot be hacked or frozen. Gold is easy to transport by air to settle balance of payments or other transactions between nations. Gold flows cannot be interdicted at SWIFT or FedWire. Gold is fungible and non-traceable (it is an element, atomic number 79), so its provenance cannot be ascertained. The U.S. is unprepared for this coming strategic alternative to dollar dominance.

No sooner had I submitted this analysis than President Erdo?an of Turkey made the following remarks in response to a currency crisis in his country: “Those who keep dollar or euro currency under their mattresses should come and turn them into liras or gold.” Turkey is not only accumulating large gold reserves, it is also a major transshipment point for gold flowing illegally to Iran.

Evidence for the rise of this Axis of Gold is overwhelming. Right now gold mining output is flat, western central bank sales of gold have ceased, and acquisition of gold by the Axis is increasing. In India, a mad scramble for physical gold has begun because the government has declared most forms of cash to be illegal. The Indian government may not like gold (they have been seizing it from private hands), but the Indian people are wiser than their government. Indians are buying as much gold as they can through legal and illegal channels.

With limited output, limited western sales, and huge eastern purchases, it’s only a matter of time before a link in the physical gold delivery chain snaps and a full-scale buying panic erupts. Then the price of gold will soar regardless of paper gold manipulations. However, it may be too late for investors to benefit because the ready supply of physical gold will be gone. The time to take a position is now.

When will this buying panic erupt? What signs can we look to for guidance?

The most important input is the gradual dumping of U.S. Treasury debt by foreign creditors of the U.S. These market participants are highly sophisticated. They know they cannot dump all of their U.S. debt at one time without causing a panic and hurting their own positions.

If dumping were viewed as malicious or hostile, the president could freeze the accounts of market participants using his powers under the International Emergency Economic Powers Act of 1977. Based on this, one would expect sales of Treasuries to be gradual and to play out over time. That’s exactly what we’ve been seeing since 2013 as shown in this graph:

U.S. is highly vulnerable to loss of confidence by foreign creditors

This graph is revealing not only because of the gradual reduction of U.S. Treasury holdings by foreigners, but also because of the extremely high level of such holdings. Some countries such as Japan are highly indebted, but the debt is held primarily by their own citizens who have no interest in attacking their own government.

That’s not true for the U.S. We are extremely vulnerable to foreign attack because of the high percentage of foreign ownership — almost 40% of the market.

The second major indicator is the run-off in China’s reserve position. China’s reserves have collapsed from over $4 trillion to about $3 trillion in the past 30 months. This decline shows no signs of stopping; in fact it has accelerated lately to the point that China is now imposing capital controls.

What is revealing about this is that while total reserves have been collapsing, gold reserves have been going up. China has been buying thousands of tons of gold even as they sell U.S. Treasury bonds to pay offshore creditors and prop-up their currency.

China Foreign Exchange Reserves

Indicators all point in the same direction – Treasuries are being dumped and gold is being acquired by the largest investors in the world. This is being done not as a “day trade” but as a strategic geopolitical move.

This means these trends will continue until the aims of the Axis of Gold have been achieved. Those aims include the overthrow of the US dollar as the benchmark global reserve currency. When that happens, collapsing confidence in the dollar will send the dollar price of gold skyrocketing.

But you do not have to wait until the final collapse of confidence in the dollar to benefit. Momentum will accelerate long before the endgame, giving early investors ample opportunity to profit from the trend.

 

 

 

 

Courtesy: Jim Rickards

Industrial Usage, ETP’s & Physical Demand will help Silver Prices Take-off

Industrial Usage, ETP's & Physical Demand will help Silver Prices Take-off

Industrial Usage, ETP’s & Physical Demand will help Silver Prices Take-off

Silver has high usage in industrial activities with about 50% of the total demand coming from industrial applications. With most of the key economies coming up with manufacturing data in the growth zone lately, silver definitely has some reasons to cheer for.

Additionally, conditions in the U.S. market are slowly improving and industrial demand for silver is expected to get a boost from stepped-up domestic economic activity. Additionally, silver supply could contract given the dearth in deposits faced by the silver miners, forcing producers to look for fresh projects.

Neils Christensen: The silver market could continue to see strong gains in 2017 from a pick up in industrial demand as the U.S. and global economies improve, according to some analysts.

With 2016 quickly coming to a close, silver has been the second-best asset in the precious-metals space, up 16.5% since the start of the year and only behind palladium, which is up almost 21% for the year.

Looking ahead, according to some analysts, it could be silver’s industrial component that drives the market, especially as U.S. President-elect Donald Trump pushes his fiscal policies, proposing to spend $1 trillion over 10 years.

While silver has broad market fundamentals, industrial demand makes up more than half of the overall market, with most of the other demand coming from jewelry, bullion coins and exchange-traded funds.

“Clearly, any uptick in infrastructure spending resulting from the recent U.S. election could benefit silver’s industrial demand side,” said analysts at CIBC, in a recently published report.

Analysts at UBS, who said that silver lacked its own narrative in 2016, mostly following gold’s lead, also see the metal’s industrial component gaining momentum next year.

“We think silver’s links to economic activity via its industrial-demand component should help its relative performance to gold during periods when markets are optimistic about growth and risk,” the analysts said in a recent report.

Analysts at HSBC said in their outlook report that they see silver averaging $18.75 an ounce in 2017. Commodity analysts at Commerzbank said that they see silver ending next year around $19 and averaging around $18.
UBS said that they see prices averaging $18.80 an ounce next year. While most analysts have lowered their forecasts for next year, prices are higher than current prices with February silver futures last trading at $15.995 an ounce.

“We believe silver prices will be better bid later in 2017. We also base our expectations on solid fundamentals, as mine supply is likely to contract while industrial and jewelry demand should increase,” the analysts at HSBC said.

One particular sector in which HSBC analysts see potential is solar power, as costs decline and energy demand increases.

“We look for a further 8moz increase in PV consumption in 2017 to 91moz. We anticipate steady increases well into the next decade and consider PV and other solar power applications an important new source of silver consumption,” they said.

Does Supply-Demand Picture Favor Higher Silver Prices?

HSBC, quoting market sources, said it is expecting to see total silver demand hit 1.159 billion ounces in 2017, up slightly from 1.148 billion ounces that are expected to be consumed this year. At the same time, total silver supplies are expected to continue to fall, reaching 1.027 billion ounces, down from 1.032 billion ounces produced this year. In total HSBC expects the silver market to see a supply deficit of 132 million ounces; this would be the fifth consecutive deficit for the silver market.

However, not all analysts are convinced that a market imbalance next year will be a major positive for the market.

While silver is expected to see further supply deficits next year, analysts at Commerzbank said that they expect a market shortfall will only have a limited impact on the prices, adding that they see only modest demand for the metal next year.

Analysts at the German bank said that they expect to see a total market deficit of around 50 million ounces. “This would be the smallest deficit since the last surplus year of 2012,” they said.

Commerzbank analysts also said that they expect to see lackluster demand in industrial usage because there is a growing trend of thrifting in the industrial sector, which means companies are finding ways to use less metal in their electrical components.

The analysts said that they expect that next year, industrial demand will fall to its lowest level since 2009.

Commerzbank said that they think the market will have to see increased investor demand in exchange-traded products and physical demand for jewelry and bullion coins to push prices back above $20 an ounce in 2017.

Silver Looks Set for a Bullish Reversal

FX dailyreport: Silver inched lower on Wednesday, dragging the price of white metal to less than $16.00 an ounce amid release of some key economic news. The precious metal left a good-looking hammer candle on the daily chart yesterday. The technical bias remains bearish because of a lower low and lower high in the recent wave.

Technical Analysis

As of this writing, the white metal is being traded around 16.00 an ounce. A support may be seen near $15.63, the intraday low of yesterday ahead of $15.50, the psychological level and then $14.78, a major horizontal support area on higher timeframes.

Silver Looks Set for a Bullish Reversal

On the upside, the precious metal is expected to face a hurdle near $16.16, a key horizontal resistance level ahead of $17.22, the swing high of the recent upside rally and then $18.97-$19.00, the confluence of psychological number as well as a huge horizontal resistance as demonstrated in the given above chart. The technical bias shall remain bearish as long as the $19.00 resistance is intact.

US Existing Home Sales

U.S. home resales unexpectedly rose in November, reaching their highest level in nearly 10 years, likely as buyers rushed into the market to lock in low interest rates in anticipation of further increases in borrowing costs. The National Association of Realtors said on Wednesday existing home sales increased 0.7 percent to an annual rate of 5.61 million units last month. That was the highest sales pace since February 2007. October’s sales pace was revised down to 5.57 million units from the previously reported 5.60 million units.

Trade Idea

Considering the overall technical and fundamental outlook, buying the precious metal around current levels appears to be a good strategy in short to medium term.

 

Gold Price Outlook 2017: Analysts Call for Price Increase

Gold Price Outlook 2017: Analysts Call for Price Increase

Gold Price Outlook 2017: Analysts Call for Price Increase

While the gold price cooled off significantly after the US election in November, the yellow metal is poised for a lift in 2017.

Unsurprisingly, 2016 was a volatile year for the gold market. At the start of the year, analysts were all over the map on the 2016 gold price; predictions were as high as $1,382 per ounce, while others projected the price would fall lower than $1,000 an ounce.

On the contrary, the gold price had a strong start to the year, rising to $1,237.90 per ounce before March. By July, the yellow metal had soared to $1,365.40 per ounce, following the Brexit decision in June. Since then, the gold price has dropped off drastically–despite a momentary spike during the US election–trading at $1,132.50 per ounce on December 20, 2016.

To get a better idea of what drove gold in 2016, and what to look for in 2017, the Investing News Network (INN) had the chance to speak with Jeffrey Nichols, senior economic advisor at Rosland Capital LLC, David Morgan, analyst at the Morgan Report, and Erica Rannestad, a senior precious metals analyst at Thomson Reuters GFMS.

2016 gold themes: politics, US dollar and inflation

Indeed, it’s impossible to talk about the gold price without mentioning the implications Brexit placed on it or, more recently, the US election.

Rannestad elaborated by saying Britain’s decision to leave the European Union and the election of Donald Trump as president “lead to increased uncertainty” in the market.

However, in speaking with INN, Morgan commented that the outcome of the US election wouldn’t particularly impact the precious metals sector.

While that could certainly be the case long term, the gold price did substantially fall off in the days following the election, even dropping to nine-month lows.

Nichols agreed with Rannestad, commenting that Trump’s victory had huge implications on the gold market, and the resource sector in general.

His statements over the course of his campaign were all contradictory so we don’t really know where he stands on a lot of issues,” he noted.

In that regard, Nichols said he was surprised the failure of inflation didn’t push the gold price as much as he expected it would in 2016.

“I was much more bullish in the market,” he told INN of his thoughts on the gold market in 2016. “I was surprised by the failure of gold to move substantially higher.”

Relatedly, Nichols pointed out that many people look at interest rates as a key to the gold price. Instead, he said it’s the real interest rate that should be considered.

Gold outlook 2017: surprising price increase?

Moving into 2017, the gold price is expected to move much higher, Nichols added. Specifically, he said there’s going to be a “surprising gold price increase” that could come within striking distance of its historic highs later in the year, based on monetary policies.

To that end, however, Yaremchuk said the statistical and technical indicators he follows suggest that gold was getting overbought and that it was due for a correction. Yaremchuk said one key indicator is the moving average of convergence/divergence, which is also known as MACD, and on a weekly basis the MACD and RSIR are indicating that the next move for gold will be up.

Over the last five years, the gold price has more or less been stuck in a bear market. Yaremchuk noted once the bear market runs its course, and if it is indeed at the end of a bear market and the beginning of a new bull market, then it goes in three stages.

The first stage, he said, is an accumulation stage, the second stage sees more mainstream investment, when gold companies start performing well, and a correction stage. The third stage is usually “the strongest move of a bull market.” On that note, Yaremchuk said it looks the industry has just finished phase one of that stage and is making its way to stage two.

“If this turns out to just a correction stage after stage one, then we’re going to see higher highs,” Yaremchuk said.

Morgan agreed that gold prices will rise in 2017, noting that he is “more favorable” to a longer consolidation period.

“2017 will definitely see a lift throughout the year,” he said. “It won’t be straight up, ebb and flow, but will overall be higher in 2017 than 2016.”

Of course, there will be contributing factors for the yellow metal to see a spike: importantly, Nichols noted, one thing that will be a driving force is demand from China and India.

“Both countries have significant cultural and social affinity to holding gold as form of investment and savings by many people in both countries but for different reasons,” he said. “We think that’s going to continue.”

In that regard, Nichols stated that gold that goes to China and India is unlikely to come out again in any perceivable time frame, suggesting that this is a reduction in what he calls the “availables via gold that is available in the market place.” When westerners get revved up again about gold and there’s an adequate supply, there’ll be higher gold prices, Nichols said.

“The panics of the gold market rely importantly on the idea that Asia is going to be a continuing buyer of gold,” he added. “That gold is very likely to get some strong hands and isn’t likely to come out except at much higher prices.”

In terms of where the gold price will land next year predictions, of course, vary. Citi Research sees the gold price falling to $1,135 per ounce in the second quarter, but rising up to $1,180 per ounce in the last three months of 2017.

Yaremchuk said it could range between $1,200 and $1,400, but it might not be until 2018 that it “gets some serious momentum” and starts challenging previous highs, and to not expect much higher than $1,400 an ounce. He added it wouldn’t surprise him if it reached his highest prediction of $1,500 per ounce, but he’s certainly not expecting it to reach quite that high.

“My gut says we continue to work our way higher in 2017, and trade in a range somewhere in the $1,225-$1,400 per ounce range for the year,” he said.

Some higher predictions include Jeffrey Christian’s, managing partner of the CPM Group, who told the Northern Miner (subscription) that he expects gold to average $1,325 per ounce next year before increasing significantly beyond 2017. Scotiabank is also optimistic about the gold price, forecasting it will average $1,300 an ounce in 2017, while Societe Generale(EPA:GLE) is also calling for a $1,300 per ounce average in 2017. The panel over at FocusEconomics expects the yellow metal to average slightly lower, at $1,297 per ounce next year.

However, not everyone is bullish on gold price making strides in 2017. For example, ABN Amro Group (AMS:ABN) suggests the gold price will fall to $1,100 an ounce by the end of next year, with a price recovery coming in 2018. Chris Beauchamp, head of market analysis at IG Group, expects gold to go lower than that, saying it could end up below $1,000 an ounce before the end of 2017.

Investor takeaway: gold thrives on uncertainty

Looking ahead, Nichols said investors should look from technical standpoint gold’s ability to establish itself higher than it has in the last year or two. He noted there’s been heavy resistance in its price late in 2016, but if it can break through from there, Nichols said he thinks it will make a big difference to investor perceptions about gold’s ability to move higher.

It’s pretty firm what needs to be broken psychologically for gold to really take off,” he added.

As we all know, markets are volatile and investors flock to precious metals like gold as a safe haven asset, and Nichols said there’s going to be a lot of uncertainty as Trump’s administration takes form. With that in mind, those in the gold market will no doubt be curious to see how 2017 unfolds, and how a Trump presidency will impact its price.

 

 

 

Courtesy: Jocelyn Aspa

Gold Investment Demand to rise on Inflation & Pent-up Selling in Red-Hot Stocks & US Dollar

Gold Investment Demand to rise on Inflation & Pent-up Selling in Red-Hot Stocks & US Dollar

Gold Investment Demand to rise on Inflation & Pent-up Selling in Red-Hot Stocks & US Dollar

Gold was again blasted to new post-election lows this week, further trashing contrarian sentiment.  The Fed proved more hawkish than expected in its rate-hike-trajectory forecast, unleashing heavy selling in gold futures.  This catapulted gold bearishness back up to extremes not seen in a year.  Investors are once again convinced gold is doomed, and thus radically underinvested.  That’s actually super-bullish for gold.

It certainly wasn’t the Fed’s second rate hike in 10.5 years this week that hammered gold.  Actually that was universally expected.  Federal-funds-futures traders had assigned it an average 96% probability in the two weeks leading up to that rate hike.  If the Fed had simply raised its federal-funds rate by 25 basis points to a 0.50%-to-0.75% range, gold futures speculators would’ve likely yawned.  They knew it was coming.

The unexpected hawkishness came in the FOMC’s Summary of Economic Projections that is published quarterly at every other policy meeting.  Also called the “dot plot”, it shows where each FOMC member and regional Fed president expects the FFR to be in the next several years and beyond.  The collective expectations of these top officials who actually set monetary policy grew from two rate hikes in 2017 to three.

Seeing the timid Yellen Fed do this was a surprise.  Just a couple weeks earlier in the Fed’s Beige Book economic report that supports FOMC meetings, one of the major reasons cited for regional US economic weakness was the strong US dollar.  Something like half the revenues of the elite S&P 500 component stocks come from abroad, making the US dollar already near 13.7-year secular highs a big threat to stock markets.

The red-hot dollar makes the products and services American companies are selling in foreign countries more expensive, naturally retarding sales.  And any profits earned have to be translated back into US dollars.  So extreme US-dollar highs are very damaging for corporate profits, a serious problem for lofty US stock markets currently trading at bubble valuations.  It wasn’t rational for the Fed to further goose the US dollar.

Yet it did, with the US Dollar Index rocketing 1.0% higher after that FOMC decision to a new 14.0-year secular high!  That epic dollar strength after the Fed was more hawkish than expected on rate hikes in 2017 is what triggered that heavy gold-futures selling.  But that really didn’t make any sense on a couple key fronts.  The dot-plot rate-hike projections are notoriously fickle, and gold actually thrives in rate-hike cycles.

