Silver has been money longer than gold. Silver is called the “people’s money”, while gold is called “money of kings”. In the U.S., silver was an integral part of our monetary system until 1964 when it was removed from coins. This change has not slowed the depletion of above ground silver stocks, nor has it changed the volume of physical silver being used, on a global scale, for everything from computers, TV’s, cell phones, bombs and solar panels to name but a few. Physical Silver is vital manufacturing material in today’s world and, as stated, is money.
This is to say nothing of the investment demand that has exploded over the course of the past ten years. Investment demand for silver coins and bars has never been higher. The U.S. Mint, Royal Canadian Mint and Perth Mint all set new records for silver in 2015. All three of these mints are on pace for another new record in 2016. Physical silver is in high demand for every purpose in which it can be used.
Let’s review some of what we know to be absolute facts regarding physical silver in 2015-2016 and beyond.
As noted in the following interviews with Jeff Brown, China Rising, China has been importing raw silver dora bars as well as silver ore/concentrates. This means China will take all the physical silver available in whatever form is readily available. This is to say nothing of the fact that China mines approximately 100 million ounces of silver annually on her own soil!! That is massive demand for a single item.
Solar Energy Drives Silver Demand in China
Unlocking the Secrets to China’s Silver Demand
If we look at the mining industry, which is how silver comes to market, we see an industry that has been abused, unloved and drained of capital inflows for the past 3-5 years. Without mining companies digging silver out of the ground silver will be completely depleted and we will only be left with above ground inventory. This will never happen, but the mining industry is a capital intensive industry and without new inflows of capital, either from the sale of their product, at a profit, or investment capital, mines begin struggling and, in a lot of cases, will slow down or shut down the operation very quickly.
This has been the case over the past several years.
The interview below, with CEO, First Majestic, Keith Neumeyer was recorded on April 24, 2016. Keith, while not naming the company, explains how his silver mining company was contacted regarding a direct line of silver for one of the large technology manufacturers.
Silver, More Rare Than the Market Understands
As you can see owning physical silver may be to your advantage. While the most popular silver coins in the world are setting new sales records, entire nations are implementing silver dependent energy sources (solar) and the companies that can actually deliver the raw material are slowing or shutting down; this makes for a perfect storm in the silver market.
One las thing. On January 28, 2016 the silver futures market and the silver spot market (this is where the exchange rate (price) of silver is set) experienced a “glitch”. The market shut down for approximately 15 minutes while the “market makers” were attempting to sort out an anomaly that had occurred. The “glitch” was an $0.80 difference in the future contract price and the spot price of silver. This was a failure of epic portions by the people controlling the silver market. Just a few weeks later, Deutsche Bank, was found to have rigged both the silver and gold markets and within 24 hours of this unprecedented decision there were two civil class-action lawsuits brought against Deutsche Bank totaling over $1 billion.
Bill Murphy: All about the Physical Market; Takin’ These Bums Out!
The bullion banking cabal is in trouble. The physical silver market is on fire with demand. Physical silver supply is strained. The storm grows stronger by the day.
Got physical silver?
Courtesy: Rory Hall
Gold on Track for Eighth Losing Session U.S. GDP data revision seen bolstering case for interest-rate increase … Gold prices edged lower Friday, on pace for an eighth straight losing session, amid mounting evidence of improving economic growth in the U.S. that would strengthen the case for an interest-rate increase. –Wall Street Journal
Gold went up by 16 percent in the first quarter of 2016 and kept on moving even afterward for a total of 20%.
Investors are nervous about the economy and the first quarter’s results reflected those nerves with a rise in gold.
Since then it’s moved down some 6% as Janet Yellen has counterattacked with vaguely worded suggestions that the Fed might hike rates again.
As we pointed out in a recent article, the idea that the US economy is on an upswing seems difficult to believe.
The US owes something like $200 TRILLION if one includes Social Security and other outflows going forward.
Meanwhile some 100 million individuals including young people and seniors are not working in mainstream jobs or not working at all.
Our perspective on the US and the world economy is summed up by a top executive for the Bank for International Settlements, William White.
Speaking some months ago, he was quoted by the UK Telegraph as saying that nothing less than a worldwide debt jubilee would bring back global solvency.
Without a jubilee, the world simply continues to sink into a morass of sovereign, corporate and personal debt.
White’s perspective was echoed just a few days ago by billionaire bond investor Bill Gross. Speaking of Japan, he said the current debt burden was not manageable and that the central bank would have to acquire it and forgo repayment.
This scenario may need to play out around the world.
Given what the most savvy financial professionals are saying about the global economic condition, it is hard to see how the mainstream media (echoing Janet Yellen) remains upbeat about a “recovery.”
Nonetheless, the Journal manages it:
Recent data suggest that 2016’s early weakness was temporary, and more recent data indicates the U.S. recovery, while weak, continues apace. Those recent data points have strengthened the hand of the Federal Reserve to further raise interest rates from rock-bottom levels.
The data being referred to includes durable goods orders, which recently rose 3.4%.