Exactly a year ago, the FOMC staked its zero-interest-rate policy with its first rate hike in 9.5 years.  Gold futures speculators panicked, blasting it to a dismal 6.1-year secular low the next day.  The dot plot the Fed released at that initial hike forecast four rate hikes in 2016.  How many did we actually see?  One!  The FOMC is bold and hawkish when stock markets are high, but quickly capitulates when stocks sell off.

Since futures speculators were so terrified of Fed rate hikes a year ago, I researched the entire modern history of gold’s performances in the exact spans of Fed-rate-hike cycles.  Gold actually thrives during rate-hike cycles.  Before this current one there had been 11 since 1971.  Gold’s average gain through all of them was 26.9%, nearly an order of magnitude greater than the S&P 500’s 2.8% average gain in all of them!

In the majority 6 of these 11 where gold actually rallied, its average gain was a staggering 61.0%!  In the other 5 in which it lost ground, gold’s average loss was an asymmetrically-small 13.9%.  Gold fared best when it entered Fed-rate-hike cycles low in secular terms and they were gradual.  Today’s started with gold at major secular lows, and there’s never been a more-gradual rate-hike cycle at one hike per year.

So it’s dumbfounding that gold-futures speculators so fear Fed rate hikes.  Have they no history books?  You’d think they could at least look to the last cycle.  Between June 2004 to June 2006, the FOMC more than quintupled the federal-funds rate to 5.25% through 17 consecutive rate hikes totaling 425 basis points.  Did that slay gold?  Not so you’d notice.  This metal powered 49.6% higher over that exact span!

Even if the Fed does hike three times next year, historically Fed-rate-hike cycles have been very bullish for gold.  But just like this year, the Fed won’t hike so aggressively.  As these euphoric wildly-overvalued stock markets roll over into an inevitable major selloff, the Fed will again scale back its future federal-funds-rate forecasts so aggressively traders’ heads will spin.  This pattern has been recurring for years now.

While the gold focus this week is the more-hawkish-than-expected Fed, the real issue is the stunning post-election stock-market rally.  Gold was faring well right up to election night, surging as high as $1337 as Trump’s odds of winning mounted!  But when stock traders’ sentiment turned on a dime and decided that Trump was bullish instead of bearish for stocks, gold selling snowballed as stocks surged higher.

Gold has always been the anti-stock trade, as it is a rare asset that moves counter to stock markets.  Thus gold investment demand for prudent portfolio diversification surges when stock markets suffer material selloffs, and wanes when stock-market highs breed great complacency.  This has led the two dominant groups of gold traders, gold-futures speculators and gold-ETF investors, to dump gold with a vengeance.

Last week I dug into the extreme gold-futures selling seen since the election, which is slowly exhausting itself despite this week’s hawkish-Fed flare-up.  So this week I’m going to focus on the extreme selling in gold-ETF shares seen since the election.  The world-leading and globally-dominant gold ETF remains the venerable American GLD SPDR Gold Shares.  GLD capital flows are absolutely essential for gold’s outlook.

This first chart superimposes GLD’s physical gold bullion holdings held in trust for its shareholders on the gold price.  GLD reports its holdings daily, in extensive detail down to individual gold-bar weights and serial numbers.  GLD acts as a direct conduit for the vast pools of stock-market capital to flow into and out of physical gold bullion.  Nothing was more important for gold in 2016 than capital flowing through GLD!

Leading into last December’s first Fed rate hike in nearly a decade, stock investors liquidated their gold exposure via GLD shares as evidenced by falling holdings.  GLD is a tracking ETF, designed to mirror the gold price.  Since GLD-share supply and demand is totally independent from gold’s own, the only way GLD can accomplish its mission is if excess GLD-share supply or demand can be shunted into gold itself.

When stock investors are selling GLD shares faster than gold is being sold, this ETF’s price threatens to decouple to the downside.  This happened in Q4’15 leading into that initial hike, and at a much-larger scale in Q4’16 on that stunning post-election stock-market surge.  In order to keep GLD’s share price tracking gold in this differential-selling scenario, this ETF’s managers have to quickly absorb the excess supply.

So they buy back enough GLD shares to keep GLD’s price mirroring gold’s.  The capital that’s necessary to fund these purchases is raised each day by liquidating some of GLD’s gold bullion holdings.  That is real physical gold that hits the global markets, pushing gold lower.  So stock-market capital flowing out of gold as evidenced by GLD-holdings draws spews bullion into world markets, exacerbating gold selloffs.

As of this week’s Fed Day, gold has plunged 13.3% so far in Q4.  That’s definitely among gold’s worst quarterly performances ever, though far short of Q2’13’s devastating all-time-record 22.8% plummet.  This post-election drop is the result of a combination of extreme gold-futures selling and extreme GLD-share differential selling.  GLD shares have been dumped so aggressively that it’s vomiting vast amounts of gold.

Quarter-to-date, the total GLD draws necessary to buy back all these excess shares are running way up at a staggering 98.5 metric tons!  That’s an enormous amount of gold, far too much for markets to absorb in such a short span of time.  Rather interestingly, this massive GLD draw is running 2.2x that seen a year ago in Q4’15.  Gold’s quarter-to-date drop is running a roughly-proportional 2.7x greater than Q4’15’s.

For two years now, and especially in 2016, gold’s price has closely tracked GLD’s holdings.  For nearly all of 2015, GLD suffered ongoing draws as stock investors forsook gold diversification to chase levitating stock markets.  Gold’s major 6.1-year secular low the day after last December’s Fed rate hike happened on the very day GLD’s holdings finally bottomed at a 7.3-year secular low of their own.  That’s no coincidence!

From those deep lows where gold was universally despised, just like today, this metal would soon rocket 29.9% higher in essentially the first half of 2016.  Why?  The stock markets finally started to roll over on the Fed’s hawkishness, leading investors to once again seek some prudent portfolio diversification with gold.  But most of that stock-market selling after the Fed’s first rate hike was delayed until the new year.

When stock markets rally considerably in any given year, investors with big capital gains often delay any selling until January of the subsequent year.  That pushes their capital-gains tax liabilities another full year into the future.  And the incentives to hold until January are far greater this year than most, since 2017 may see lower tax rates thanks to Trump.  So there’s a big risk of pent-up stock selling exploding next month.

Last January as stock markets fell into their worst correction since mid-2011, a 13.3% S&P 500 selloff, gold investment demand via GLD shares soared.  In Q1’16, GLD’s holdings rocketed 176.9t higher.  Later the World Gold Council, the definitive arbiter of global gold supply-and-demand fundamentals, declared total world gold investment demand grew by 219.4t year-over-year.  GLD’s holdings build alone accounted for 80.6% of that!

So without American stock investors flooding into GLD shares to modestly diversify their portfolios as the stock markets sold off, gold’s young new bull this year never would’ve happened.  Unbelievably GLD’s dominance grew even greater in Q2’16.  GLD’s holdings jumped massively again, soaring by 130.8t that quarter.  The WGC reported that total global gold demand grew 139.8t YoY, pegging GLD’s contribution at 93.6%!

The dominant reason gold’s bull stalled in Q3’16 is because the shocking new stock-market highs in the wake of late June’s Brexit-vote surprise killed gold investment demand from American stock investors.  So GLD’s enormous holdings builds in the first half of 2016 withered to a trivial 2.1t draw.  Without that key differential GLD-share buying that had overwhelmingly driven gold’s bull, this metal couldn’t keep climbing.

In Q1, Q2, and Q3 this year, gold’s performances ran +16.1%, +7.4%, and -0.4%.  These are remarkably proportional to GLD’s quarterly builds of 176.9t, 130.8t, and -2.1t.  Given that precedent, it shouldn’t be surprising that Q4’s massive 98.5t GLD draw so far has resulted in a 13.3% gold plunge.  The pain that spawned for contrarian investors and speculators has been immense, fueling extreme gold bearishness.

Every indication before the election was that a surprise Trump win would trigger a major stock-market selloff and thus a major gold rally.  So the resulting carnage has been brutal, hammering gold, silver, and their miners’ stocks down through stop losses.  The psychological damage suffered by contrarians in one of gold’s worst quarters ever is huge.  I’m not cavalier about it after drinking from this bitter cup too.

But speculation and investing aren’t about the past, which can’t be undone.  The greatest mistake made by most traders is to extrapolate current trends out into the future indefinitely.  This is especially true when markets trade at extremes, like the stock markets and gold today.  If you’d been 100% in cash through all of Q4, and thus had no emotional attachment, would it make more sense today to buy stocks high or buy gold low?

The horrendous gold psychology this December feels exactly like it did a year ago.  The euphoric stock traders had just shrugged off the first Fed rate hike in nearly a decade, while gold traders panicked on it.  Yet from the very week of that rate hike, gold would surge nearly 30% higher in the next half-year while the S&P 500 merely climbed 4.3%.  The leading gold-mining stocks would nearly triple over that same span!

The entire trader community is making the same foolish linear assumptions today that it made a year ago.  Traders again expect stock markets to miraculously keep surging from wildly-overvalued levels without any material selloffs, and for gold to keep spiraling lower.  This universal belief has led to radical gold underinvestment.  With stock markets far riskier, this is even more bullish for gold today than a year ago.

This last chart looks at a proxy for gold investment demand by American stock investors, the guys responsible for the lion’s share of 2016’s gold bull.  It compares the total value of GLD’s gold-bullion holdings with the collective market capitalization of all 500 elite S&P 500 stocks.  Dividing these numbers and charting the results over time reveals when gold is really in favor or out of favor, great times to sell high or buy low respectively.

As of the end of November, the value of GLD’s holdings was just 0.166% the market capitalization of the S&P 500.  We only calculate the latter number monthly, but can estimate where this GLD/SPX ratio sat as of Fed Day this week.  It likely dropped near 0.152%!  That conservatively implies that American stock investors have allocated well less than 0.2% of their portfolios to gold.  That may as well be zero it’s so low.

The last normal years for gold and the stock markets before the Fed’s extreme QE3 campaign levitated stocksand thus killed gold investment demand ran between 2009 to 2012.  This GLD/SPX-ratio proxy of gold portfolio exposure averaged 0.475% over that span, over 3.1x higher than today’s meager levels!  That means stock investors have vast room to buy gold again when stock markets inevitably roll over from here.

For centuries the world’s smartest investors have recommended gold allocations in portfolios of at least 5% to 10% for every investor.  As the anti-stock trade, gold is the ultimate diversifier that acts as a hedge and form of insurance against significant weakness in stocks and bonds.  It’s hard to imagine anyone with some understanding of stock-market cycles and market history totally neglecting to maintain a gold allocation.

A massive new gold bull doesn’t require American investors’ collective gold allocation to soar way up to 5%.  Returning to merely one-tenth of that, 0.5%, would likely drive gold prices higher for years as stock-market capital poured into gold.  And just like a year ago, all it will take to get investors interested in gold again is a major stock-market selloff.  One is certainly overdue again no matter what wonders Trump works next year.

Stock markets perpetually move in great valuation-driven cycles, with bull markets always followed by bears.  Stock valuations get too stretched in bulls as traders bid up stock prices far faster than the critical underlying corporate profits are actually growing.  That leads to euphoric toppings that soon give way to major bears, which force stock prices lower for long enough for profits to catch up with lofty stock prices.

At the end of November even before this month’s incredible stock-market surge, the simple average of the trailing-twelve-month price-to-earnings ratios of all 500 S&P 500 companies was already 28.1x.  That is double historical fair value of 14x, and literally in bubble territory!  A major bear at least cutting stock prices in half is long overdue, but even a major correction approaching 20% is all but certain in 2017.

Remember all it took to rekindle gold investment demand in early 2016 was a 13% S&P 500 correction, fairly small as far as corrections go.  They range from 10% to 20%, with anything beyond that qualifying as a new bear market.  Sooner or later all the euphoria about what Trump and the Republicans could do will give way to the hard realities of what they actually can and will do.  It won’t be as extensive as traders hope.

Republican Congressional leaders are already blunting the tax-cut and infrastructure-spending hopes, declaring they need to be revenue-neutral so they don’t balloon the already-staggering federal debt.  And it is unlikely any major tax cuts will come before 2018 at the earliest, leaving the bubble-valued stock prices heavily exposed to falling profits thanks to the Fed-goosed US dollar.  Stock markets are in serious trouble.

And even if Trump comes through with gargantuan tax cuts and huge new spending, this vast deluge of new money will lead to rampant inflation.  This week the Fed already hinted at inflation rising, but what’s been seen so far is trivial compared to what’s coming if even half of Trump’s campaign proposals make it to reality.  Inflation is very damaging to stock markets, and thus very bullish for gold investment demand.

So it’s imperative smart investors and speculators fight the herd group think today.  The stock markets will not keep rallying indefinitely as everyone expects, and gold isn’t doomed to spiral lower forever.  Once these euphoric stock markets inevitably reverse decisively, investment capital is going to come roaring back into gold for portfolio diversification.  Gold’s upside potential in 2017 is much greater than it was in early 2016.

The bottom line is gold is suffering from radical underinvestment today.  American stock investors have fled gold since the election, liquidating vast quantities of GLD shares.  The red-hot stock markets way up at all-time record highs have convinced them diversified portfolios are no longer necessary.  Every time such euphoria, complacency, and even hubris have happened in the past, major stock selloffs soon followed.

With American stock investors owning essentially-zero gold exposure, they have vast room to buy again when these wildly-overvalued stock markets inevitably roll over.  The same thing happened a year ago, and it led to gold powering dramatically higher in the first half of 2016.  That gold investment demand was triggered by post-Fed-rate-hike stock selling delayed until January for tax reasons.  It’s deja vu all over again!

 

 

 

Courtesy: Adam Hamilton

Will China & India’s Falling Demand Impact Gold Prices? Can Central Bank Gold Demand Help?

 

Will China & India's Falling Demand Impact Gold Prices? Can Central Bank Gold Demand Help?

Will Falling Demand from China Adversely Impact  Gold Prices?

Increasing gold premium

Gold has reached a ten-month low, with the federal interest rate pushing the yield-bearing precious metals lower. The slide in the precious metals started after Trump’s victory, due to the rising US dollar. The drastically lower gold prices could have led to an increase in demand, but this did not happen.

The demand for gold has been weak in India and China. The cash crunch in India contributed to the falling demand. In an attempt to constrain the outflows of the Chinese yuan, the Chinese have curbed the import of gold. The yuan was the weakest it’s been in almost eight years. According to the Shanghai Gold Exchange, China allows only 13 banks, including three foreign lenders, to import gold. Gold premiums in China surged to their highest in nearly three years, likely due to the supply shortage.

Will Falling Demand from China Adversely Impact Gold?

The largest gold market

According to Thomson Reuters, gold premiums in China have risen to $40 from $28–$30 the week prior. The higher gold premiums deter investors from gold. As Asia is the largest market for gold, the falling demand can result in a more negative sentiment.

Gold-based funds that have been impacted by the negative sentiment in gold include the Sprott Gold Miners ETF (SGDM) and the iShares MSCI Global Gold Miners ETF (RING). The mining shares affected by the precious metal include Eldorado Gold (EGO), Alacer Gold (ASR), IAMGOLD (IAG), and Kinross Gold (KGC).

India’s Top Bank in Limelight, Investors Stay Away from Gold

India’s demonetization

As India moved to replacing its higher-denomination notes, the impact was far felt. The country’s tax authority is making a list of dealers that they believe could be involved in suspicious activity. The ban on gold imports after the demonetization has put many dealers in danger.

Axis Bank, India’s third-biggest private sector lender and the top gold importer during the past week, is familiar with the consequences of money laundering. Several jewelers’ and gold dealers’ deposit accounts were frozen, and activities were suspended. 19 employees were involved in “black money” laundering after the demonetization deadline. The bank has suspended the accounts of some precious metal dealers and jewelers after two executives were arrested for money laundering.

Although the added insecurity in the market could lead to gold purchases, investors fear that the government’s anti-money laundering steps could target gold and impose further restrictions.

India’s Top Bank in Limelight, Investors Stay Away from Gold

The gold market is likely experiencing a drought. Money has stopped flowing to favourite funds such as the SPDR Gold Shares ETF (GLD) and the iShares Silver Trust ETF (SLV). These two funds saw significant outflows.

Higher premiums

The demonetization in India also impacted gold prices, as there were higher premiums paid for gold in exchange for the banned currency notes. Premiums as high as 50% on ten grams of gold were witnessed during the start of demonetization in India. Although the country’s demand and import figures had a minimal immediate impact on the market, a longer-term impact may be felt. Mining shares affected by gold prices include Sibanye Gold (SBGL), Gold Fields (GFI), Primero Mining (PPP), and Newmont Mining (NEM).

Could Central Banks’ Demand for Gold Rise?

Central banks’ gold demand could rise

The US federal debt is growing at a fast rate—it has even exceeded the GDP growth rate. Trump’s win of the election in November came as a surprise for investors. Gold increased initially, but later, it tumbled. The fall since Trump’s victory has been significant and affects gold-following funds such as the iShares Gold Trust ETF (IAU) and the Physical Swiss Gold Shares ETF (SGOL). When major central banks increase debt as a percentage of GDP, their gold holdings often rise.

Could Central Banks’ Demand for Gold Rise?

Rising debt has an adverse impact on the economy. Anything that is negative for the economy could be positive for gold prices. In turn, anything positive for gold could be value-adding for mining shares such as Barrick Gold (ABX), Goldcorp (GG), Yamana Gold (AUY), and Coeur Bank (CDE).

Increased spending

According to Valuewalk, the US debt is $67 trillion, nearly 400% of GDP. Investors can compare GDP versus debt to understand whether the country can make its future payments. Trump is planning to increase the country’s spending on infrastructure, which may add to the nation’s debt. Higher debt is also negative for the US dollar, and a fall in the dollar could trigger an increase in gold prices, as gold is a dollar-denominated asset.

– Meera Shawn

As Investors Flee Gold Central Banks Are Buying

Rupert Hargreaves: It has been a tough year to be a gold investor. The price of gold has whipsawed throughout the year on the back of changing interest rate expectations and political uncertainty. Indeed, as uncertainty grew throughout the first half of 2016, gold prices pushed steadily higher from around $1,075 an ounce at the beginning of the year to a high of just under $1,400 an ounce after the Brexit vote.

However, over the past six months as uncertainty has faded and the global economy has surprised to the upside, gold prices collapsed, falling to a low of $1,136 an ounce at close on Friday.

According to HSBC investment demand for gold has also collapsed during the second half of 2016. The 84 global gold exchange traded funds tracked by the bank’s commodities analysts reported a decline in gold holdings of 3.9 million ounces during November, the highest monthly outflow since May 2013. Gold prices declined by 7% in November 2016, compared to a 5% drop in May 2013. SPDR, the largest gold ETF globally, shed 1.9 million ounces of gold during November, contributing close to half of the total ETF outflows for the period. Still, on a net basis ETF buying for the year is 20.3 million ounces, the largest annual ETF gain since 2010.

As Investors Flee Gold Central Banks Are Buying

While investors were net sellers of gold during November, HSBC’s research also shows that central banks are gobbling up excess supply. The bank tracks gold holdings as reported in arrears by the International Monetary Fund’s International Financial Statistics on a monthly and annual basis with a focus on the top ten gold holders who represent c79% of global holdings. Per data from the World Gold Council, global central banks accumulated a net 33.7t of gold in October vs.13.7t in September, the highest since January 2016’s 35.5t. Russia was the largest buyer accumulating 40.4t, closely followed by Qatar at 6.2t and China at 4.04t. Russia remains the largest gold buyer in 2016, increasing gold holdings by c168.5t to date, and substantially ahead of China, which has accumulated c80.3t of gold so far.

Meanwhile, figures from the Shanghai Gold Exchange, which give an indication of the trends in physical demand for gold sales in China showed that trade volumes of the physical metal more than doubled month-on-month during November after Donald Trump’s win of the US elections. Monthly trading hit 1.5kt surpassing the previous record of 1.2kt printed after the Brexit vote.

Commodities that will Continue the Industrial-led Rebound in 2017

Commodities that will Continue the Industrial-led Rebound in 2017

Commodities that will the Continue Industrial-led Rebound in 2017

Commodities are poised to score their strongest yearly gain since 2010, with industrials leading the way higher, in a complete turnaround from last year’s performance.

Iron ore, zinc and natural gas are the year’s best performers, but last year were among the big losers.

“In 2016, commodities began the recovery from a five-year bear market,” said Christopher Wyke, product director of the Schroder Commodity Strategy.

The Bloomberg Commodity Index BCOM, +0.34% is poised to tally its first yearly percentage gain in six years—a significant turnaround from the end of 2015, when it posted its worst annual percentage loss since 2008. As of mid-December, it traded up 11.5% for the year, after 2015’s drop of nearly 25%.

“We believe that this rally will be extended over the next few years,” supported by supply and demand “dynamics, government action and investment demand as investors seek inflation protection,” said Wyke.

Performance overview
Many of the year’s strongest performers made up for 2015’s losses and then some.

“As producers across the complex have scaled back supply, markets appear to be rebalancing,” said Ben Ross, portfolio manager at Cohen & Steers. “We believe that this is part of a fundamental recovery and estimate most commodities are likely to achieve supply-and-demand equilibrium by the end of 2017.”

“Most commodities have been trading below their marginal cost of production for an extended period, causing producers world-wide to reduce output and cut investment in future projects,” he said. “We believe this supply response is slowly rebalancing the market amid stable global demand growth.”

Iron-ore prices have about doubled this year as of Dec. 14, after losing roughly 46% last year at this time. Copper is about 22% higher year to date, after dropping about 24% last year, while palladium has advanced more than 29% this year, compared with a loss of roughly the same amount in 2015.

Brent crude up around 46% year to date as of Wednesday, has done a bit better than West Texas Intermediate crude‘s nearly 38% climb so far this year.

Gold looks set for yearly gain of nearly 8%, recouping most of last year’s 10.5% drop, while silver’s SIH7, +1.14% up over 22%, following a loss of almost 12% in 2015.

Industrials lead the charge

Industrial metals have led the rally in commodities this year.

A chart complied by Adam Koos, president of Libertas Wealth Management, which compares year-to-date gains for iron ore, silver and copper, and others, with their performance a year ago, puts the turnaround into perspective.

The slides that follow detail these as well as a few other big commodity movers.

Iron ore
While many commodities rebounded from last year’s steep declines, iron ore made the largest move by far—making a full U-turn in 2016 from the previous year’s devastating losses.

“When you look at what iron ore did in 2015—a considerable downtrend—it had nowhere to go but up this year, and it did,” said Joseph Innace, metals content director at S&P Global Platts.

“The trend has been up all year, reaching a recent peak of $82.30 [per dry metric ton] on December 7, 2016,” he told MarketWatch on Dec. 8—a surge of 92.7% year to date, based on S&P Global Platts IODEX daily price data.

“As Chinese steelmaking goes, so goes iron ore,” said Innace. The annualized 2016 rate of steel production from China is at nearly 810 million metric tons, while most predictions saw it coming in under 800 million metric tons, he said.

Copper

Copper was also among the worst performers last year, but this year comes in among the largest gainers.

Expectations that U.S. President-elect Donald Trump’s plans to improve the nation’s infrastructure will boost industrial commodity demand helped provide an extra late-year lift.

Copper futures settled at $2.605 a pound on Comex Wednesday. It trades over 20% higher year to date.

Traders realized that copper had been left behind by the rise in other base metals, said Christopher Ecclestone, a mining strategist at investment bank and research firm Hallgarten & Co.

Prices for the metal had a tough time holding on to a gain for the year on the back of ample supplies, but has spiked higher from the lows seen in October.

It found some support from a “small element of underinvestment, no new flow of projects, [and Chinese] buying, said Ecclestone. And earlier this month, Rio Tinto suspended shipments from the Oyu Tolgoi mine in Mongolia after Chinese authorities closed a border crossing, according to news reports.

Ecclestone expects copper to climb to around $3.10 a pound next year.

Zinc

Zinc prices have seen a spectacular 72% rise so far this year.

The metal, which is used as a coating for steel and iron to prevent rusting, got a boost from “prolonged underinvestment, a dramatic life of death decision by Glencore to restore its fortunes by closing capacity,” along with permanent mine closures by others in 2015, according to Ecclestone.

The metal’s future, as is the case with most industrial metals, is “closely linked to the economic health of China, which is the largest producer, consumer and refiner of zinc, said Chris Gaffney, president of world markets at EverBank.

The market saw worries about China’s growth in the first half of this year, but the second half of 2016 saw investors betting on “further infrastructure spending, which combined with predictions of a deficit in supply to dive prices higher,” said Gaffney.

Looking ahead, he expects infrastructure projects in the U.S., China and India to continue to increase demand for zinc, while production will be “slow to ramp back up.”

“This means we could see continued price increases, albeit slower than what we have seen in 2016,” he said.

Oil and natural gas

Oil and natural-gas futures bounced back after two years in a row of steep losses.

Yearly gains of nearly 45% for Brent and almost 38% for West Texas Intermediate crude were impressive, but not as impressive as the more than 52% jump seen for natural-gas futures.

“Supply and demand is slowly rebalancing and we should start seeing inventories start declining in 2017 with demand exceeding supply,” Brian Youngberg, senior energy analyst at Edward Jones, told MarketWatch.

During the year, the energy market saw a continued decline in investment, which translated into falling production in the U.S. and elsewhere, he said. “Demand growth is solid and better than expected, led by India and the developing world.”

And the Organization of the Petroleum Exporting Countries’ recent agreement to cut back output “has helped push prices up with expectations that the rebalancing will occur a bit earlier in 2017 than otherwise thought,” said Youngberg.

Many oil producers outside of OPEC also agreed this month to reduce output by 558,000 barrels a day and OPEC’s top producer Saudi Arabia, said that it may even cut more than promised.

Looking ahead, WTI oil prices are likely to move through the $50s in 2017 and end the year near $60, Youngberg said.

The market is concerned about oil shale production ramping up, but most producers will remain disciplined and investment likely will not increase until prices get above $55 and look stable, he said.

Natural gas, meanwhile, may see a material price rise if the market sees extreme weather, Youngberg said. If not, “we could see prices decline” with a worst-case scenario being a revisit to the $2 level next year.

Gold and silver

Gold is looking at its first yearly gain since 2012, albeit a modest one, while silver is ready for its highest annual percentage rise in six years.

The yellow metal is up roughly 7.9% year to date, set to come up short of recouping last year’s nearly 11% loss. Silver is up over 22%, following hefty drops in each of the last three years.

“Gold saw a tremendous start to 2016 as a combination of global growth worries, uncertainty regarding Brexit and the U.S. elections, and a pullback in U.S. rate-hike expectations drove precious metals prices to the best performance of all asset classes,” said Gaffney.

But gold peaked just after Brexit, then “range-traded” during most of the third quarter as U.S. election uncertainties were offset by new rate-hike expectations here in the U.S., he said. After the U.S. election, gold prices then saw a big drop “as investor confidence in global growth, along with expectations of higher U.S. interest rates” pushed gold prices back down.

On Wednesday, the Federal Reserve announced its decision to increase interest rates for the first time in a year.

Silver’s “resilience” after the U.S. election is the “biggest surprise,” said Gaffney. The white metal has more industrial uses than gold, so the “renewed confidence in global growth has placed a floor under the price of silver as we approach the new year.”

Julian Phillips, co-founder of GoldForecaster.com, said he expects President-elect Donald Trump’s economic stimulus actions to boost growth in the U.S., but “it may well be at the expense of the dollar, certainty and global stability,” as his policies may significantly raise the U.S. debt burden.

“This will be positive for the gold price,” said Phillips.

Gold prices are likely to “drift higher” next year, according to Gaffney, possibly “booking returns in the high single digits to low double digits.”

Hellenic Shipping News

Commodities that beat Equity in 2016 – India

ETMarkets: Commodities outpaced domestic equities in 2016, as crude oil, precious metals, base metals and agricultural commodities delivered over 20 per cent return on an average against tepid gains in the domestic equity indices.

During the year, the BSE Sensex and NSE Nifty have advanced nearly 1.50 per cent each till date.

 

Base Metals

Among the commodities available for trading on the domestic bourses, zinc has gained the most at 70 per cent since the beginning of this calendar year till December 16. Prices of the metal rose from Rs 106 a kg to nearly Rs 185 a kg till date. Other base metals – copper, aluminium and lead – advanced 24 per cent, 28 per cent and 17 per cent, respectively, during the year.

Most of the base metals witnessed an amazing rally during November, as all of them have been beneficiaries of robust manufacturing activity in major consumer nations, namely the US, China and the EU.

Also, a commitment by US President-elect Donald Trump to increase infrastructure spending is widely expected to spur growth and inflation.

Supply constraints and a decline in inventories also spurred base metal prices higher. Recently China’s top economic commission approved a $36 billion plan on new rail links around Beijing, boosting demand for industrial raw materials.

Prathamesh Mallya, Senior Research Analyst for Commodities & Currencies at Angel Broking, said: “The rise in base metal prices was attributed to an assurance by US President-elect Donald Trump that he would cut taxes and invest more than $500 billion on infrastructure, the core demand area for base metals.”

Gold and silver

Precious metals on an average gained nearly 14 per cent during the year. Gold underperformed other precious metal and gained nearly 9 per cent to Rs 27,239 per 10 gm as of December 16, 2016 compared with Rs 24,967 per 10 gm in December last year, whereas silver surged nearly 19 per cent during the year. The white metal has rallied to Rs 39,590 per 1 kg from Rs 33,360 in last 12 months.

On gold and silver price movement, Madhavi Mehta, Analyst at Kotak Commodity Services, said: “Gold failed to outperform silver in 2016 due to lower safe haven demand, strength in the US dollar and uncertainty over Indian demand. On the other hand, most industrial metals are trading near multi-month highs amid improved risk sentiment and demand expectations.”

Silver is primarily used in industries that make solar panels and cellphones, among others.

Agricultural Commodities

 In the agricultural space, wheat, jeera and turmeric prices climbed nearly 24 per cent, 23 per cent and 22 per cent, respectively. Coriander and chilli prices slipped 23 per cent and 17 per cent in 2016 till date.

On impressive returns given by wheat, Subhranil Dey, Senior Research Analyst (Commodities-Fundamental), SMC Comtrade, said: “The commodity touched an all-time high of Rs 2,175 per quintal on the national bourse in 2016, buoyed by fundamental factors such as tight supply and consistent demand. In the spot market, wheat prices have surged to Rs 2,100-2,150 per quintal in northern states from Rs 1,600 at the beginning of the last rabi season.”

To cool off wheat prices, the government lowered wheat import duty in September to 10 per cent from 25 per cent and then exempted wheat from import duty levy altogether. India’s annual consumption of wheat is of 87 million tonnes, whereas production stands at around 93.50 million tonnes.

At present, the country is consuming the wheat grown during crop year 2015-16 and the new crop is expected to arrive April.

Other agro-commodities such as cotton, sugar and pepper gained 15 per cent, 14 per cent and 9 per cent, respectively.

Prices of soybean tumbled nearly 19 per cent this calendar year to Rs 3,030 as of December 16 from Rs 3,743 per quintal in December last year.

India is the sixth largest producer of soybean in the world and it is mainly dependant on monsoon rains. After two consecutive years of weak monsoon, normal and above-normal rainfall in 2016, particularly during the peak planting season of June-mid-July, encouraged planting of the oilseed.

“Indian growing conditions during last year’s cropping season were largely categorised as normal and soybean production in most growing areas was largely unaffected by adverse weather,” said Dey.

Crude oil

Crude oil has surged 40 per cent since the beginning of ongoing calendar year. Prices of the black gold hit nearly 17-month high recently after Goldman Sachs boosted its price forecast for 2017 and producers showed signs of adhering to a global deal to cut output.

Since the beginning of December, crude prices have jumped over 5 per cent after the Organisation of Petroleum Exporting Countries (Opec) agreed to cut output by 1.2 million barrels a day (bpd) for six months from January 1, with top exporter Saudi Arabia cutting it by around 4,86,000 bpd.
On December 10, non-Opec producers, including Russia, agreed to reduce output by 5.58 lakh bpd, short of the initial target of 6 lakh bpd but still the largest-ever contribution by non-Opec nations.

Gold and Silver Market – Surviving A Collapse?

Gold and Silver Market – Surviving A Collapse?

Gold and Silver Market – Surviving A Collapse?

For the average family, the acquisition of gold and silver is a failed strategy.

Do Americans really need to worry about a financial collapse in world money markets, leading to national rioting and chaos? History shows it has happened before in many countries around the world and many so-called experts say we do, but they are leaving out the most important details.

Of course when the media gives voice to the opinions of the “experts” that alone builds some worry into financial markets. Some astute observers may ask if this is by design and if by doing so they intentionally create niche markets for the products and services they sell related to gold and silver hedges and financial advice. Still, even if this is by design, the facts on the ground in regard to record national debt and quantitative easing are of themselves creating a situation where instability is a natural result; going too far out on any limb will ultimately cause the stress on the limb to exceed its breaking strength.

Central banks and equity markets around the world today are operating with hair-triggers. Nobody wants to be the last one out when the music stops, and the music must stop soon. There is no such thing as unlimited debt and growth; corrections must and will come, one way or another. And since the markets have been manipulated to keep them afloat, when the correction (polite term) comes, it will now be far more devastating.

The people (elitist-globalists) who are directly and indirectly holding all of world debt, $20 trillion of which is owed by the U.S. government, will at some point have to be repaid, one way or another, and therein is the big worry. Of course at the same time, the debt holders also see that the odds of these debts, which have already been restructured many times, being repaid are growing dimmer by the day.

So these same elitists are setting themselves up to profit from a coming world crash. They are now marketing their gold and silver, which they acquired at market lows, and are now selling it back to the masses at market highs, while they quietly diversify into other essential commodities that people and governments will require. The point of this visionary strategy is to be in a position to wait out a market collapse and the ensuing chaos, and then, during that chaos and instability, buy back all of the gold and silver at new market lows.

But why would gold and silver go into the tank? Some may ask this question, and there is a very good reason why that may happen related to market demand.

First of all, we must remove the selective perception that the marketing psychologists have instilled into the masses via media — “gold and silver yield security” in tough times. For average people, this is false. For the purposes of intergovernmental trade, yes, there is some logic to this, if there is an agreed-upon value for these metals. It’s important to keep in mind that the intrinsic value of these metals only relates to their industrial, medical and vanity jewelry uses, nothing more. But through the use of crafty psychological marketing, the elite have built a perception that gold and silver are now more valuable than the things people really need like water, food, shelter and other items that actually support life. Gold and silver are actually little more than illusions of wealth created by highly intelligent people who know how to manipulate the masses, as they have for millennia. And as history shows, for those who take the time to learn it, there is a cyclic pattern used by elitists who have extremely long-term wealth- and power-building models that are literally generational in nature, where one generation sets things into motion and the next generation follows the plan and reaps the benefits. The masses, kept financially and educationally oppressed (much of the brainwashing starts in school), thus have great difficulty in emulating a generational wealth-building strategy. Adding to the advantages of the elitists over the masses is that they have been employing their wealth-building strategies for many hundreds of years. This is why we see the same names over and over again as being the wealthiest people in the world.

Between hungry people who are defending their belongings from outside threats, which may include neighbors who are also doing without the essentials of life as a result of a massive breakdown of the financial and supply-chain infrastructures, gold and silver will never fill an empty stomach or warm a freezing child. So who among these people would accept a gold coin in such conditions for a case of tuna fish, a warm coat or a pack of cigarettes? The real answer is none of them.