Jobless claims supposedly dropped 10,000 to 268,000 for the week ending May 21, vs. forecasts for 275,000. Home sales jumped 5.1% in April
Yet market watchers quoted in a recent New York Times’ article remain unconvinced.
Reports … suggest that 2016’s economic trajectory will follow an arc that has bedeviled forecasters for years: a soft first quarter followed by a turnaround in the spring even though underlying conditions remain largely the same throughout the period.
“There is better momentum now, but it’s still a bit of a head fake,” said Diane Swonk, an independent economist based in Chicago.
Swonk pointed out that some of the upturn may be simply be statistical. Seasonal anomalies can “create a false sense of security.”
And she added about the first quarter, “It was still a tepid quarter even if it was less bad. That doesn’t equal good growth.”
How on earth is a rate hike going to aid US solvency? And according to White and Gross, the problems are so bad that they cannot be dealt with by normal means. The world, in other words, will have to organize a jubilee.
The Journal does not focus on this “bigger picture” of course. In fact, it points out that “Rising rates tend to weigh on precious metals, as gold struggles to compete as an attractive investment with yield-bearing securities such as bonds.”
Conclusion: But when the entire world’s financial infrastructure is threatening to implode due to unmanageable debt, what would you rather be holding – gold or bonds?
Courtesy: Daily Bell
Steve St. Angelo shares his top-notch research with our listeners on some alarming trend changes in silver supply and explains how and why the debt bubble is eventually going to burst and why he believes gold and silver will be the assets to own when it all unravels.
Mike Gleason: It is my privilege now to welcome in Steve St. Angelo of The SRSrocco Report. Steve is an independent researcher and investor who follows the precious metals and energies markets like few others, and has one of the very best content based websites in our entire industry. Steve, welcome back, it’s good to talk to you again.
Steve St Angelo: Yeah Mike, looking forward to the conversation.
Mike Gleason: To start out here, Steve, it’s been several months since we spoke last, so give me your take on the action in the metals here this year, specifically what’s driving the recent pullback from the late April highs in gold and silver.
Steve St Angelo: Well I think what the number one factor that caused the big jump in not only physical, but also ETF, mostly gold ETF demand was the big crash in the market, the big correction, 2,000 points (in the DOW). What was interesting about this, this time around, there was like 364 tons that flowed into the gold ETF just in the first quarter. You’ve got to go back all the way to 2009, during the first quarter 2009, when the DOW was crashing to like 6,600, it was 400, I believe 50 tons went into gold ETF that quarter, because investors were scared to death. Well it only fell 2,000 points Mike, and investors flocked into the gold ETF like the world was falling apart. On a regular, let’s say, 10 or 15% correction. So this time around, investors were very worried that this was going to be the big one.
Well it didn’t happen. By the time April came around, the markets recovered and sentiment has changed. Another thing that is on the back of gold and silver prices is the huge commercial short positions. They have increased to record highs as of a week or 2 ago, so investors are looking at that. Now what we needed to do was break through $1,300 gold, and $18 silver. That may have pushed a lot more stress on the commercials. We almost got there, but it seems as if that was the line that commercial banks used, and we had some huge $2, $3 billion gold knockdowns in a few minutes on several days, and that did it. And so this is where we’re at now, and so sentiment is much lower because we didn’t get passed those $1,300 gold and $18 silver marks. Now we’re waiting to see how these commercial shorts play out and what happens going forward. That’s how I see the market right now.
Mike Gleason: Definitely want to talk to you a lot about the supply side of things. You cover that so closely and have so much great content on that. You recently broke down the massive increase in demand for the Silver Eagles and Silver Maple Leafs and pointed out that the combined annual silver mine production between the U.S. and Canada is short of all the ounces needed each year to mint these 2 coins, which is a big shift from 10 or 15 years ago. Talk about this here, Steve, what did you learn in your research and what conclusion did you draw there? Because this is a very interesting development in the supply/demand dynamic here in North America.
Steve St Angelo: I do think it’s important for your readers and listeners to understand, we need to focus more on the mid to long term fundamentals, because fundamentals always win out in the end, even with market manipulation. And we’ll get into that towards the latter part of the interview. In 2001, U.S. and Canada was producing a little more than 95 million ounces of silver, and Maples and Silver Eagle sales were like 9 million, so it was less than 10% of overall production. Like you said, 2015, mine supply was 47 million. It fell by half, but just the demand from Silver Eagles and Maples, it was 81 million last year. It was like 33, 34 million ounces more than the Canadian and U.S. mine supply.
Back in 2001, they had extra silver they could use for industrial purposes, jewelry, silverware, but now they have to import 33 million ounces of silver just to cover the U.S. Eagle and Maple Leaf programs. That’s phenomenal. So it’s the ongoing trends that we’re looking at. The North Americans, for some reason, they like to collect silver coins, where in Asia, or let’s say India, it’s more silver bar. So we’re seeing a lot more coins, even rounds, being purchased by North Americans. That’s what’s driving the investment market. I think going forward, we’re going to see much higher, I would say maybe 90 million ounces of combined U.S. Eagle and Silver Maples this year. And I think production will be about the same, so it’s going to be maybe another 7, 8 million deficit just for that. That’s huge, Mike.