The reality is, as we saw during the period (1919-1933) of the Weimar Republic, society collapsed and descended into poverty and despair, where it took sacks-full of cash to buy a loaf of bread, while elitists bought back gold and silver at huge discounts. But this time around, it will be brutally worse because we now find ourselves in a world packed with needy people and desperate nations all around, nations desperate for the resources owned and controlled by the U.S.

During the collapse of the Weimar Republic, the world population was about one-fourth of what it is today, about 2 billion people. Today we have a world population of about 7.5 billion people. And all of these people require the same resources; drinking water, food, shelter, clothing, medicine and other items to support life. The demand for these resources is now at the limits of the new “just-in-time” supply-chain infrastructure, which is extremely vulnerable to a myriad of potential points of failure, including but not limited to any financial collapse.

I will put it bluntly: If you fail to read When Money Dies, you will remain uninformed and in the dark.

And when a correction (nice way to articulate a collapse) comes, the effect of that collapse will be devastating this time around for many reasons that did not exist previously, as we now begin to understand. The parallels we now see unfolding between what happened in the Weimar Republic and the United States today are truly unsettling, and these are conclusions are not being drawn with some product or service marketing agenda associated. Quite frankly, they fly in the face of those people working for the elitists who are touting gold and silver as a safe haven for average people. I personally couldn’t disagree more.

Ask yourself this simple question: If gold and silver are so hot, and are going to go up in value, why would they be selling any of it? It’s not like it will spoil or cannot be stored. The simple reason is the correct reason: The elitists are now diversifying and dumping gold and silver at market highs. They are getting out while the getting is good, while the masses are being sold on what a great investment it is. Of course this is typical behavior by these people; they feel they are superior to the masses and we only need to know what they want us to know. But the easily observable facts tell the truth.

First, we have huge population centers that are already disenchanted and ripe with unrest and lawlessness. The infrastructure of these cities is at the breaking point. This includes the supply-chain infrastructure, which provides the basic needs for life — water, food, health and sanitation, law enforcement, etc. And it won’t take very much to trigger a complete failure of these integrated services, where one affects another like dominoes.

Sadly, the current role models in power over the past eight years at the top of the American government are morally repugnant and have failed to lead by a positive example. And worse yet, they allow the continued media brainwashing of the people via the psychologists who craft all of the political and marketing messaging that is poured out onto Americans via all of the media outlets, which they control.

Some people are placing all their bets on the newly elected government in America, because hope is all they have — the hope that someone, anyone new, might make the changes needed to make America great again, as coined by President-elect Donald J. Trump.

There was a song by the band The Who titled Won’t Get Fooled Again that has the lyrics, “Meet the new boss, same as the old boss.” As we watch the government appointments being made by Trump, the question that currently stands in American is, will Trump do what he promised Americans he would do? Or did he just say what he knew Americans wanted to hear, and will he instead embark upon the path that was preordained by the elitists? Americans voted for Trump because they believed in his campaign promises.

Many Americans are living at or near the poverty level and have reached the end of their wits, and as a country we have reached a level of desperation rarely seen before. These people are not a tiny isolated pocket of the population; they number in the many tens of millions, and many of those are illegal immigrants who have not been assimilated into America and retain their own cultural set of values, which dictates their behavior in any society. They see leaders at the top of American government who are benefiting from corruption and lawlessness while they barely manage to eat. This same group of so-called leaders have, in many ways, through speech and action, or lack thereof, condoned lawlessness by making excuses for the criminal behavior of political activists who seek to foment more unrest in the interest of creating an environment where they may have a chance to rise to power again. There are without a doubt outside forces who have infiltrated the American government (radical Islamists) and who also see unrest and instability in America as “opportunity.”

But for the average American family, in the final analysis, the acquisition of gold and silver over the essential commodities of life is a failed strategy and plays into the hands of the elitists who intend to buy them back at huge discounts when the markets collapse and people become desperate for the commodities they really need just to stay alive.

For the people who live in the cities and who are fortunate enough to have some discretionary funds, I believe land that can provide sustainable living is now the best investment for an uncertain future. A place to live that is not dependent upon banks or just-in-time supply chains — a place with a garden, some chickens and pure water — would be hard to beat in tough times.

Hope and pray for the best but prepare for the worst in response to what history teaches us.

 

 

 

Courtesy: Capt. William E. Simpson

Gold Price Outlook Hostage to Uncertain Trump & India

Gold Price Outlook Hostage to Uncertain Trump & India

Gold Price Outlook Hostage to Uncertain Trump & India

It was supposed to be a good year for gold, given all the uncertainty and surprises over the U.S. presidential election, the British vote to leave the European Union and general concern about the health of the global economy.

But things didn’t quite pan out the way gold bulls would have hoped, and now they face a new year where the price of the precious metal is likely to be hostage to developments that are inherently unpredictable.

The two main risks for the gold outlook for 2017 are what actually happens in the presidency of Donald Trump and how the demonetization of Indian Prime Minister Narendra Modi plays out in the world’s second-largest consumer of the precious metal.

Gold certainly enjoyed a strong first half in 2016, with the spot price gaining almost 30 percent between the end of last year and the intraday high this year of $1,374.91 an ounce on July 6.

However, since then it has slid 17.5 percent to the close on Dec. 16 of $1,133.99 an ounce, as investor sentiment swung from gloomy to optimistic that the United States will help lead global growth and reflation.

Much of the newly-found optimism is based on the view that Trump will be able to kickstart the U.S. economy through his plans to spend up to a $1 trillion on infrastructure and other projects.

Equity markets and industrial metals have enjoyed strong gains since Trump’s surprise victory over Democrat Hillary Clinton in the Nov. 8 vote, with the U.S. dollar also rising as investors expect the Federal Reserve to continue raising interest rates after this month’s hike.

The market’s expectation for Trump’s presidency is bearish for gold as a rising US dollar and interest rates, coupled with strong equity markets, leaves the yellow metal out in the cold.

But the markets have so far priced in all the positive outcomes from Trump, while ignoring the potential negatives.

While Trump has clearly stated he wants to boost the U.S. economy, he has also clearly stated he intends to take the U.S. out of global and regional trade agreements, and impose tariffs on goods on various countries, including China.

He also wants to restrict immigration into the United States and build a wall along the border with Mexico.

The view investors have taken so far is that Trump will do all the good things for the economy and none of the bad.

IRRATIONAL TRUMP OPTIMISM?

This seems unduly optimistic and gives gold the opportunity for gains in 2017 if Trump disappoints the expectations now being built up around his presidency.

While it would be economically stupid to spark a trade war with China, it’s not beyond the realms of possibility that Trump will do it anyway.

It’s also far easier for a U.S. president to impose trade barriers using executive powers than it is for him to pass tax cuts and raise money to spend on projects, as these decisions have to go through Congress.

Beyond Trump, gold will also depend on what happens in China and India, the two major consuming nations.

China’s gold demand has dropped this year, with third quarter consumer demand at 182.5 tonnes, down 22 percent from the same period in 2015, while India’s 194.8 tonnes is 28 percent lower.

China’s gold demand should be at least steady in 2017, with some upside as consumers buy into rising prices in local currency terms.

But India’s gold demand will be far from certain in the aftermath of the government’s decision to withdraw 500 and 1,000 rupee ($7.37 to $14.75) notes, which represent about 86 percent of all notes by value.

Indians mainly use cash to transact and the withdrawal of the two largest denomination notes has led to shortages of money as people struggle to pay for goods and services.

Gold will be affected as well, given many Indian families use cash to buy gold, especially during the wedding season.

It’s likely that gold demand will be crimped by the demonetization policy, but the key question is for how long.

It’s possible that as cash shortages ease, consumer gold demand will bounce back.

But it’s also possible that the government’s aim of cracking down on the informal economy will hurt gold demand as consumers are left with little choice but to put money into banks rather than use cash to buy gold.

It’s estimated that as much as one-third of India’s annual demand is paid for by “black money,” funds held in secret by people to avoid paying tax.

The impact of India’s demonetization on gold demand is far from certain, and similar to Trump’s presidency, it’s difficult to make definitive predictions.

 

 

Source: Clyde Russell

With US Dollar so Strong, How come Gold Prices are yet so High?

With US Dollar so Strong, How come Gold Prices are yet so High?

With US Dollar so Strong, How come Gold Prices are yet so High?

Gold is about to have one of its worst quarters in nearly 35 years, but its price is still significantly higher than it should be right now, and there does not seem to be any real reason why.

That is according to the latest research from analysts at Macquarie, who ask in a note circulated to clients last Friday: “Why is the gold price so … high?”

Macquarie’s team, headed up by Matthew Turner, argue that despite gold’s fall in the second half of the year, almost every major price driver suggests that the precious metal should not be worth almost 7% more than it was at the same time last year.

Writing in the Australian bank’s “Commodities Comment” Turner and his team say: “Gold might be on course for its second-worst quarterly performance since 1982, but it remains well above last year’s price low, despite a stronger dollar, high bond yields and ominous signs physical gold demand is hamstrung. So we ask – why is it so high?”

Macquarie’s analysts then run through a whole heap of possible reasons for gold’s relatively elevated level, but nothing really fits.

First up, a weaker dollar. As the analysts note: “If that was the case then gold might be lower in key currencies of consumers, helping demand, or producers, curbing supply.”

However, obviously, the dollar is not at all weak. In fact, it is incredibly strong right now. The US dollar index is trading above 100, a mark it previously hadn’t crossed since 2004. Macquarie adds that “while that is perhaps a misleading comparison given the sickly British pound is a large part of that index, it is up 2% against the Indian rupee, 4% against the euro and 7% against the Chinese yuan.”

So it is not any weakness on the dollar’s part providing relative support to gold. Neither is it low yields on government debt.

“If it is not the dollar that is keeping gold up, another possibility is low yields, the other financial market metric that is closely correlated to the gold price. As Figure 3 shows, the 10yr US Treasury yield has, however, soared far higher than it was last year (it is in fact the highest it has been since mid-2014),” Turner et al write.

Here is Figure 3 (axes are inverted):

Screen Shot 2016 12 19 at 10.53.29 --- With US Dollar so Strong, How come Gold Prices are yet so High?

One possible explanation posited by Macquarie’s team is that real yields – nominal yields minus the rate of inflation – remain subdued from late 2015 levels. Here is the quote (emphasis ours):

“The yields which have not yet reached last year’s level, however, are the real yields as measured by Treasury Inflation Protected Securities (TIPs). These have increased significantly in recent weeks and even days – closing 15 December at 0.70%, up from 0% at the end of 3Q, marking their third-biggest quarterly increase since 2000. But they remain below the peak seen this time last year of 0.84%.”

Later in its research, Macquarie concludes:

Indeed, of the main metrics we use to ‘value’ the gold price, only lower real yields really justifies it, and then only to an extent. A larger stock of ETF investment (and indeed futures positioning) than last year surely plays a role and can be justified if investors are focusing on things other than US yields and the dollar, eg, higher global risk or future inflation prospects.

Gold prices may have dropped by more than 17% since its peak in the aftermath of Britain’s vote to leave the EU (as the chart below illustrates) but it is still significantly overvalued, and Macquarie can’t work out why.

Screen Shot 2016 12 19 at 11.09.09 --- With US Dollar so Strong, How come Gold Prices are yet so High?
Courtesy: Will Martin

Why Gold Prices Could Bottom “On or Close to”, After Fed’s Rate Hike

Why Gold Prices Could Bottom "On or Close to", After Fed’s Rate Hike

Why Gold Prices Could Bottom “On or Close to”, After Fed’s Rate Hike

With higher yields predicting higher price inflation and consumer confidence at a 2-year high, the Fed rate hike could mark an intermediate bottom in gold prices.

Oil has been on a tear, and gold may be next, especially once this week’s anticipated Federal Reserve rate hike is behind us.

Three notable things happened to the price of oil this week. First, a much forgotten gap that opened in late June 2015 is on the verge of finally being filled. See the red circle below.

Why Gold Prices Could Bottom "On or Close to", After Fed’s Rate Hike

Second, as you can see from the same chart, the 50-week moving average is just now turning up for the first time since June 2014, just before the whole oil collapse mess began. Third, we have tentatively broken through resistance at $52.42, and are at the door of resistance at $54.24 established after the very first brief bounce post-2014 collapse.

Why Gold Prices Could Bottom "On or Close to", After Fed’s Rate Hike

The OPEC deal to cut oil production, while certainly being the catalyst for this move, speaks nothing of its magnitude. Only the amount of money available on the sidelines determines the magnitude of a move after a catalyst. The fact that oil can climb so quickly on what is essentially indeterminate news speaks volumes of the amount of money in the system waiting to fall on good deals. Why indeterminate? Because there is no way of knowing if a deal between OPEC and other oil exporters will actually be honored. Trusts like these sometimes tend to break apart when one member seeks an edge over other members. Funny how conspiring to raise the price of a commodity is illegal on a domestic scale but anticipated on an international one.

If there is enough money to bid up oil prices so fast, then there is enough money to bid up consumer prices as well. What has happened to bond prices since July is even more extreme than what has happened to oil since August. Oil is up 28% since Aug. 1, but interest rates on the 10-year are up an astonishing 84% since July 8. Even more extreme, interest rates on the five-year are up 106% since July 5. Naturally rising interest rates tend to precede higher price inflation. This is why the Federal Reserve mainly uses that tool to head off any unwanted consumer price gains, successfully or not.

The iShares Barclays 20+ Year Treasury Bond ETF (NASDAQ:TLT) is skirting new 52-week lows, and though interest rates continue to be at historic lows, servicing the national debt becomes impossible at some tipping point. With Donald Trump’s spending plans and bellicosity against Iran and China, there is little possibility of that debt coming down. With the higher likelihood of trade disputes with China with Trump at the helm and heavy protectionism of U.S. businesses at the expense of consumers, we have even more artificial stimulus to the price inflation equation.

Further evidence of bubbling price inflation is that consumer confidence has just hit a two-year high. Consumers are more willing to part with cash, which can only add further upward pressure on prices.

The only major predictor of price inflation we have not seen yet is a rising gold price. The latest correction in gold has timed itself almost perfectly with oil’s latest recovery, oil having bottomed Aug. 1 and gold having topped one day later on Aug. 2. This suggests that when the current oil rally takes a breather, gold could be the immediate beneficiary, especially once the anticipated Fed rate hike will be behind us.

Interestingly, the Fed rate hike decision will be announced only 18 and a half hours before the new CPI and Core CPI numbers are released on Thursday. While a rate hike is bearish for gold, all other things being equal, and the metal could take a knee-jerk fall on the announcement of a rate hike, keep in mind that all other things are never equal and that gold reached its famous 1980 $821 peak precisely when interest rates were at historic highs.

All together, the situation now is extremely complex. On the one hand, interest rates at the short end of the curve have already doubled since July. In the face of a manual rate hike by the Fed, they are poised to go even higher. Eighteen hours later we have the CPI, which, given stabilized oil prices, is set to jump. We could therefore see a knee-jerk move lower on a Fed rate hike, followed by a sharp move higher marking a gold bottom on the CPI numbers. And in the background we have naturally rising interest rates, which, if they continue, will make servicing what is nearly a $20 trillion debt harder and harder.

Certainly, if the Fed ever has to hike overnight rates significantly, the ability of Congress to spend money on much besides mandatory spending and debt service becomes severely hampered, as do Trump’s infrastructure plans and the U.S. dollar.

 

 

 

Courtesy: Matt Winkler

SILVER – Ridiculously Underpriced, but Most Rewarding Investment Vehicle

SILVER - Ridiculously Underpriced, but Most Rewarding Investment Vehicle

SILVER – Ridiculously Underpriced, but Most Rewarding Investment Vehicle

At this point in the cycle, the silver market should be relatively easy for the average person to enter. Prices are beginning to move back toward natural supply and demand equilibrium, as large disruptions are occurring between the positioning of dominant futures speculators that have kept futures prices entrapped for nearly 6 years.

SILVER - Ridiculously Underpriced, but Most Rewarding Investment Vehicle

It’s easy to buy physical silver right now. It can be bought in person.

It can be through online dealers.

Relatively speaking, it requires relatively few ‘currency notes’ to acquire its cheapest form (closest to its commodity state) in the form of bullion or rounds, and silver that previously circulated in the currency otherwise known as 90% silver or ‘junk silver’.

But when you actually hold silver, it changes things.

It becomes not just ‘skin in the game’, but real weight in the game.

And then it becomes a little more complicated in that physical silver needs to be stored, watched, protected.

That often divides the landscape of potential investors.

Why get your hands dirty if you don’t have to? Why hold physical precious metals in your possession if there are other available (less burdensome) methods for storage, or options for exposure?

It’s similar to how some generations view farming or growing vegetables at home as unfashionable or a primitive practice for the underprivileged.

At the same time, all of this effort leads to somewhat of a “feedback” awakening.

A reminder of perhaps the factors that lead us to thinking about silver as a safe haven investment to begin with; as a protection against inflation, or in some cases, an opportunity to make money and ‘profit’ over the short, intermediate, or long term.

Currently, there are no significant retail shortages, though some forms have experienced notable cycles of retail scarcity over the last 10 years.

Obviously, this can change very quickly on a sudden surge in price, as the would-be retail investors awakens to price action.

SILVER - Ridiculously Underpriced, but Most Rewarding Investment Vehicle

Outside of the matrix of predictions and emotion, anyone can learn about the fundamentals of silver on the Internet.

Much silver information is disseminated through retail bullion dealers, producers, large industry consulting groups (World Gold Counsel) the chief US futures regulator (CFTC), The Silver Institute, and various exchanges and trading platforms.

These channels might be considered the ‘high-road’, because aside from a few prominent bullion dealers, there is a built-in incentive to quietly ignore the true nature of world price discovery.

If price discovery were revealed for what it is, many of these institutions would cease to exist.  (More on that in a moment).