Mike Gleason: Yeah, and one of the things I found really interesting was the report you did recently highlighting how global investment demand for physical silver bullion products has gone from being a mere 8% of what industrial demand was 10 years ago to now half of what global industrial demand is. And we’re not seeing a big drop off in industrial demand, necessarily, although it is down a bit. Who knows, Steve, at this rate, we could soon see more silver production needed for investment purposes than is needed for industrial applications. That’s truly mind boggling based on where we’ve been. What are your thoughts here?
Steve St Angelo: If we look at 2005, 6 and 7, investment demand, which is physical bar and coin, was 8%, for each of those years, 8%. Then 2008 came around and things changed. What happened? We had the first collapse of the U.S. banking and housing market. I call it the first because the second one is still on its way. They’re doing everything they can to keep that from happening, but they can’t do it forever. In 2008, it jumped to 29% that year. And now, GFMS has recently included, in their data, privately (minted) rounds and bars. They did not include that before. They couldn’t get a good figure. What they did is they included it this year in their 2016 world silver survey for 2015 data. It really jumped, I think, 40 to 50 million ounces of silver bar and coin demand last year. So they actually had to revise their figures for 2014, 13 and so on. And so that is what really pushed up investment demand, which is now 50% of industrial demand.
Now here’s the thing: the reason why we got off of the silver standard back in the 60s, was silver became too valuable to use in currency. It’s really that’s what happened, because we were using so much in industry, we couldn’t do both. We couldn’t have silver coinage and (silver needed for) industry, as well as jewelry and silverware. There just wasn’t enough silver. What they did is they took it out of the coin, because it would actually push up the price of the coin too. Now we’ve been using industry, which has been devouring silver, and half of it is gone forever. Now I do see, at some point in time, if we just had a doubling of last year, it would surpass, if we had a doubling of silver investment where institutions really came in, like investors were worried in the first quarter this year. Once we get a big crash in the markets, just a doubling from the almost 300 million ounces of silver bar and coin last year, to 600; it would surpass industrial demand, and because silver and gold are real money. So I do see, at some point, the demand will really surge and I don’t think they will be with the supply, Mike.
Mike Gleason: Furthering the point here, you’ve been following the supply deficit in silver for a long while, and I want to get your comments on the Thomson Reuters statistics on global silver supply and demand here, Steve. You recently reported on a revision that makes the deficit in supply worldwide much larger than originally published. So the market has been able to run for more than a decade with this persistent shortage, yet prices, while quite a bit higher than 10 or 15 years ago, they’ve been lower for the last 5 years. So what gives there?
Steve St Angelo: In just a few months, let’s say 6 months, they revised a little more than a billion ounce deficit since 2004 to almost to 1.3 billion ounce deficit. So it was a little less than 300 million ounces they added to the deficit. Now I’ve had an email exchange with the head GFMS silver analyst and I asked, I said, “I’ve heard that there were deficits early in the 1980s and 1990s.” They sent me the actual supply/demand and deficits since 1975. And if I look at all of them, there were surpluses in the 80s, and there were surpluses especially in the 90s when investors dumped a lot of bar on the market in the middle of the decade, because they thought prices would recover, but they never did. So there were surpluses in the 80s, surpluses in the 90s, and it turned out to be about 1.6 billion ounces. That’s from both of those decades.
Well guess what? From 2000 to 2015, it’s been a 1.6 billion ounce deficit. So in all actuality, this last 15 years we’ve been living on the surpluses of the market in the last 2 decades prior. So why hasn’t that impacted price? Well because the market is rigged. The market is totally rigged. Why is the DOW going up when we’re getting the worst fundamental data coming out? It is a very strange market, but unfortunately, just like Bear Stearns, Bear Stearns was a company that imploded, and so did Lehman Brothers, in no time. But the fundamentals, to understand that they were weak and that they weren’t worth their stock price and that they were bankrupt, that was known probably 2, 3 years before if you really understood the data.
And this is the issue we’re dealing with now. Silver and gold are undervalued because the market really doesn’t understand the data. When the market understands the data, and when the real fundamentals kick in, it will be reverse Lehman Brothers, reverse Bear Stearns, and that’s when we’ll see the price of gold and silver finally take off.
Mike Gleason: Obviously with the increase in investment demand here, we’re seeing a lot of metal flow over to the East, maybe leaving weak hands in the West, going to strong hands in the East. And that metal’s likely not to come back anytime soon, so maybe there are more products going into investors’ hands, but they’re not going to necessarily be willing to give that up unless we see significantly higher prices. I have to think that that’s going to be a big part of this as well, is that in order to draw that product back on to the market, if somebody’s going to sell it at a profit, they’re going to need to see significantly higher prices before they do that, because we are seeing a lot of metal go into very strong hands. Do you see it the same way?
Steve St Angelo: Oh yes, and we have to remember, look what happened in 2011, when the average annual price of silver was over $35, even though we had high silver scrap supply come into the market. It was about 240 million ounces, that was it, that’s all that came on the market was 240 million ounces and it was all absorbed. So even if the price doubled to $100, if we saw that price, I actually think we could see less scrap. Because here’s the issue: when people have a gold coin, and when Americans bought a lot of gold jewelry in the late 1990s and early 2000s, they bought a lot of gold jewelry because the price of gold was low and things were going good for them back then. So Americans used it for adornment and bragging purposes, where Indians use it for a nest egg. It’s like their retirement, their wealth. Where Americans use it to show that they’ve got a nice gold ring. People will take that gold, and they will get it pawned, because it’s worth the effort to go to the pawn shop and get $500 or $800 for it.
But a silver ring doesn’t have an ounce of silver in it. Even if at $100, you’re not going to go down to the coin store, or the jewelry store, and pawn it for like $40. This is the reason why jewelry is not really recycled in silver. Whereas gold jewelry is, because the price is so much higher. So I don’t see a huge increase of supply coming into the market. And even if prices really move higher, and even if it does Mike, I think it’s going to be absorbed. It will be absorbed very rapidly because gold and silver will be the go to assets to own in the future.
Mike Gleason: Certainly, if recycling is not going to necessarily increase substantially with higher prices, then where’s that supply going to come from. We know that mine production, of course it takes a long time for mines to sort of get things ramped back up. A lot of them are shuttering mines right now, going on care maintenance. And it doesn’t just happen immediately to bring those back online as prices rise. I want to talk to you about the DOW-Silver ratio. You’ve been doing some studies on that. What have you learned through that research Steve, the DOW-silver ratio?
Steve St Angelo: Well I think this is important because we don’t realize how out of whack everything is, Mike. Back in 1980, when silver hit $49, and it also hit $49 in May of 2011, 30 something years; the difference was the DOW Jones was 864 points in the first quarter of 1980. It was like, I think it was like the 12 or 13,000 range in 2011. So the DOW Jones silver ratio, 1980, was 25 to 1. And then over the next several decades, it really went high, it was 2,500 in June 2001. So you could buy a hundred times more silver in 2001, compared to the DOW Jones, than you could in 1980. Well when the prices really increased in 2011, it fell to 250 to 1, the DOW Jones to silver ratio fell to 250 to 1. It fell 10 times. Now it’s about 1,000 to 1.
The thing I want your listeners and readers to understand is this: as the DOW Jones increased 21 times its value since 1980, U.S. debt has increased 22 times. And the total U.S. retirement market has increased 25 times. So when you figure all those together, all those assets, the DOW Jones and the U.S. retirement market; they all increased almost the same amount as the debt has increased. So all those assets out there are debt assets. They’re not real assets. An asset is something you can sell. Retirement accounts and the DOW Jones are claims on future economic activity. And as I’ve told you about my energy analysis, we’re peaking in U.S. oil production, and it’s just going to get worse from here. So the market has funneled assets from physical assets back in the 1970s and 80s, into paper assets, which are the DOW Jones, which are U.S. treasuries, which are the retirement market, and it’s all backed on debt. There’s no coincidence that all these paper assets have ballooned 20 plus times on the back of U.S. debt increasing 22 times. This is the issue.
And investors don’t realize it, Mike, that they’re invested in claims. They’re not invested in assets. And silver, the average price was $30 in the first quarter of 1980. It’s $16 today. If investors had been putting their money, instead of in a retirement account, which is a Ponzi scheme, and they had put it in gold and silver, the values of gold and silver would have been much higher today. And the retirement market, or the DOW Jones, would have been much less. That’s the problem. This is what’s happened over the past 3 decades.
Mike Gleason: Speaking of energy, you alluded to it there a moment ago, anyone who visits your site, Steve, will see the acronym EROI, which stands for Energy Returned on Invested. I want to explore this with you for a minute here, and have you explain that to our listeners, but before we go any further, I want to read an excerpt from an article you put out this week related to this subject and then I’ll get your comments. You wrote:
“Folks, it won’t matter how much money is floating around in the future as energy production plummets. Who cares if there are trillions of M2 or M3 outstanding,”… and you’re talking about the money supply there… “When we won’t have enough energy to continue running a system that only can function by a growing energy supply. To base the future value of gold on outstanding currency is folly.
Which is precisely why I label gold and silver as investments. There value will surge as most paper and physical asset values collapse. The reevaluation of gold and silver will occur well beyond the collapse of fiat money. They will also rise in value due to the disintegration of most physical and paper assets. This is well beyond the scope of money or insurance.”
So please give us a brief explanation of EROI, in layman’s terms, and then expand on the excerpt I just read and tell us why you believe this is all going to point to much higher gold and silver prices.