Silver, for the mainstream inventor/observer, is therefore relatively easy to ignore and has only a very small, yet vocal group of “grass roots” advocates, bloggers, newsletter writers (some part-time, with day jobs like me), or analysts.

Compared with equities, foreign exchange, options, and even futures, there are relatively few (if any) ‘professional’ analysts who focus mainly on silver.

At best, most so-called ‘professional’ analysis of silver is lumped in with the other precious metals.

In addition, silver is ‘rationalized’ and evaluated from a derivative-based, technically driven price function that at best, secondarily informs on supply and demand – rather than the other way round.

This informs and cultivates the prevailing mainstream (lack of) awareness.

Silver, in the minds of the ‘intellectual class’, represents jewelry or silverware with only a very detached recognition of its role as currency and money throughout the years.

In most cases, it is (misleadingly) lumped in with it’s yellow cousin.

The average Joe is essentially oblivious to great silver option.

There is of course, an undeniable political climate that hangs over the opportunity. Silver is certainly not progressive in the minds of most.

In fact, if the metal is understood from a historical standpoint it is relatively benign, if not interesting to the laymen.

SILVER - Ridiculously Underpriced, but Most Rewarding Investment Vehicle

What silver might represent from an investment or monetary hedge comes across as a very regressive position, where seeking safety is considered conservative.

This can be dangerous in the current cycle of humanity, where hope for progress as the ultimate salvation is worshiped while the foundation for prosperity (economic, social, cultural) visibly unravels.

(The great irony is that silver is essential to the technological progress they worship).

Many arrive at precious metals looking for an investment alternative. Some come for protection from inflation or currency collapse. Many imagine silver as an useful currency, in addition to a basket of others items stored for emergencies. Many also arrive here in the aftermath of the serial booms and bust brought forth by sanctioned financialization.

While guarding wealth and maintaining purchasing power sounds prudent enough, most silver investors cannot help but see a huge option for significant monetary gains.

From whatever angle, just below a surface understanding, lies the recognition that it is nearly impossible to find any other investment vehicle so ridiculously underpriced. Silver is not only under valued in simple inflation-adjusted terms, but also in terms of visible (verifiable) supply and demand.

Digging a bit deeper we encounter the murkiness regarding paper versus physical silver.

And further we eventually uncover the currency or the yard-stick used to value practically everything, the empty fiat currency promise.

In the background to all of this is the primary mechanism of price.

Enter price manipulation. 

With silver, you also have a relatively easy commodity to control because, along with other commodities, it’s price arises from pure speculation on futures markets.

The reason why it’s easy to control is that relatively little collateral or a lot of leverage can be gained with very little money down in these markets, so large entities, speculators, can afford to manage price at a relatively low cost.

In terms of price manipulation, if you have control over the price, you can also, of course, leverage those positions for profit, profit that is very easy to look back and notice is a very consistent thing if you are the one controlling the price.

This conveniently fits with the higher order agenda required for maintaining ‘confidence’ in a currency by preventing anyone from knowing the relative value of anything.


Central banks are engaged in a desperate battle on two fronts

What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, they seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.

It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first…..

Peter Warburton: The debasement of world currency: It’s inflation but not as we know it


Price manipulation and control comes from concentration and the size magnitude of concentration.

Concentration in a market simply means that one or a few entities are able to accumulate positions that are much, much greater.

Concentration is not exactly like a corner.

The concentrated position of ownership is manipulative by nature because it is impossible for a trade (by said entity) not to have massive influence in price.

For example, in the silver market, in the futures market, (the COMEX owned by the for-profit CME), you have essentially two classes of traders.

These big traders are actually, in fact, investment banks, large investment banks with deep pockets and some ways limitlessly deep pockets. The so-called commercials (though not producers by any stretch), as a class, trade with the other side of the speculative game, the funds that manage large pools of money for others. These are the managed money funds or hedge funds or speculative traders.


From Wikipedia:

CME Group Inc. (Chicago Mercantile Exchange & Chicago Board of Trade) is an American futures company and one of the largest options and futures exchanges. It owns and operates large derivatives and futures exchanges in Chicago and New York City, as well as online trading platforms. In 2014, it gained regulatory approval to open a derivatives exchange in London. It also owns the Dow Jones stock and financial indexes, and CME Clearing Services, which provides settlement and clearing of exchange trades. The exchange-traded derivative contracts include futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, rare and precious metals, weather, and real estate.[5] It has been described by The Economist as “The biggest financial exchange you have never heard of.”


Collectively they play by the “rules” of technical analysis. Price direction, volume, momentum are used to drive the market – not physical supply and demand.

Here, the great devolution of finance echoes in futures trading had once evolved to create price equilibrium and iron out the variances between need and production capacity.

As a result of the speculative class gone wild in futures, nowhere will you find today users and producers trading in any significant degree.

That’s probably an overstatement.

Historically speaking, after the Hunt Brothers were excommunicated from COMEX and the price of silver fell precipitously beginning in 1980, there were essentially no sellers left in the market.

This left the ‘market-makers’ or the liquidity providers as the main entities. They became the only sellers in a truly depressed market.

All the while, the demand for industrial silver continues as governments sold down stockpiles to the point where leading up to the turn of the millennium most above ground stockpiles were gone and the amount of silver consumed by industry and investment exceeded production on an annual basis.


Now, all of you know these changes are necessary for a very simple reason–silver is a scarce material. Our uses of silver are growing as our population and our economy grows. The hard fact is that silver consumption is now more than double new silver production each year. So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins.

Lyndon B. Johnson – Remarks at the Signing of the Coinage Act

July 23, 1965


Generally speaking, commodities, especially cheap ones, are overlooked.

We don’t think about them in day to day life. They form part of the elements that make up the things that we construct in the whole, but relatively speaking, most of us don’t think about it or we simply take it for granted.

This giant concentrated short position accident was built up and allowed to continue overtime, passed on through the decades, now controlled by JP Morgan and probably ScotiaBank.

But this position always carries the risk that it could get run over.

Regulators, observers, economists, financial analysts have been able to ignore for the most part or even bash as conspiracy because things have gone on for so long.

It reminds me of the earthquake that occurred off the coast of Japan in 2011.

SILVER - Ridiculously Underpriced, but Most Rewarding Investment Vehicle

The Diachii nuclear power plant was constructed in a very rational way. It was engineered to withstand an earthquake of the size that occurred. Japan needs energy.

Most of their energy needs to be imported, so nuclear power’s a reasonable option. Again, this facility was engineered sophisticated enough. The fail safe mechanisms did not, in fact, fail. They just hadn’t prepared. They weren’t prepared for a tsunami. One could ask, “Well, why not?” Couldn’t a seismologist have predicted that a subluxation of this size would create a tsunami?

It just hadn’t been considered as a significant risk or those who were considering it for a multitude of reasons, many of them could be involved with budgeting, they were ignored, so we got a complete disaster.

That’s what the magnitude of this concentrated position  (the very definition manipulation) in silver futures is like.

Silver is the poster child for this in terms of this large position.

When that position becomes overrun, or when one of the large commercial shorts (JPM) decides to cover and run, there is no possible way that the masses will not suddenly awake to news of this market moving. A market that no one really paid attention to before.

Once that happens, even though the silver market is so relatively small,

this ‘accident’ will be of such magnitude, what it will do is it will by a process of coalescing as create the situation where it’s impossible to ignore.

The ‘growth’ of the financial sector over the last 50 years has been unprecedented and cancerous. Yet much of that is considered progress. These ‘achievements’ have been used for as much good as ill. Mostly ill.

A ‘price’ that turns perception on its head.

Given the volume of paper obligations in need of fulfilling on sudden move up, in a market where the lone seller is gone, the price could move up and through that level quite easily. Therefore, $150 silver would be a conservative inflation-adjusted high.

It’s somewhat like having the situation where a jetty is built to protect a harbor. Enormous boulders are stacked so tall that no one can get to a vista high enough to see the volatility and/or the violence of the ocean behind that jetty.

It’s been effective for years and no one pays attention to it. Besides, the water’s very cold. No one dares to venture near or around the jetty. It’s too dangerous.

In our cognitive dissonance, we ignore it. The blockade has held up all this time. Regulators have ignored the risk of failure and/or actively denounced those who bring up the issue.

Until one day, out of the blue comes a big earthquake or a massive storm, and the jetty fails. With it, the violence of the sea held back by the jetty moves in, and the harbor will never look the same again.

 

 

 

Courtesy: Dr. Jeffrey Lewis

A Clear Picture of the Current Development in Silver Price Charts

A Clear Picture of the Current Development in Silver Price Charts

A Clear Picture of the Current Development in Silver Price Charts

It’s always such luck to find something when you really need it. I didn’t update the monthly chart for silver from July as we need to give time to the market for visible changes. I am very thankful to regular readers who comment on my posts and doing so; they give me a feedback with a clue of what you really need or what is your biggest concern. Last week one of the readers asked why I put short term setups with a bullish view. I answered that as long as the market broke above the medium-term downtrend, we can watch the upside. Today I would like to update the monthly chart as it is always better to see once than to read/hear about it many times.

This time I changed the usual order of charts. I would like to start from what we all didn’t see. The exotic pattern was detected, and I am glad to share it with you below.

Chart 1. Silver Monthly Chart: Cup and Handle Pattern

Monthly Chart Of Silver W/Cup and Handle Chart Pattern
Chart courtesy of tradingview.com

The exotic pattern we are talking about is the Cup and Handle Chart formation. Amazingly, but we’ve already seen this pattern this past March, but on the daily chart. This time it was shaped on the monthly chart.

The shape of the Cup is not perfect as it has a concave bottom, but at the same time, the Left Lip and the Right Lip are almost at the same level. The price is in the Handle already and sits above the important 61.8% Fibonacci retracement level ($16.47). That’s why at the start of this post I have mentioned our luckiness to detect this pattern when it has been almost fully shaped, and it will be ready for trading soon.

The setup is quite simple. The conservative approach requires waiting until the breakup of the Right Lip’s top above the $21.12 mark before entering a long trade. The target is located at the distance of the Cup’s depth ($7.70) added to the Right Lip’s top and is set at the $28.82 mark, quite ambitious, isn’t it?

Some traders take action before that on the breakup of the first resistance, which is located on the upper side of the Handle ($18.50) as they consider it as a Bull Flag pattern. If some of you choose this method, then it is highly recommended to limit your risk below the minimum price level within the Handle (currently $16.11) after the breakup.

Below I put the classic monthly chart to show you where we are and which barriers could arise for the Cup & Handle pattern’s target.

Chart 2. Silver Monthly Chart: Classics Is Immortal

Monthly Silver Chart W/RSI and Fibonacci Analysis
Chart courtesy of tradingview.com

I remind our regular readers about the breakout of the multi-year downtrend channel (red) which took place this June, and as long as we are above it, we should watch the upside keeping with the market’s price action. After the good rise to $21+ level, silver started a consolidation, and it’s a regular market behavior. Breakouts are usually followed by the pullbacks to the broken trendlines. Market participants book profits and think over their next steps.

The pullback touching point is located within the $15.00-15.20 range. This complies with the depth of the 78.6% Fibonacci level located at the $15.2 mark (look at the Chart 1). The RSI is a very good indicator of market behavior as it confirmed the breakout is breaking above important 50 level in the summer. Now it dipped back below the 50 level reflecting current pullback. I guess we will see RSI above the 50 again when the price will break up the Handle. It is necessary to confirm the upside move.

Now let’s talk about the possible barriers on the way to the upside. The right blue rectangle shows the Fibonacci Resistance Area between the $27.43 and $35.97 levels. This area correlates with the former consolidation zone highlighted by the left blue rectangle. The Cup & Handle’s target aims between the 38.2% and 50% Fibonacci levels where the first serious barrier is positioned.

There are also some minor resistance levels not shown on the chart to avoid overload. The first one is located at the recent high plus 2014 tops area at $21-22 levels. The next one is based at the top of the red falling channel at the $25.10 mark.

Now we have a clear picture of the current price development. Let’s see how it goes!

Intelligent trades!

 

 

 

Courtesy: Aibek Burabayev

Gold Prices Preparing for ‘The Next Big Leap Higher’

Gold Prices Preparing for 'The Next Big Leap Higher'

Gold Prices Preparing for ‘The Next Big Leap Higher’

Gold is probably the most controversial and talked about asset. We’ve all read about or witnessed heated arguments involving the yellow metal. There are two hardcore camps as far as gold is concerned:

  • The Gold Bugs (or their most extreme version, the “preppers”): These are people who believe that gold is the most important form of money, with thousands of years of monetary use in humanity’s history. They are convinced that there will come a time when the “reset” will come. When all fiat money will be massively devalued (given the relentless money printing that started in force during the financial crisis), and when gold will rocket higher to $2000, $5000, $50000 – take your pick on a price with many zeros. Preppers believe that humanity will reach a point where the world’s financial (and social) system will blow up and the most valuable possessions on the planet will be gold, weapons, water and canned food.
  • The Gold Haters: These are people who believe that gold is, to use John Maynard Keynes’s famous description, a “barbarous relic”. Many world-class investors (such as Warren Buffett) believe that gold is just a shiny rock that has little or no intrinsic value. Others dislike the metal so much that with almost every sentence they write, they close with a sarcastic “buy gold” comment.

I’m going to disappoint preppers, but I think that we can safely say that if the world apocalypse comes, people will have much bigger problems than having enough gold. On the other hand, gold has been a monetary metal and/or store of value for thousands of years, and its price has been steadily increasing broadly in line with money supply. All major central banks hold considerable amounts of gold reserves, the Fed in particular storing its 8133 tonnes of gold inside the most secure building complex in the world. China is being super-secretive about its gold reserve levels, which have been increasing considerably in the past decade. So it’s a near zero possibility that it will ever become worthless (sorry Warren). For the purpose of this blog post, we will ignore these two extremes.

So, what is it about gold that makes it so special? What are the underlying trends of the past decades? Where could it be heading? Let’s take a few steps back and examine it in more detail. Money supply used to be linked to gold (or silver) from ancient times. In modern history, the US Dollar was linked to gold and the two were fully convertible at $20.67 per ounce for several decades. In 1934, President Roosevelt confiscated Americans’ gold and then conveniently revalued the price to $35 the same year. Then came the Bretton Woods system: a system of payments based on the US Dollar, in which all currencies were defined in relation to the Dollar (itself still fully convertible to/from gold at $35 per ounce). As US money supply grew and physical gold stock couldn’t keep up the pace, it was unavoidable that the gold/US$ convertibility eventually crumbled. In 1971, President Nixon shocked the world and unilaterally cancelled the direct international convertibility of the US Dollar to gold.

What actually drives gold prices

We’re now going to propose some big assumptions and then try to refute or confirm them:

  • Gold is an extremely important resource, being one of the most reliable (if not the most reliable) ways to store value.
  • It’s the most important reserve asset of most countries.
  • The price of gold vs. the local currency is a direct indicator of how well the country’s central bank handles monetary policy and how well the government handles fiscal policy.
  • Most of the major central banks want to have possession of significant amounts of physical gold.

Assuming that all the above are true, what would major central banks do? Their goal is to increase their gold holdings but they can’t simply go in the market and start buying, because that would increase prices dramatically and then they’ll get into all sorts of trouble (the monetary policy effectiveness indicator would be flashing red). The obvious way to get it is to confiscate it from the public, making it illegal to own gold. The Americans tried this in 1933 and it worked relatively well, but such an executive order would probably be much less effective today.

While central banks are on a gold-buying programme they actually want prices to drop, giving them better levels to buy the physical asset at. So, in a stroke of genius, they came up with derivative products that can be sold with no physical gold changing hands. This way they can push the price lower using only fiat currency and when the price is low enough they exchange their currency for the real thing. Having done that, they then buy back the derivatives they’re short of – et voila – job done. It’s worth noting (although it’s probably evident by now) that derivative products can move the price of an asset regardless of the physical interest in it. In the past 5 years, physical gold demand has been steadily increasing; this is totally at odds with the underlying price. Another interesting point is that the COMEX (the primary market for trading metals such as gold) paper to physical ratio has gone through the roof. This ratio used to be in a “normal” range of 30-50 times, but in 2016 it smashed through 100, 200, even 500+ at some point. With so much paper (derivative) gold out there for every 1 ounce of physical gold, it will only take a few demands for physical delivery to bring the whole system to a crashing halt.

In a world of fractional reserve banking and money creation on a massive scale, creating fiat money is the easy bit. The hard bit is converting it into an asset of real value. Following the financial crisis, many types of real assets have been on a tear: prime location real estate, fine art, rare wine, classic cars among others. A well-known saying is “follow the money”, and these are the items which are in hot demand among the top 1%. Meanwhile, although gold saw a steep rise leading into the crisis, it’s nearly back to 2009 levels.

Screen Shot 2016 12 12 at 10.36.43 AMForex Analytix
Screen Shot 2016 12 12 at 10.36.56 AMForex Analytix

Imagine a market where this derivative-led price suppression of gold goes on for years. Let’s say that the price drops from $1900 to $1160 in just under 5 years, while money creation increases at an unprecedented rate (any resemblance to actual figures may be totally intentional). Such prolonged price action will surely frustrate your average Joe individual who wants to own some physical gold for investment. Many weak hands will be shaken off and a lot of physical gold will be sold in exchange for Dollars, Euros, Pounds or other currencies. It’s no coincidence that in many major cities, shops that buy & sell gold have multiplied like mushrooms. Conspiracy theorists assert that these shops are certainly not small family-owned ventures; the ultimate receivers of this gold are unknown.

Let’s now go back to the original assumptions we made a few paragraphs back. If they are not valid, why would central banks go into so much trouble storing it and in many cases repatriating it? Why would there be massive gold derivative sell orders – often over a whole year’s physical production equivalent – during the most illiquid time of the day? If there were a legitimate desire to sell such a big order, wouldn’t the seller want best execution and best price achieved? Selling the whole lot in one go, taking out several price levels below is definitely not the way to do it.