Steve St Angelo: Yeah Mike, my analysis is different than most of the precious metals analysis, because they look at the Austrian School of Economics, and they look at the money supply. Jim Sinclair, and even Jim Rickards, they forecast $10,000, $15,000, $20,000, $30,000 gold based upon how much money supply is out there. As you stated in that quote, it won’t matter how much M1 or M2, or M3 is out there if energy production declines. And so we have to remember, the huge debt that we have now is $20 trillion. That’s just public and private. I call that energy debt. The problem we have now, and it’s all based on the energy return on invested, and simply, the energy return on invested means how much energy you put in to get energy out.
And when this country first started getting into producing oil, it was high, it was 100 to 1. So when we put one barrel of energy out, we burned one barrel of energy, we’d get 100 barrels in the market. It has fallen drastically. In the 1920s, 1 barrel found 1,500 barrels. Now it’s 5 to 1. As a matter of fact, ConocoPhillips, because the price is so low, ConocoPhillips is actually excluded exploration, and they’ve stopped all exploration. ConocoPhillips is the third largest oil company in the United States. They’re finding now 5 to 1, but I think that’s even going to fall. The energy return on invested is really declining. The shale oil industry is 5 to 1, where it used to be 100 to 1. In 1970 it was 30 to 1.
So our economy, our modern society, needs something 12 to 1 energy returned on invested, and shale oil isn’t paying the bills. Deep-water is like 10 to 1. We are in big trouble. Let me tell you how much trouble we’re in. The U.S. energy sector is facing $370 billion in debt. And last year, they paid almost $17 billion of their operating profits just to pay the service, the interest on their debt. Not to pay the debt down, just to pay the interest on the debt. Well it was even worse in the first quarter of this year. It was 86% of their profits went just to pay the interest on the debt.
Now yes, the oil price has gone up a little bit, but the reason why the oil price has gone up a little bit is because China is absorbing a lot. They have increased their strategic reserve. The world isn’t consuming all this oil, some of it is being stockpiled at these cheap prices. So I don’t think we’re going to see higher prices. We could see lower prices here, once China finally fills up their reserve. So the thing is, going forward, U.S. oil production is already down almost a million barrels since its high last year. A million is gone, and it’s not coming back. We can’t afford higher oil prices, either. That was a 3, 4 year phenomenon because of 0% interest rates and money printing. It might go on a little bit longer, but the debt now is too high, Mike. This is a problem.
The debt in the energy industry, as I just explained to you, and the debt in the system is too high. It’s $6 of debt to get $1 of GDP. It’s a disaster. Now how long can this go on? It could probably go on a little bit longer, but the fundamentals will kick in, and when those fundamentals kick in, by gosh, if you’re in paper assets, and if you’re in real estate; you’re going to be in trouble. Because paper assets are going to implode, and real estate prices are going to implode because they’re going to be sunk assets, because you can’t run a huge suburban economy on 20, 30, 50% less of the energy you use to running it. That’s going to impact real estate prices.
I’ve been saying this in interviews with you over the past year or 2, but it just gets worse going forward, and investors don’t see this. Most investors don’t see it, but it’s going to make its way, and when it does make its way, again, that’s why I think the best liquid assets to own are physical gold and silver, and they are investments. They will be much more than just money. And that’s how I see it.
Mike Gleason: Yeah it’s a very fascinating outlook and take on everything. That’s one reason why we like to have you on so much. You bring a very unique perspective there, one that a lot of people are not considering and I always enjoy talking to you about that. Well before we let you go, Steve, if you can let our listeners know how they can learn a little bit more about The SRSrocco Report, what they’ll find there, and then any parting words before we close.
Steve St Angelo: At The SRSrocco Report, we put out about 2 or 3 articles, mostly on precious metals, mining and then I include energy, even though, unfortunately, when I do an energy article, the reads are maybe 10%, 15% of the precious metals, but actually it should be the other way around. The energy is the driver. If a person is sick, if they say, “I’m deathly sick. I can’t get out of bed.” You don’t have the energy. You have the flu, it takes you out. You can’t get out of bed. You can’t go to work. You have to have the energy to get out of bed. You have to have the energy in your car, the gasoline, to get you to work. And you have to have the energy that actually runs the whole system. Unfortunately, solar and wind and renewables; they don’t work. They’ll never work. On an individual basis, it’s probably wise to have solar on your home, if the grid goes down, but on large scale, they don’t work. They won’t ever work, unfortunately. I’ve done the math on them.
So in the future, your readers and listeners should continue looking at the fundamentals. And the fundamentals are showing us more people are getting into the metals, even though the price doesn’t show it. And the energy situation, it continues to get worse. And so with the debt now on the system, it’s going to be hard for the establishment to continue business as usual. I don’t know how long this will continue, but each 6 months, each year; it just gets worse. And the best thing to do is to purchase precious metals physically, on an ongoing basis just like your retirement account. Instead of having claims, or IOUs, in an account, it’s better to have stored economic energy in a gold or silver coin or bar in a place of safekeeping. And that’s how I see the thing going forward, Mike.
Mike Gleason: We both agree that we don’t know exactly when the system is going to collapse, but it certainly looks like we’re headed that direction. And it’s probably just a matter of time. It’s all very enlightening stuff. More people need to wake up and recognize what’s going on here, and I think you’re a big part of that Steve. Thanks for all the work that you do there. We appreciate your time as always, and hope you have a great weekend. Look forward to catching up with you again soon.