So what’s the conclusion here? Should we sell everything and buy gold in anticipation of 5-figure prices? The answer is no. Gold is still an asset that has relatively limited use other than investment & store of value. For this reason, human psychology will always play a very big factor in determining its price. Its value will effectively be what the person next to you thinks it’s worth.

Having said that, the behaviour that we’ve been seeing in the past few decades (and certainly since the financial crisis) tends to confirm the assumptions we made above. Gold is a finite, real asset. Its production numbers are quite specific and it takes a lot of effort to produce an ounce. Certainly, a whole lot more effort than pressing a computer key and conjuring fiat money out of thin air. It’s probably a good idea to keep a portion of investable funds into gold. Fundamentals and the macro picture strongly indicate that gold is in a long consolidation phase and coiling for the next big leg higher. The fact that the markets are currently fully pricing a Fed hike next week while also expecting a relatively hawkish tone, makes it a very good long entry point. Let’s see if the shiny metal can finally fly.

Stelios Konto

Basic Technical Analysis

Technically, gold is at 127% extension of the summer lows to the summer highs. We are in a strong downtrend, but we need to point your attention to a couple of things. a) the RSI looks to be oversold and divergent, which suggests new lows from current levels will be a little tougher to accomplish. b) While gold keeps registering fresh 10 month lows, silver has not followed and we need to stress that divergences like this, can often be found near market turns. If the gold market can hold $1150, a recovery back above $1200 would be a good sign we may be headed back to attack the multi year trend line near $1300.

Blake Morrow

Harmonics Analysis

Harmonics analysis is more bearish on Gold.  Like many we expected the sharp sell off after the US election to find some support in the $1172 area but the failure after a few attempts to hold this support means that $1172 is now resistance and we look for a drop. The target is at least the $1116-$1120 area but more likely $1085, where we see a bullish bat pattern. Bat patterns retrace hard and we should then see a $100 jump from there to $1182.  In the bigger picture we still like selling rallies.

Nicola Duke

Courtesy: Forex Analytix

Reasons for Silver Demand to Explode have never been Stronger

Reasons for Silver Demand to Explode have never been Stronger

Reasons for Silver Demand to Explode have never been Stronger

The “market” reaction to the Italian referendum has been as blatantly rigged as that of the post-Trump victory, in that the Euro surged and stocks rose – particularly when it was announced that Bank Monte dei Paschi will likely be bailed out this weekend, even though the ECB charter prohibits it.  And when I say stocks “rose,” I mean they have never been more “aided” by official means, overt and covert – as evidenced by the “dead ringer” I first described nearly five years ago supporting the “Dow Jones Propaganda Average” every day, whilst the gold Cartel has gone berserk suppressing every gold rally, particularly with “cap of last resort” raids at the 12:00 PM EST “key attack time” – as connoted by the below graphs of the past two days’ trading.  Heck, gold was held to just a $4/oz gain yesterday, even as silver rose $0.40!  In other words, whether considering the “reaction” of stocks, bonds, crude oil, or Precious Metals, don’t for a second forget that each and every tick is “influenced” by manipulation.  Which although it feels as endless as it has been relentless, is destined to fail – as NOTHING unsustainable can be sustained indefinitely; particularly, in this case, when historically mis priced assets try to fight the unstoppable tsunami of “Economic Mother Nature.”

a1

The bubble in U.S. stocks; and countless other Western financial assets -particularly sovereign bonds, the biggest (Central-bank aided) bubble of all-time; is so egregious, it long ago put the dotcom bubble to shame.  To that end, consider that the reason the Russell 2000 index of small-cap stocks is “valued” in terms of Enterprise Value/EBITDA – as opposed to price/earnings or price/cash flow for larger indices like the Dow and S&P – is because the vast majority of Russell companies don’t make money, even after the third longest economic “expansion” in U.S. history (nearly eight years, if you LOL, believe the BLS’s fraudulent GDP data).  So, for anyone that fears “missing out” on stocks’ current, PPT-aided explosion – according to the financial media, catalyzed by the comically flawed “Trump-flation” narrative, after it goosed stocks all Summer based on an equally ridiculous “Clinton-flation” narrative – have a gander at just how overvalued small stocks have become; let alone, in a financially catastrophic environment of surging interest rates and historic worldwide political instability.  Ironically, on today’s 20th anniversary of Greenspan’s infamous “irrational exuberance” speech – which I remember well, working at a New York City hedge fund at the time.

a2

Back to Europe, Moody’s followed up Fitch’s move yesterday in cutting its outlook on Italy from, LOL, “stable” to negative – which as we speak, sports a credit rating one notch above junk status.  Which somehow, I don’t think the imminent Monte Paschi bailout – perhaps, as soon as this weekend – will help any; and given that German and French banks – like say, Deutsche Bank – are the largest holders of PIIGS debt (of which sadly, Italy’s is far from the most dangerous), it’s difficult to believe a financial crisis is not sitting directly at Europe’s door.  Let alone, if rates continue to rise, given that the vast majority of Deutsche Banks’, Monte Paschis’, and essentially all Western banks’ gargantuan derivatives holdings are related to interest rate swaps.

Which can’t be helped by the fact that the Euro is perched just above its 14-year low of 1.046 dollars; which, when inevitably breached to the downside, could easily prove to be the proverbial “straw that breaks the derivatives’ back.”  Which frankly, could be catalyzed by any number of potential near-term events – in Italy, France, Greece, Spain, or Portugal, to name but a few.  Or heck, China, which yesterday reported another massive capital outflow in November, as speculators continue to bet on the upcoming, unprecedented Yuan devaluation I first predicted last summer – mere hours before “phase one” commenced.  Which, I might add, will only add to the reasons silver demand is ready to explode.

Or perhaps OPEC, whose fraudulent “deal” is becoming more scrutinized each day, as evidenced by WTI crude falling below $50/bbl yesterday.  To that end, the evidence of its fraud is coming hot and heavy, starting with former Saudi Oil Minister Ali Al-Naimi admitting this week that “we typically cheat” on production quotas; to Monday’s realization that OPEC’s November production was 400,000 barrels above October’s record level, from which said “production cut” was theoretically based.  Moreover, the 600,000 barrel per day production cut non-OPEC participants like Russia and Mexico supposedly agreed upon has not yet been validated, subject to discussions at this upcoming weekend’s Doha meeting.  And last but not least, yesterday’s catastrophic post-cash-ban PMI plunge in India – until now, the world’s fastest-growing source of crude oil demand – makes it more and more unlikely that OPEC can meaningfully reduce history’s largest crude oil glut.  To that end, following said Doha meeting, it’s entirely possible that by Monday morning, oil prices could again be under intense pressure; and with them, whatever remains of OPEC’s near-dead “credibility.”

Let’s move on to today’s principal topic, of why silver demand is ready to explode.  Not that it hasn’t already, given 2015’s all-time high demand in both the Eastern and Western world; which should tell you all you need to know about how desperate the Cartel is to suppress prices, in that 2015 ended with silver prices at a five-year low – before decidedly bottoming the day, ironically, that the Fed raised interest rates (hint, hint).  This year, Western demand has been strong, but slightly lower than a year ago, if you believe data coming from the U.S. Mint – which was as strong as a year ago until July, when it “mysteriously” weakened in the aftermath of the BrExit, despite prices surging to (albeit Cartel-capped) multi-year highs!

October and November demand surged anew – as is always the case after blatant Cartel smashes; such as on October 4th, when China was closed for its “Golden Week” holiday; and November 10th, following the “post-Trump annihilation” raid.  And if indeed the insane, bubblicious speculation in base metals continues based on the “Trump-flation” meme, yesterday’s “silver fundamentals versus the base metals bubble” article describes why silver must inevitably “catch up” to copper, lead, and zinc, given that roughly three-quarters of global silver production is utilized for industrial purposes.

Then there’s that little thing called “2017, the year of money printing” – which will commence with silver prices at historically low, Cartel-suppressed levels; and the potentially biggest wild card of all, INDIA.  Which, if it indeed is attempting to suppress gold buying (which inevitably, will surge in the black markets), will unquestionably result in explosive silver buying by Rupee-hating, but equally government-fearing, Indians, who had already been increasing their silver purchases in recent years…

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particularly since 10-plus percent import tariffs were imposed on Precious Metals in 2013, which has a disproportionately large impact on higher absolutely-priced gold.

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The reasons for silver demand to explode – amidst an environment of verified peak production, and historically low above-ground, available for sale inventories, have never, in my very strong view, been stronger.  Which is why, I might add, the opportunity to make a year-end tax swap, at an historically high gold/silver ratio of 69, may make sense to many investors.

Eventually, the suppression of the dying monetary systems’ Achilles Heel, silver, must die – and when it does, the “revaluation” process will likely be unprecedented in modern financial market history.

 

 

 

Courtesy: Andrew Hoffman

Cash Is No Longer King: The Phasing Out of Physical Money Begins

Cash Is No Longer King: The Phasing Out of Physical Money Begins

Cash Is No Longer King: The Phasing Out of Physical Money Begins

As physical currency around the world is increasingly phased out, the era where “cash is king” seems to be coming to an end. Countries like India and South Korea have chosen to limit access to physical money by law, and others are beginning to test digital blockchains for their central banks.

The war on cash isn’t going to be waged overnight, and showdowns will continue in any country where citizens turn to alternatives like precious metals or decentralized cryptocurrencies. Although this transition may feel like a natural progression into the digital age, the real motivation to go cashless is downright sinister.

The unprecedented collusion between governments and central banks that occurred in 2008 led to bailouts, zero percent interest rates and quantitative easing on a scale never before seen in history. Those decisions, which were made under duress and in closed-door meetings, set the stage for this inevitable demise of paper money.

Sacrificing the stability of national currencies has been used as a way prop up failing private institutions around the globe. By kicking the can down the road yet another time, bureaucrats and bankers sealed the fate of the financial system as we know it.

A currency war has been declared, ensuring that the U.S. dollar, Euro, Yen and many other state currencies are linked in a suicide pact. Printing money and endlessly expanding debt are policies that will erode the underlying value of every dollar in people’s wallets, as well as digital funds in their bank accounts. This new war operates in the shadows of the public’s ignorance, slowly undermining social and economic stability through inflation and other consequences of central control. As the Federal Reserve leads the rest of the world’s central banks down the rabbit hole, the vortex it’s creating will affect everyone in the globalized economy.

Peter Schiff, president of Euro-Pacific Capital, has written several books on the state of the financial system. His focus is on the long-term consequences of years of government and central bank manipulation of fiat currencies:

“Never in the course of history has a country’s economy failed because its currency was too strong…The view that a weak currency is desirable is so absurd that it could only have been devised to serve the political agenda of those engineering the descent. And while I don’t blame policy makers from spinning self-serving fairy tales (that is their nature), I find extreme fault with those hypnotized members of the media and the financial establishment who have checked their reason at the door. A currency war is different from any other kind of conventional war in that the object is to kill oneself. The nation that succeeds in inflicting the most damage on its own citizens wins the war. ” [emphasis added]

If you want a glimpse 0f  how this story ends, all you have to do is look at Venezuela, where the government has destroyed the value of the bolivar (and U.S. intervention has further exacerbated the problem). Desperation has overcome the country, leading women to go as far as selling their own hair just to get by. While crime and murder rates have spiked to all-time highs, the most dangerous threat to Venezuelans has been extensive government planning. The money they work for and save is now so valueless it’s weighed instead of counted. The stacks of bills have to be carried around in backpacks, and the scene is reminiscent of the hyperinflation Weimar Germany experienced in the 1920s. Few Western nations have ever experienced a currency crisis before, meaning many are blind to the inevitable consequences that come from the unending stimulus we’ve seen since 2008.

In order to keep this kind of chaos from spreading like a contagion to the rest of the world, representatives are willing to do anything necessary, but this comes at a cost. Instead of having to worry about carrying around wheelbarrows full of money, the fear in a cashless society will likely stem from bank customers’ restricted access to funds. With no physical way for consumers to take possession of their wealth, the banking interests will decide how much is available.

The level of trust most people still have in the current system is astonishing. Even after decades of incompetence, manipulation, and irresponsibility, the public still grasps to government and the established order like a child learning how to swim. The responsibility that comes with independence has intimidated the entire population into leaving the decisions up to so-called  ‘experts.’ It just so happens that those trusted policymakers have an agenda to strip you and future generations of prosperity.

Some of the few hopes in this war against centralization are peer-to-peer technologies like Bitcoin and Ethereum. These innovative platforms have the potential to open up markets that circumvent state-controlled Ponzi schemes. The future development of crypto-assets has massive potential, but being co-opted is a real danger.

The greatest threat to individual freedom is financial dependence, and as long as your wealth is under someone else’s control, it can never be completely secure. Unfortunately, private blockchains are becoming increasingly popular, creating trojan horses for those just learning about the technology (in contrast, Bitcoin’s transaction ledger is public) . Without the decentralized aspect of a financial network, it is just a giant tracking database that can be easily compromised like any other.

The World Economic Forum released a report on the future of financial infrastructure. Giancarlo Bruno, Head of Financial Services Industries at WEF stated:

“Rather than to stay at the margins of the finance industry, blockchain will become the beating heart of it. It will help build innovative solutions across the industry, becoming ever more integrated into the structure of financial services, as mainframes, messaging services, and electronic trading did before it.”

The list of countries who are exploring integrating blockchain technology into their central banking system is extensive. Just to name a few; Singapore, Ukraine, France,  Finland and many others are in the process of researching and testing out options.

For those who appreciate more tangible wealth, diversifying into hard assets like gold and silver is a great first step. It’s not about becoming a millionaire or getting rich quickly, but rather, using precious metals as vehicles for investment in the long-term. Regardless of what events unfold over the decades to come, the wealth preserved in physical form is more secure than any other asset. Forty years ago it was possible to save your money in the bank and accumulate interest over time, but that opportunity no longer exists. Those who fail to adapt to this new financial twilight zone will likely find themselves living as slaves to debt for years.

Control and confidence are two of the most important things in the system we live in. Once these digital spider webs have been put into place, the ability for an individual to maintain privacy or anonymity will all but disappear. Only through understanding the subversive actions being taken can people protect themselves from having to put their future in someone else’s hands. The cash that allows free transactions without tax burdens or state scrutiny won’t be around much longer. There will be many rationalizations for a cashless society in the years to come, but without fixing this broken financial system first, this will only ensure that despotism gains an even sturdier foothold.

 

 

 

Courtesy: Shaun Bradley – theAntiMedia.org

Brutal Gold Futures Selling Seems to be Exhausting Itself

Brutal Gold Futures Selling Seems to be Exhausting Itself

Brutal Gold Futures Selling Seems to be Exhausting Itself

Gold has suffered brutal, withering selling pressure in the month following the US presidential election.  The stock markets’ surprise surge after Trump’s surprise win has led speculators and investors alike to rush for the gold exits.  As usual the former group’s extreme selling came largely through gold futures.  But this gold futures dumping has been so severe that it is rapidly exhausting itself, a bullish omen for gold.

Gold’s stunning post-election selloff resulted from a united mass exodus by gold’s two dominant groups of traders.  Speculators ferociously dumped gold futures with an intensity rarely witnessed, while stock investors jettisoned shares in the leading GLD gold ETF far faster than gold itself was falling.  With so much gold being spewed into the markets so rapidly, this metal didn’t have a chance of staying on its feet.

Gold futures had actually skyrocketed on election night, up 4.8% to $1337 as Trump’s perceived odds of winning started to soar.  But once the plummeting stock markets rebounded violently, the gold selling began.  And it soon intensified after the election.  Not only did stock markets shockingly surge to new all-time record highs, but the US Dollar Index blasted up to a major new 13.7-year secular high of its own.

Gold has always been a contrarian anti-stock trade.  As a rare asset that moves counter to stocks, gold’s critical investment demand is heavily dependent on stock-market fortunes.  Investors alternatively flock to gold to diversify their stock-heavy portfolios when stock markets fall, and then abandon it as stocks soar again.  The exceedingly-strong post-election stock markets swiftly slayed gold investment demand.

Record stock-market highs breed extreme euphoria and complacency.  Traders naturally start to believe stocks do nothing but rally indefinitely.  Thus their interest in deploying capital in counter-moving gold fades to oblivion.  And since investment demand fueled the great lion’s share of gold’s new bull market this year, this metal couldn’t stand without it.  Gold’s recent cratering resulted from euphoric stock sentiment.

While speculators’ extreme gold futures selling and investors’ extreme GLD-share selling over the past month share the blame, that’s too much to cover in a single essay.  So this week I’m focusing on the gold futures side.  While the massive post-election gold-futures dump was miserably painful, it looks to be exhausting itself which is very bullish.  The finite supply of gold futures to sell is rapidly dwindling.

Gold futures have a wildly-outsized impact on gold prices, dominating short-term action.  Futures offer radical leverage far beyond the decades-old legal limit in the stock markets of 2.0x.  Every gold futures contract controls 100 troy ounces of gold.  At $1175, that’s worth $117,500.  But the maintenance margin required to own each contract is just $6000 this week, enabling maximum leverage running way up at 19.6x!

And that’s actually fairly modest for gold futures trading, with 25x+ being common when gold hasn’t just plunged.  Even at 20x, each dollar of capital speculators trade in the futures market commands 20x the impactof a dollar invested in gold outright!  So when speculators as a herd aggressively buy or sell gold futures, the gold price moves fast.  Their collective amplified power to move gold is immense and unparalleled.

Exacerbating their utter dominance over this metal’s short-term fortunes is the fact that gold’s reference price traders watch is that very futures one.  So when futures speculators bully gold around with their extreme leverage, investors are quick to react which intensifies gold’s moves.  Contrarian investors have long decried this blatantly-unfair-if-not-absurd gold market structure granting futures speculators such supremacy.

Further complicating this whole messy situation, gold futures speculators’ trading activities are obscured by low-resolution data.  Not only are their trades only reported once a week, but even that happens with a 3-trading-day delay!  This effectively hides what gold futures speculators are doing from wider scrutiny by investors and analysts.  This lack of futures transparency has long been a serious problem for gold.

Because of gold futures’ extreme inherent leverage, speculators must maintain an ultra-short-term focus to survive.  At 20x, a mere 5% adverse gold move will wipe out 100% of their capital risked!  So countless times when gold-futures trading on mere herd sentiment drives big gold moves, the day it happens the resulting volatile price action is wrongly and falsely attributed to fundamental changes in the world gold market.

Speculators’ collective gold futures positions are published late every Friday afternoon in the famous Commitments of Traders reports from the CFTC.  Those are already old though, current to the week that ended the preceding Tuesday.  Thus speculators’ market-moving gold futures trading activity is hidden for up to 8 trading days, which is inexcusable in this information age.  Maybe Trump’s people can fix this.

So by the time extreme gold futures selling is unmasked, the resulting big gold plunge has already long been wrongly attributed to fundamentals which greatly damages sentiment for investors.  This seriously retards gold investment demand, creating a vicious circle where selling begets selling.  And that’s what has happened to gold in the wake of the election.  Gold selling is feeding on itself, driving even more selling.

This first chart looks at gold and its weekly gold futures CoT data over the past couple years or so.  The total upside bets on gold by both large and small speculators, gold futures long contracts, are rendered in green.  Their total downside bets, short contracts, are shown in red.  Gold just suffered its third major plunge this year for the same reason the first two happened, extreme selling by gold futures speculators.

Brutal Gold Futures Selling Seems to be Exhausting Itself

This longer-term perspective is essential for understanding what’s happened to gold in the past month since the election.  Note above how gold prices are heavily positively correlated with speculators’ long contracts in gold futures.  When they collectively ramp up their upside bets, gold surges higher.  Then later when they sell these ultra-leveraged longs, gold plunges.  Nothing is more important for short-term price action!

While speculators’ downside bets on gold through futures shorts are smaller, they have the same gold impact but in the opposite direction.  Gold prices are heavily negatively correlated with speculators’ gold futures shorts.  When they effectively borrow gold they don’t own to short sell it in the futures market, gold is pushed lower.  Later when they buy offsetting long gold futures contracts to cover their shorts, gold climbs.

In the gold futures market, the downside price impact of selling long contracts and adding short ones is identical.  Between January 2015 and December 2015, gold fell 19.3% largely because these futures speculators sold 90.9k long contracts while adding 107.0k short ones.  That works out to the equivalent of 615.5 metric tons of gold, nearly 1/5th of 2015’s total global mine production!  That can’t be absorbed fast.

Last year’s intense gold futures selling by speculators, much of which happened on Fed-rate-hike fears, ultimately pushed gold to a deep 6.1-year secular low a year ago in mid-December.  Gold bottomed the very next day after the Fed’s first rate hike in 9.5 years, entering a new bull market that flourished in much of 2016.  By early July, gold had powered 29.9% higher to hit its best levels seen in 2.3 years.

What helped fuel gold’s strong new bull run in addition to surging investment demand?  Heavy-if-not-extreme gold futures buying by the speculators!  Over that span they added 249.2k long contracts while covering 82.8k short ones.  That works out to the equivalent of 1032.6t of gold buying, nearly tripling the parallel 351.1t build in that GLD gold ETF’s physical gold bullion holdings over that same bull-market span!

Speculators’ enormous gold futures buying pushed their long contracts to an all-time record high 440.4k in early July.  Right after that CoT report was published, I wrote an essay warning about the resulting record selling overhang gold faced.  While that was a hardcore contrarian stance in the midst of gold’s mid-summer euphoria, if speculators exited their record longs fast gold was threatened with a serious selloff.

Amazingly part of speculators’ mass exodus from their excessive gold futures longs tarried all the way until early November’s presidential election!  That’s pretty shocking, and I never would have predicted such an unprecedented delay last summer.  Overall between early July and the latest CoT report, the speculators have sold 165.1k gold futures long contracts while adding 7.3k short ones.  That’s serious selling.

With each gold futures contract controlling 100 ounces of gold, speculators have spewed the equivalent of 536.2 tonnes of gold into the markets!  And much of that slammed gold almost all at once following the election surprise.  Gold plunged after Trump’s win because futures speculators ran for the exits.  I really suspect the GLD investors wouldn’t have fled in sympathy if futures speculators hadn’t paved the way.

Thankfully this extreme gold futures selling looks wildly overdone.  Speculators hold only so many gold futures long contracts, this supply of paper gold is very finite.  And once all the weak-handed traders susceptible to being scared into selling low have largely exited, this extreme futures selling will dry up.  As this next chart zooming in to the past year shows, odds are this gold futures selling is exhausting itself.

Brutal Gold Futures Selling Seems to be Exhausting Itself

After speculators’ gold futures longs hit their all-time record high in early July, they surprisingly defied the odds to hold near those levels for several more months.  In the past big surges of long buying were short-lived, soon collapsing.  But there was a lot of conviction gold’s young bull was heading higher, so speculators were loath to sell.  Until early October, when gold drifted below key $1300 support triggering stops.

Since gold futures are so hyper-leveraged, speculators must run tight stop losses so they aren’t quickly wiped out when gold moves against their bets.  So there was a huge cluster of long-side stops set right under $1300.  As the initial stops were triggered, the resulting selling accelerated gold’s losses.  This in turn tripped more stops, exacerbating gold futures selling.  And the result was early October’s mass stopping.

That alone was an extreme and rare event, and should’ve flagged a major bottom within an ongoing gold bull.  And indeed it did for over a month, with gold initially grinding higher along key support at its 200-day moving average before surging into the election as Trump’s perceived odds of winning grew.  It’s hard to believe now, but remember pre-election everyone feared a Trump win would be disastrous for stocks!

But early the morning after the election, stock-index futures started soaring.  One elite multi-billionaire investor had seen stock-index futures limit-down at 5% losses, and left Trump’s party to deploy $1b into stock-index futures in the middle of the night.  Then Trump’s victory speech was not only magnanimous, but he claimed Clinton had called and conceded.  Stock futures started to soar with no contested election.

That’s when the heavy gold selling started.  After rocketing up nearly 5% on election night on big safe-haven buying as stock markets burned, speculators rapidly exited those gold futures longs.  In the first full CoT week after the election surprise, they dumped a staggering 45.9k long contracts or nearly 1/7th of their entire positions!  That was epic, the 6th-largest long liquidation out of 933 CoT weeks since early 1999.

While that extreme mass exodus from gold-futures longs abated to just 0.6K contracts in the second CoT week after the election, it accelerated again in this latest one.  That was current to November 29th, which was the newest CoT report available when this essay was published.  Speculator long dumping ramped right back up to 19.0k contracts, right on the edge of the 20k+ contract single-week moves that are huge.

This resurgence in speculators dumping gold-futures longs was likely due to the outsized impact their earlier selling had on gold sentiment.  Unfortunately that initial massive wave of selling in the week right after the election was wrongly interpreted at the time as gold’s fundamentals deteriorating.  That scared the institutional investors owning GLD shares, so they started to exit en masse on bearish futures-driven sentiment.

The heavy GLD selling during Thanksgiving week as a result of the extreme gold-futures selling the week before forced gold low enough to get the gold-futures speculators fleeing again!  This is a perfect example of the selling-begets-selling vicious circle that sometimes ignites in gold.  In the 3 CoT weeks reported since the election, speculators jettisoned 65.6k long contracts or nearly 1/5th of their election-day bets.

But odds are this extreme gold futures selling is exhausting itself.  Out of all the gold futures longs the speculators added in gold’s entire young bull between last December and early July, a staggering 66.3% have been unwound.  Nearly 2/3rds of long-side gold futures buying fueling 2016’s gold bull has been reversed!  That’s staggering, leaving speculators’ collective upside gold bets at 275.3k contracts per the latest read.

That’s really low on multiple fronts.  Speculators’ gold-futures longs have never and will never retreat to zero, as there is always some base demand for leveraged gold upside.  During 2015 for example, deep in a major bear where gold bearishness was epic, speculators’ gold futures longs averaged 223.2k contracts.  That’s only 52.0k below current levels, guaranteeing the lion’s share of the selling is behind us.

Assuming 2015’s average long levels will be seen again, which is very unlikely in a new gold bull, then over 3/4ths of the maximum total speculator gold-futures long selling since early July’s peak upside bets is behind us!  But with gold still in a new bull market despite the super-anomalous post-election plunge, longs almost certainly aren’t heading all the way back to bear-market levels.  That’s very bullish for gold.

Speculators’ collective longs have fallen to a 9.0-month low, their worst levels since early March before gold formally entered new-bull-market territory at 20% gains off last December’s secular low.  With such a massive retracement already, it’s hard to imagine much more selling.  In most futures selloffs, early selling is the strongest as stops are triggered and weak hands flee.  Then selling moderates once they’re out.

The only thing that could potentially trigger more meaningful speculator gold-futures long dumping is significant new gold lows.  But with gold pounded to a 10.1-month low this week, its worst levels since way back in early February, fully 62.3% of this gold bull’s progress has already been erased!  It’s difficult to conceive of enough new gold selling materializing to push this metal much lower after such colossal technical damage.

And if speculators’ extreme gold futures long selling is exhausting itself and largely over, then gold is going to stabilize if not start marching higher.  That will arrest the heavy differential GLD-share selling in response to gold prices spiraling lower.  So when speculators cease dumping longs, odds are gold will carve a major durable bottom.  That’s likely happening now, and if not almost certainly by next month at the latest.

But gold does remain at risk of more gold futures short selling.  Since early July, speculators’ total shorts merely grew by 7.3k contracts.  During this latest CoT week, they were only at 107.5k which isn’t too far above their 95k-contract bull-market support that has held strong since April.  There are a couple potential upside targets for new shorting if some catalyst spooks speculators into believing gold is heading for a fall.

The highest spec shorts have been since gold’s new bull market formally began in early March is 122.7k contracts.  That’s only 15.2k above the latest CoT read, not enough to ignite a major new gold selloff unless all this short selling happens within an hour or so.  And in 2015, that dark bear year of hyper-pessimistic gold sentiment, speculators’ shorts averaged 139.6k contracts.  Even those levels aren’t crazy-bearish.

Getting back to there would require 32.1k contracts of new shorting, which isn’t huge compared to the 172.4k contracts of gold-futures selling already suffered since early July.  The main potential catalyst for big gold-futures shorting flaring again is next week’s FOMC meeting.  The Fed is universally expected to hike rates for the first time in a year and the second time in 10.5 years, but that rate hike won’t hammer gold.

This week federal-funds futures are implying a 93% chance of a rate hike next week, and it was way up at 99% as December dawned.  So a rate hike won’t surprise anyone, including speculators trading gold futures.  The big risk comes from the accompanying quarterly Summary of Economic Projections, which shows where top Fed officials making decisions expect the federal-funds rate to be in the coming years.

The last SEP, or “dot plot”, in late September showed Fed officials forecasting two rate hikes in 2017.  Gold could see significant futures short selling if that increases to three.  But if the Fed indeed hikes next week, it will have to be super-dovish in the rest of its communications to avoid spooking stock markets.  Thus it’s unlikely a hawkish SEP would be published the same day, greatly lessening the downside risk to gold.

Soon speculators and investors alike will realize how radically oversold gold is, and how anomalous its extreme post-election selloff was.  These record-high stock markets literally trading at bubble valuations remain overdue to roll over into a new bear no matter what Trump does.  And his proposed tax cuts and big government spending will ignite serious inflation.  All of that is very bullish for gold investment demand!

While investors can certainly play the coming resumption of gold’s young bull in that leading GLD gold ETF, individual gold stocks will really amplify gold’s gains.  While gold powered about 30% higher in the first half of 2016, the leading gold-stock index nearly tripled with a 182% gain!  These huge gains were only reaped by smart contrarians willing to fight the crowd and buy low a year ago.  The same is true today.

The bottom line is speculators’ extreme gold-futures selling has been the dominant driver of gold’s steep post-election plunge.  Their near-record rush for the exits blasted gold lower so fast that investors were spooked into fleeing.  But speculators’ epic futures long liquidation that crushed gold sure looks to be exhausting itself.  So many gold futures longs have been dumped that there simply aren’t many left to sell.

And once speculators’ aggressive gold futures selling ceases, gold prices will stabilize which will arrest the parallel investor selling.  That decisive bottoming will pave the way for gold’s young bull market to resume.  Investors will soon realize their radical underinvestment in gold isn’t very wise, especially with wildly-overvalued stock markets trading at euphoric record highs.  New investment demand will propel gold far higher.

 

 

 

 

Courtesy: Adam Hamilton

Higher Debt Will Accelerate Central Bank Gold Demand

Higher Debt Will Accelerate Central Bank Gold Demand

Higher Debt Will Accelerate Central Bank Gold Demand

Inflation can be understood as the destruction of a currency’s purchasing power. To combat this, investors, central banks and families have historically stored a portion of their wealth in gold. I call this the Fear Trade.

The Fear Trade continues to be a rational strategy. Since President-elect Donald Trump’s surprise win a month ago, the Turkish lira has plunged against the strengthening US dollar, prompting President Recep Erdogan to urge businesses, citizens and institutions to convert all foreign exchange into either the lira or gold. Most obliged out of patriotism, including the Borsa Istanbul, Turkey’s stock exchange, and the move has helped support the currency from falling further.

Gold Save Turkish Lira

 

Venezuela, meanwhile, has dire inflationary problems of its own. Out-of-control socialism has led to an extreme case of “demand-pull inflation,” economists’ term for when demand far outpaces supply. Indeed, the South American country’s food and medicine crisis has only worsened since Hugo Chavez’s autocratic regime and the collapse in oil prices. The bolivar is now so worthless; many shopkeepers don’t even bother counting it, as Bloomberg reports. Instead, they literally weigh bricks of bolivar notes on scales.

“I feel like Pablo Escobar,” one Venezuelan bakery owner joked, referring to the notorious Colombian drug lord, as he surveyed his trash bags brimming with worthless paper money.

Because hyperinflation has destroyed the bolivar, the ailing South American country sold as much as 25 percent of its gold reserves in the first half of 2016 just to make its debt payments. Venezuela’s official holdings now stand at a record low of $7.5 billion.

Trump-Carrier Deal a Case Study in U.S. Inflation

The U.S. is not likely to experience out-of-control hyperinflation anytime soon, as the dollar continues to surge on bets that Trump’s proposals of lower taxes, streamlined regulations and infrastructure spending will boost economic growth. But I do believe the market is underestimating inflationary pressures here in the U.S. starting next year.

As I explained to Scarlet Fu and Julie Hyman on Bloomberg TV today, inflation we might soon see is largely caused by rising production costs, which is different from the situation in Turkey and Venezuela.

Nevertheless, it still serves as a positive gold catalyst for 2017.

Consider Trump’s recent Carrier deal—the one that saved, by his own estimate, 1,100 jobs from being shipped to Mexico. We should applaud Trump and Vice President-elect Mike Pence for looking out for American workers, but it’s important to acknowledge the effect such interventionist efforts will have on consumer prices.

As I see it, the Carrier deal is indicative of the sort of trade protectionism that could spur inflation to levels unseen in more than 30 years. The Indiana-based air conditioner manufacturer has already announced it will likely need to raise prices as much as 5 percent to offset what it would have saved by moving south of the border.

We can expect the same price inflation for all consumer goods, from iPhones to Nikes, if production is brought back home. That’s just the reality of it. Prices will go up, especially if Trump succeeds at levying a 35 percent tariff on American goods that are built overseas but imported back into the U.S. The extra cost will simply be passed on to consumers.

What’s more, Trump has been very critical of free trade agreements, threatening to tear them up after blaming them—NAFTA, specifically—for the loss of American jobs and stagnant wage growth. There’s some truth to this. But trade agreements have also helped restrain inflation over the past three decades. This is what has allowed prices for flat-screen, plasma TVs to come down so dramatically and become affordable for most Americans.

International Trade Deals Slowed Inflation

In its 2014 assessment of NAFTA, the Peterson Institute for International Economics (PIIE) calculated that for every job that could be linked to free trade, “the gains to the U.S. economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households.”

Additional tariffs and the inability to import cheaper goods are inflationary pressures that could result in a deeper negative real rate environment. And as I’ve pointed out many times before, negative real rates have a real positive effect on gold, as the two are inversely correlated.

Inverse Correlation Between Gold Real Fed Funds Rate

 

Macquarie research shows that last year, ahead of the December rate hike, gold retreated about 18 percent from its year-to-date high. Afterward, it gained 26 percent in the first half of 2016. The decline so far this year has been about 15 percent from its year-to-date high. Gold, according to Macquarie, is setting up for another rally in a fashion similar to last year.

Central Bank Demand Could Accelerate on Growing Federal Debt

The U.S. government is currently saddled with $19.9 trillion in public debt. Since 2008, federal debt growth has exceeded gross domestic product (GDP) growth. And according to a Credit Suisse report this week, Trump’s tax proposal, coupled with deficit spending, could cause federal debt to grow even faster than under current policy.

After analyzing projections from a number of agencies and think tanks, Credit Suisse “estimates a federal debt-to-GDP of 92 percent by 2026, including a GDP growth offset from the lower tax tailwind, and 107 percent excluding the GDP growth offset.”

Higher US Budget Deficits Debt Spur Banks Increase Gold Buying

 

The US dollar accounts for about 64 percent of central banks’ foreign exchange reserves. With the potential for higher U.S. budget deficits and debt risking dollar strength, central banks around the globe could be motivated to increase their gold holdings, says Credit Suisse.