Steve St Angelo: All right Mike, always a pleasure. Thank you.
Submitted by: Mike Gleason
Speculative traders abandon gold in latest week … Gold prices fell Monday, moving in the opposite direction of the US dollar, which soared after comments by Federal Reserve Chairwoman Janet Yellen last week indicated an interest-rate hike could come this summer. –MarketWatch
Today, gold prices have been clinging to around $1,200 against the dollar. It is becoming increasingly obvious that the Federal Reserve has two goals.
One is to keep the dollar strong against gold and the other is ensure that the world’s quasi-depression continues.
Yellen doesn’t say so, but this will be the result of her actions.
“It’s appropriate — and I have said this in the past—for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said in a recent speech at Harvard University where she received an award. “Probably in the coming months such a move would be appropriate.”
But it’s probably not appropriate. Nothing in the US economy is signaling “recovery.” US statistics are endlessly optimistic anyway.
We’ve reported previously on this: Yellen is raising rates because she wishes to raise rates not because of any particular financial evolution that is forcing her hand.
In a recent CNBC article, “The Fed could be blindsided by ‘stagflation’,” contributor Michael Pento went even further.
Pento doesn’t seen any real US economic strength. And he believes that if Yellen raises rates, any possibility of a recovery is lessened.
“Janet Yellen is creating ’70’s style stagflation with her monetary policies,” he writes.
Since July of 2015 economic growth has been languishing, while CPI has been rising during a relatively similar time span. In fact, the most recent month over month increase in the CPI of 0.4 percent was the highest since February 2013.
At the same time, Pento writes that the economy only expanded by 160,000 new jobs in April whereas Wall Street had expected a 203,000 gain.
The Fed is seeking higher employment and low inflation. “What is becoming manifest is the exact opposite.”
Is Yellen prepared for an economic scenario that opposes the one that she anticipates? Pento believes neither Yellen nor Wall Street are prepared for such a turn of events.
In fact, “The government’s effort to engender viable growth through debt and inflation is virtually guaranteed to fail.”
Pento believes the medicine of Paul Volcker is necessary: an environment of much higher interest rates.
This is because he doesn’t believe the economy is improving but asset bubbles are forming nonetheless. It is these asset bubbles that carry the greatest risk.
Yellen’s slow-motion rate increases do nothing to alleviate these risks.
She is adopting the tactic of raising rates slowly while asset bubbles expand quickly – eventually causing an economic meltdown.
Alternatively, the modest increases will not have a significant impact on price inflation.
Pento closes his article by asking which scenario will play out.
Will low growth plus asset bubbles create an “unprecedented contraction” in the near term? Or will Yellen’s misguided strategy simply create a vicious stagflation that will an unprecedented and intractable inflation?
The only thing missing here is Yellen’s rationale. We tend to think these are end days for the US and the world’s economy – as they exist currently.
At some point, the world moves toward a more global economic structure. Europe itself may use Brexit as a means of achieving a stronger political union.
The International Monetary Fund may try to expand its SDR basket of currencies when the yuan becomes more of a factor in October.
Change happens for a reason. Around the world, economies are staggering. Markets advances are narrowly based. If an evolution is to occur, it will be within a context of misery and dysfunction.
Yellen may not be “missing” the risks of stagflation. More likely, she is heading there on purpose – as terrible as that sounds to say.
But either she is incredibly misguided or she intends to do what she is doing …
Anyway, we don’t see another bull cycle taking place any time soon. The pressure for increased economic globalization seems to be the priority. And Yellen’s enunciated strategy supports that.
Conclusion: How will gold react? That’s still not clear. But in our view, the longer term trends involve price inflation and economic stagflation. These will weigh down the dollar and drive gold prices higher against it.
Courtesy: Daily Bell
With the holiday weekend, the focus will be on charts only for, ultimately, they reveal the truest story of what is developing in any market. There is one more trading day in May, next Tuesday, but we are using ending data from Friday, the 27th, for the monthly charts.
The rally in both gold and silver has been a significant change in market behavior, and these changes are telling the world that the decline from 2011 may have ended. We note the ending action at 1, on the monthly chart. Besides the obvious support and resistance areas, what stands out are the two high volume months when price closed lower each time, once in March, and now for May.
Volume is the energy behind every move. Without it, no trend can be sustained. Always remember, exceptionally large volume is when smart money movers are in action, either covering old or taking new positions, in the market. It is during these high volume events that one can see the “footprints” left behind by smart money movers. We define “smart money” as those who move and influence market direction, to keep it simple.
To put bars 2 and 3 into context, when bars overlap, especially moving sideways, it is the struggle/battle between buyers and sellers for control. The volume for bar 2 was the highest since the 2011 all time high for gold. It was interesting when there was no further downside movement in April. When price stops on a dime, as it were, under heavy selling pressure, it can only mean one thing. The apparent selling pressure was overwhelmed by opposing buyers in numbers great enough to halt any further decline. That means what looks like a selling month, for March, was actually net buying.
What is interesting about the lack of downside follow-through, after March, was that the low at the end of the month was where buyers took total control, and that specific low should now become important support on any subsequent retest because it was at the point where sellers could not move the market even a penny lower.
In the process of ending, May’s volume was even higher, so the battle between buyers and sellers was at an even greater pitch than in March. Yet, when one views that action, May was nothing more than another overlapping bar, and the exceptionally high selling effort did nothing to carry price lower, at least up to that point.
We all remember the surprise selling minutes when billions of dollars worth of gold were dumped on the market with impunity and no care for market impact, were the “seller” so concerned. There are fewer of those kinds of market dumping and their impact has lessened, considerably. When we talk about changes in market behavior, March and May exemplify the significance of that change. Gold is not selling off to lower swing lows, as occurred in the past. In the present rally/decline, the decline portion has not even approached the half-way retracement level, an indication of relative underlying market strength.
We see March and May as “messages from the market,” advertising its intent. Some little skirmishes designed to take one’s attention off that intent may yet follow, and that is when weak-handed players get lost in the shuffle.
This is the developing “story” as we see it, and it pays to lock onto further developments in order to take advantage of potential new upside trends that leads to greater probability for being profitable by harmonizing with the trend.
Because of the high volume that stopped at the March low, discussed above, that stopping area should now become support. Chart comments explain it further. We will instead add to the observation of volume increasing as price declined.
Smart money sells high and buys low. When smart money is active, volume increases. If smart money were selling gold, the highest volume would occur near the swing highs, and not after a $90 decline. The highest volume is at the low, [so far], so smart money is trying to hide its hand as it buys into the decline. Also, smart money has deep pockets, very deep, so they are not concerned with day-to-day price action even when price moves against them. They know price is going higher because they are the ones behind the move.
A $20, $30, $40 move, even more, against them is no big deal. Most often, it is smart money moving price against their position to shake out weak hands, and they keep buying whatever is sold from those who cannot afford such a move against them. Smart money does not like company. It is their purpose to create as many situations as possible to shake people out of the market. The current reaction is one such effort.
We often mention synergy between the various time frames. Right now, there is a consistent synergy from the monthly on down as price moves into a reaction area of support. As you look at the daily chart, what has been the net move from early February to the end of May? Zero, practically speaking, but look at all the “noise” the “distraction” in between. It appears that smart money is preparing for the advance almost everyone else has been waiting for.
If we are on target with this assessment, gold should start exhibiting stopping activity to end the current down trend from the May high, and price should start showing evidence that an uptrend continues to develop.
Silver. Second verse, nearly the same as the first. The details vary, but a developing “story” of support that keeps ostensible selling activity at bay is unfolding. It is a little bit like the United States
supporting “fighting” ISIS. After 13 months of arming bombing ISIS, there has been no apparent effect, except that they are stronger. In comes “smart money” Russia, and using its incredibly effective aerial bombing, [new, increased and stronger “volume], there was a change in the developing “story.” ISIS was getting its ass kicked, and the “trend” has been turning.
This is the importance of observing new developments pertaining to volume, because it is a market changer and driver. April saw evidence of sharply increased volume in silver while price rallied. That is a market “message” of which to be aware.
The “story” continues evidenced by the significantly smallest range bar at the end of the current decline from the May swing high. Why is the range so much smaller? Sellers are ineffectual, and buyers are stepping in to take control. If one does not pay attention to these “market messages,” it is easy to not maintain a focus on this larger picture, and instead, just look at the somewhat random day-to-day “noise” activity designed to keep people confused and bogged down in more meaningless details.
Silver has declined somewhat more grudgingly than has gold. It is more compact in the charts, which makes sense due to the considerably lower prices per ounce for silver as opposed to gold. The gold:silver ratio has been wavering in the 74.5 – 76+ to 1 area, recently, but that is still lower than the previous readings at 84:1, several weeks ago.
We see a new “story” developing [changes in developing market activity that create a change in direction]. There can be a little chaos during the transition, but a steady focus and careful price selection should begin to pay off.
Here is a close-up picture of when price “took off to the upside” in April in this 4 hour chart, starting with the left-hand side activity. Now on the right side, price has returned to retest that April rally. During this correction, you can see how the level of price direction slowed considerably, starting on the 19th with its sharply higher volume.
The down-sloping channel defines the near-term trend, down, and price is struggling at the lower channel line. This tells us buyers have been unable to successfully counter the efforts of sellers, and until that changes, the shorter term trend will remain down. Should a change begin, at or near these levels, it will be a buying opportunity.
Submitted by: Edgetraderplus
You may be wondering if you “missed the boat” on gold.
After all, the price of gold is already up 15% this year. It’s at its highest level in 15 months.
Gold stocks, which are leveraged to the price of gold, have done even better.
Gold’s 15% jump has caused the Vectors Gold Miners ETF (GDX), which tracks large gold miners, to soar 68% this year. Many individual gold stocks have gained 100% or more.