Waiting for Mean Reversion

As I mentioned last week, gold is looking oversold in the short term and long term, down more than two standard deviations over the last 20 trading days. Statistically, when gold has done this, a return to the mean has often followed. This has been an attractive entry point for investors seeking the sort of diversification benefits gold and gold stocks have offered.

In a note to investors this week, ETF Securities highlighted these diversification benefits, writing that a gold allocation has “historically increased portfolio efficiency—lowering risk while increasing return—compared to a diversified portfolio without an allocation to precious metals.”

As always, I recommend a 10 percent weighting: 5 percent in gold bullion, 5 percent in gold stocks, then rebalance every year.

 

 

 

Courtesy: Frank Holmes

Gold And Silver is What You Should Trust – Do Not Expect Much Difference With Trump

Gold And Silver is What You Should Trust – Do Not Expect Much Difference With Trump

Gold And Silver is What You Should Trust – Do Not Expect Much Difference With Trump

Obama was the “Yes, we can!” hope and change candidate that become the deep state elite’s presidential lackey.  It was Obama’s choice to sell his political and personal soul in serving the globalists.

History has been somewhat hidden from the public but still in the open for those who take the time to look. The US went bankrupt in 1933 when Roosevelt declared the Bank Holiday.  Its purpose was to eliminate any and all banking independence and give all control over to the Federal Reserve cartel.  Every bankrupt entity has a bankruptcy judge to oversee the bankruptcy.  That job went to the Secretary of the Treasury as agent for the globalists that took control over the United States.

Does anyone ever wonder why the Secretary of Treasury is always chosen from Goldman Sachs?  It is the banking arm for the globalists.  As a bankrupt entity, the corporate United States has no choice and must bow to the dictates of the Treasury Secretary.  Trump has no choice.   This is one of the reasons why this country has constantly been under the War Powers Act since the 1930s.  Under the War Powers Act, the Constitution is suspended, and the president “runs the country” by Executive Order.

Despite Trump stating that Clinton was a puppet of the Wall Street banks, much like Obama said Wall Street would be held accountable once he was elected, he proceeded to place chosen Wall Street elite bankers into high Cabinet posts.  Trump, now as president- elect, is following in Obama’s footsteps.  He has no choice if he [Trump] wants to stay in office, or even stay alive.  Many of Trump’s selections have Rothschild ties.

Steve Mnuchin, Trumps’ choice for Treasury is a Goldman Sachs Alumni.  Wilber Ross for Commerce Secretary ran Rothschild’s NY investment office for around 18 years and helped bail out Trump when Trump almost went bankrupt with his casinos.  Trump owes Ross, big time.  Time for payback, bigger time.

There may be a change in presidential style, but there will be no change in substance as the deep state retains a stranglehold on the “leadership” of this country.  The office of president, Congress, and the Senate are nothing but Bread and Circuses for public consumption.

Where in the Constitution does it allow the government to spy indiscriminately on the American people?  [Hint:  Nowhere!].  Under Trump, that will not change, and in fact, it will get worse.  Look up Rule 41, just passed, that allows even more powers for spying, at will, on your e-mails, phone calls, computers, etc, etc, etc.  There is no more privacy for anyone.

Germany’s BND, that nation’s federal intelligence service and, embarrassingly for Germany, is a de facto arm of the CIA.  It has been spying throughout Europe and sending the information back to the CIA.  Just like Rule 41 was passed, the BND was also granted even more spying powers.  Elsewhere, the UK has unabashedly removed any and all obstacles for spying on British citizens.  These are unified and controlled events by the globalists as they continue to tighten their noose on a hapless public.

The trap has been developing and is all set for the final steps to place the world under the umbrella of the New World Order.  One of the final phases is to destroy all fiat paper, [Problem], and throw the world into financial chaos [Reaction – Anyone aware of India’s sudden elimination of 1,000 and 500 Rupee notes knows what to expect].  Those unaware will likely remain unaware, playing into the hands of the globalists.

The globalist’s Solution will be the introduction of the Special Drawing Rights [SDR] to replace the world financial system.  The SDR will usher in the One World Currency.  Local currencies will still exist, to a limited degree, as the inexorable march to a cashless society will make everyone dance to the globalist banker’s digital world.  Then, every financial transaction you, or anyone, makes will be under total scrutiny of the New World  Order government.

Gold and silver remain as the only true money recognized all over the world.  Those who have it can function and survive outside of the digital system, but just as cash vanishes and is no longer allowed in financial transactions, it is a matter of time before the bankers also outlaw the use of gold and silver in any transactions.  It is hard to imagine any other way.

This may take at least a few years, maybe more, to be implemented.  All countries are on board, including China, including Russia.  No country can survive the power of the globalists without incurring financial suicide in a currency war conducted by the central bankers, much as the US has been doing for decades around the world.

The charts show low prices for gold and silver and no signs of a turnaround, yet.  These low prices defy logic, defy supply and demand, but they fully reflect the financial power of the globalists to act at will and with no opposing forces.  China’s, Russia’s, and even India’s amassing of physical gold is not to topple the Western elites and Western central bankers, at all.  These countries are accumulating gold, not to back any currency, but to be in a position of power to participate in the New World Order’s one global currency.

The SDR is a given, if anyone reads the position of the International Monetary Fund [IMF], and its boss, the Bank of International Settlements [BIS], the handwriting is on the proverbial wall.  All paper fiat currencies will become subservient to the elite’s ultimate SDR, another paper currency that will be created perhaps initially on the partial strength of a country’s gold holdings, but like Federal Reserve Notes were initially backed by gold and silver from 1913 to 1933, the SDR gold backing will eventually disappear, and the globalists will be in total control of the world, creating “money” out of thin air, just like the Fed has been doing.

In the interim, those who have gold and silver will fare best while they can until the transition is completed, again, years away.  Those concerned about the current price of gold and silver, instead of doing everything possible to have and accumulate physical possession of them, are playing a fool’s game.  China, Russia, India, even central bankers are all amassing as much physical gold and silver as is possible.  Take a page from those who rule and do the same.  Accumulate whatever you can, while you still can.

As an aside, and seemingly unrelated, mainstream news media continues to blame Russia for interfering in American politics without an iota of evidence.  The Bread and Circuses Congress just passed “H.R. 6393: Intelligence Authorization Act for Fiscal Year 2017? at the following location” which also endeavors to blame Russia [and deflect any responsibility for the US’ shortcomings], can also be part of a Trojan Horse to gain more and more control over the internet, to the detriment of everyday users.  The globalists are everywhere, doing everything possible to rid people of all freedoms.  Count on it.

[We recently posted  two articles on how the federal government deceitfully functions that offer yet more tangental information that supports the premise of this commentary.]     Elite-Controlled Federal Government Does Not Represent You, and Federal Government False Flag Actors, for general reading.

It is a guess on our part that the high volume in November is an attempt to run as many longs out of the paper gold and silver market as possible while smart money is covering what they can in eliminating competition.  We could be wrong on that, which is okay because we are not advocating positions in the paper market from the long side.

Exactly what is going on is not clear, except for the potential for lower gold and silver prices.  It is why it becomes essential to monitor the character of how the market responds to current negative conditions.  For sure, the market is not indicating strong reasons to be long the heavily manipulated paper futures market.

The weekly chart confirms the weakness seen in the monthly.  Last week there was an easing of the downward momentum as price closed only slightly lower from the prior week.  It does not negate the fact that last week was a lower high, lower low, and lower close.  We are just taking note that it will take more effort for sellers to press the market lower, or buyers will try to take advantage and mount a rally.  There is no assurance that will happen which is why we take a cautious approach to wait and see how the market develops, week by week.

gc-w-2-dec-16

Daily gold is and looks weak with no evidence that buyers could make even a feeble rally effort since price cascaded lower a few weeks ago.  There is no apparent strong base from past market activity to act as a basis for support and prompt a turnaround.  Absent that, the long side of the paper market has little to offer in potential reward amidst conditions where longs have been punished harshly.  Stay away.

gc-d-2-dec-16

The chart comments cover what needs to be addressed.  The sideways activity does not indicate any change in either direction.  The lower range around 13.50 could be retested without worsening the chart structure.  The damage would be more psychological for those long, including the physical metal, which the globalists would welcome in this efforts to make life miserable for those choosing precious metals instead of their worthless fiat.

si-m-2-dec-16

Of all the charts, weekly silver offers the slimmest glimmer of hope for a rally.  Price is in an oversold condition [always remembering oversold can become more oversold], while at the same time the downside momentum came to a halt by virtue of 2 weeks moving sideways and not sharply lower.  This is no reason for being long futures, rather, it is an observation to monitor the character of how the market continues to develop.

si-w-2-dec-16

Price has been moving sideways since mid-November, much like it did throughout October, but the rally that ensued in November was short-lived.  This demonstrates why trying to trade from the long side has been the wrong way to trade.

Buy the physical; avoid paper.  In fact, avoid any investment that is recognized only by holding a piece of paper as proof of owning something.  Physical gold and silver is the only asset that has no third-party counter-risk.

si-d-2-dec-16

 

 

 

 

Submitted by: Edgetraderplus

Is Inflation Caused by Rises in Commodity Prices or by a Deliberate Act of Currency Debasement?

Is Inflation Caused by Rises in Commodity Prices or by a Deliberate Act of Currency Debasement?

Inflation Is Not About Price Increases

There is almost complete unanimity among economists and various commentators that inflation is about general increases in the prices of goods and services. From this it is established that anything that contributes to price increases sets in motion inflation.

A fall in unemployment or a rise in economic activity is seen as a potential inflationary trigger. Some other triggers, such as rises in commodity prices or workers’ wages, are also regarded as potential threats.

If inflation is just a general rise in prices as the popular thinking has it, then why is it regarded as bad news? What kind of damage does it do?

Mainstream economists maintain that inflation causes speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources. Inflation, it is argued, also undermines real economic growth.

Why should a general rise in prices hurt some groups of people and not others? Or how does inflation lead to the misallocation of resources? Why should a general rise in prices weaken real economic growth?

Also, if inflation is triggered by various factors such as unemployment or economic activity then surely it is just a symptom and therefore doesn’t cause anything as such.

To ascertain what inflation is all about we have to establish its definition. Now to establish the definition of inflation we have to establish how this phenomenon emerged. We have to trace it back to its historical origin.

The Essence of Inflation

Historically, inflation originated when a country’s ruler such as king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process the king would falsify the content of the gold coins by mixing it with some other metal and return diluted gold coins to the citizens. On this Rothbard wrote,

More characteristically, the mint melted and re-coined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks,” but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.

On account of the dilution of the gold coins, the ruler could now mint a greater amount of coins and pocket for his own use the extra coins minted. (He could now divert real resources to himself.) What was now passing as a pure gold coin was in fact a diluted gold coin.

The increase in the number of coins brought about by the dilution of gold coins is what inflation is all about. As a result of the increase in the amount of coins that masquerade as pure gold coins, prices in terms of coins now go up (more coins are being exchanged for a given amount of goods).

Note that what we have here is an inflation of coins, i.e., an expansion of coins. As a result of inflation, the ruler can engage in an exchange of nothing for something (he can engage in an act of diverting resources from citizens to himself).

Also note that the increase in prices in terms of coins comes on account of the coin inflation. Observe however that it is the increase in coins brought about by the dilution of gold coins that enables the diversion of resources here to the ruler and not an increase in prices as such.

Under the gold standard, the technique of abusing the medium of the exchange became much more advanced through the issuance of paper money un-backed by gold.

Inflation therefore means an increase in the amount of receipts for gold on account of receipts that are not backed by gold yet masquerade as the true representatives of money proper, gold.

The holder of un-backed receipts can now engage in an exchange of nothing for something. As a result of the increase in the amount of receipts (inflation of receipts) we now also have a general increase in prices.

Observe that the increase in prices develops here on account of the increase in paper receipts that are not backed up by gold.

Also, what we have here is a situation where the issuers of the un-backed paper receipts divert real goods to themselves without making any contribution to the production of goods.

In the modern world, money proper is no longer gold but rather paper money; hence inflation in this case is an increase in the stock of paper money.

We don’t say that the increase in the money supply causes inflation. What we are saying is that inflation is the increase in the money supply.

Inflation Is About Wealth Destruction

Note that increases in the money supply set in motion an exchange of nothing for something. They divert real funding away from wealth generators toward the holders of the newly created money. This is what sets in motion the misallocation of resources, not price rises as such.

Real incomes of wealth generators fall, not because of general rises in prices, but because of increases in the money supply. When money is expanded (i.e., created out of “thin air”) the holders of the newly created money can divert goods to themselves without making any contribution to the production of goods.

As a result wealth generators who have contributed to the production of goods discover that the purchasing power of their money has fallen since there are now less goods left in the pool — they cannot fully exercise their claims over final goods since these goods are not there.

Once wealth generators have less real resources at their disposal this is obviously going to hurt the formation of real wealth. As a result real economic growth is going to come under pressure.

General increases in prices, which follow increases in money supply, only point to an erosion of real wealth. Price increases by themselves however do not cause this erosion.

Can Increases in Commodity Prices Cause Inflation?

According to most economists, an important factor behind a general increase in prices is increases in commodity prices.

We have seen that inflation is brought about by a deliberate act of currency debasement — on a gold standard by issuing un-backed by gold paper money, while on a paper standard an increase in the supply of paper money.

An increase in commodity prices as such is not related to an act of embezzlement. For instance, in a true market economy an increase in the price of oil versus the prices of other goods is just a reflection of changes in peoples’ demand. Obviously it has nothing to do with an act of currency debasement brought about by the increase in money supply out of “thin air.”

Also, if the price of oil goes up and if people continue to use the same amount of oil as before, people will be forced to allocate more money to oil. If peoples’ money stock remains unchanged, less money is available for other goods and services.

This of course implies that the average price of other goods and services must come down. Again, remember a price is the sum of money paid for a unit of a good. (The term “average” is used here in conceptual form. We are well aware that such an average cannot be computed.)

Note that the overall money spent on goods doesn’t change; only the composition of spending has altered, with more on oil and less on other goods. The average price of goods or money per unit of good remains unchanged.

Hence, the rate of increase in the prices of goods and services in general is going to be constrained by the rate of growth of money supply, all other things being equal, and not by the rate of growth of the price of oil.

It is not possible for increases in the price of oil to set in motion a general increase in the prices of goods and services without the corresponding support from money supply out of “thin air.”

We can then conclude that the so-called general increase in prices that seems to follow an increase in a commodity price such as oil, is in fact on account of an increase in the money supply out of “thin air.” (Note that since an injection of money doesn’t enter all the markets instantly, a general increase in prices ensues on account of previous increases in money supply.)

Most economists, when discussing the issue of general increases in prices, which they label inflation, never mention the word money. The reason for that is the lack of a good statistical correlation between changes in money and changes in various price indexes such as the CPI.

Whether changes in money supply cause changes in prices cannot be established by means of statistical correlation.

A statistical correlation, or a lack of it, between two variables shouldn’t be the determining factor in establishing causality. One must figure it out by means of reasoning as to the structure of causality.

Can Inflation Expectations Trigger a General Price Rise?

We have seen that, as a rule, a general increase in the prices of goods emerges on account of an increase in the amount of money paid for goods, all other things being equal.

The key then for general increases in prices, which is labeled by popular thinking as inflation, is increases in the money supply.

But what about the situation when increases in commodity prices ignite inflation expectations, which in turn strengthens a general increase in prices? Surely then inflation expectations must be also an important driving factor behind the general increase in prices?

According to most economists, inflation expectations are the key driving factor behind increases in general prices.

Once people start to anticipate higher inflation in the future they raise their demands for goods at present thus bidding the prices of goods higher.

Also, according to popular thinking, workers expectations for higher inflation prompt them to demand higher wages. Increases in wages in turn lift the cost of producing goods and services and force businesses to pass these increases on to consumers by raising prices.

It is true that businesses set prices and it is also true that businessmen while setting prices take into account various costs of production. However, businesses are ultimately at the mercy of the consumer who is the final arbiter.

The consumer determines whether the price set is “right,” so to speak. Now, if the money stock did not increase then consumers wouldn’t have more money to support the general increase in prices of goods and services, all other things being equal.

Hence, on account of expectations for higher prices in the future, all other things being equal, consumers will not be able to raise their demand for goods at present and bid the prices of goods higher without having more money. Consequently, the amount of money spent per unit of goods will stay unchanged.

So irrespective of what peoples’ expectations are, if the money supply hasn’t increased then peoples’ monetary expenditure on goods cannot increase either. This means that no general strengthening in price increases can take place without an increase in the pace of monetary pumping.

Note that inflationary expectations as such don’t cause a currency debasement, so in this sense an increase in so-called inflation expectations has nothing to do with inflation — i.e., an increase in money out of “thin air.”

Imagine that somehow the Fed did manage to convince people that central bank policies are aimed at stopping inflation and maintaining price stability, yet at the same time the central bank also raises the rate of growth of money supply.

Even if inflationary expectations were stable the destructive process will be set in motion regardless of these expectations on account of the increase in the rate of growth of money. Note that people’ expectations and perceptions cannot offset this destructive process.

It is not possible to alter the facts of reality by means of expectations. The damage that was done cannot be undone by means of expectations and perceptions.

When inflation is seen as a general increase in prices, then anything that contributes to price increases is called inflationary. It is no longer the central bank and fractional-reserve banking that are the sources of inflation, but rather various other causes.

In this framework, not only does the central bank have nothing to do with inflation, but, on the contrary, the bank is regarded as an inflation fighter.

On this, Mises wrote,

To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call “inflation” the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase. They put the responsibility for the rising cost of living on business. This is a classical case of the thief crying “catch the thief.” The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices.

 

 

 

Courtesy: Frank Shostak

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