With massive gains like that, it’s easy to think that you’ve missed your chance.
But if you’ve ever been part of a gold bull market, you know gold stocks could go many times higher.
During the 2000–2003 bull market, the average gold stock rose 602%. The best stocks returned 1,000% or more.
So, if you’ve been wanting to buy gold and gold stocks, know that you’re not too late.
As we’ll cover today, this bull market hasn’t run its course…it’s just getting started.
In fact, with GDX’s 11% correction over the past month, now could be the perfect time to buy. More on that later. First, let’s look at why gold is set to move higher for the next few years…
• Casey Research founder Doug Casey thinks gold is in the early stages of a “true mania”…
As you may know, Doug thinks we’re on the verge of a major financial crisis. When it hits, he says “paper currencies will fall part, as they have many times throughout history.”
When the average investor wakes up to this, he’ll rush into gold. That’s because gold is real money. It’s preserved wealth for centuries because it has a unique set of qualities: It’s durable, easily divisible, and transportable. No matter where you go, people recognize gold’s intrinsic value.
It’s also survived stock market crashes, economic depressions, and full-blown currency crises. It’s the ultimate safe haven asset.
Doug believes the price of gold could easily triple in the coming years.
Louis James, editor of International Speculator, also thinks gold is in the early innings of a major bull market. If you don’t know Louis, he’s Casey’s resource guru. His specialty is finding gold miners with massive upside.
Last week, Louis told Wall St for Main St, a financial information website, that gold is just getting started:
First, know that it’s not too late…
What we have seen so far this year is the beginning of a major move that will run for years.
• “Mainstream” investors like gold again for the first time in years…
According to the World Gold Council, demand for gold funds hit its highest level since 2009 during the first quarter.
Louis says the perception of gold is changing for the better:
You have this mainstream awareness now. I think it’s very significant that there are people on Wall Street who now understand and value the safe-haven aspect of gold and silver. These people have received an education…and I think they’ll deploy it the moment the conditions seem right to them.
• Wall Street hasn’t paid much attention to gold in the past few years…
Instead, it has focused on U.S. stocks, which have been in a historic bull market. With the S&P 500 more than tripling in 2009, “mainstream” investors saw little reason to own gold…until recently.
• The S&P 500 hasn’t set a new high in more than a year…
Earlier this week, we explained that “dry spells” like this usually appear at the end of a bull market. And that’s just one of many reasons to be worried about U.S. stocks.
Corporate profits are drying up. The global economy is stalling. And many important stocks are already trading like we’re in a recession.
The stock market hasn’t looked this fragile since just before the 2008 financial crisis. Investors are nervous. They’re starting to buy gold.
There’s just one problem…
• There may not be enough to go around…
In March, Doug Casey explained how small the gold-stock market really is:
The combined market capitalization of the 10 biggest U.S.-listed gold stocks is less than 29% of the size of Facebook.
I’ve said it before, and I’ll say it again: When the public gets the bit in its teeth and wants to buy gold stocks, it’s going to be like trying to siphon the contents of the Hoover Dam through a garden hose.
Louis also thinks gold could get a big boost if the mainstream investors “jump on board”:
It could go our way…it could be dramatic…and it could be soon.
• There are plenty of ways to make money in this gold bull market…
The safest way is to own physical gold.
We encourage everyone to hold at least 10% of their wealth in gold. That may not sound like much, but it could keep you from losing a lot of money in a financial crisis. It could even make you a lot of money. Remember, Doug thinks the price of gold could easily triple in the coming years.
• You could make even more money owning gold stocks…
As we mentioned, gold stocks are leveraged to gold. When gold rises 20%, gold stocks can rise 80%, 100%, or more.
You can make a lot of money very quickly owning gold stocks in a gold bull market. But gold stocks are also very risky. They’re extremely cyclical, meaning they go through huge booms and busts.
If you’re willing to take on more risk, you can make a fortune in small gold stocks. Here’s Louis:
[Y]our smaller, higher-risk companies have greater potential to double, triple. If you go down in the food chain here to the little nano-caps and exploration companies, you can be looking at 10-baggers or more. If one of these companies makes a significant discovery, the change in real value is enormous.
A “10-bagger” is a stock that rises 1,000%. Again, that kind of gain sounds almost impossible if you’ve never invested in a gold bull market. But experienced gold investors know they are not only possible, but fairly common.
• If you’d like to buy less risky gold stocks, consider gold “streaming” companies…
Gold streaming companies don’t mine gold of their own. Instead, they finance early-stage exploration or production projects. When a mine they finance starts producing, the company gets a cut of the cash flow.
It’s a much less risky business model than gold miners. Louis explains:
The lowest-risk way to play precious metals with some leverage is the streaming companies. They offer leverage to the underlying commodities. They have a very sound business model. They make money at low prices and regardless of what happens on the ground. Whether a mine makes money or not, these streaming companies still get paid. They only don’t make money if the mine actually shuts down.
Louis currently has two streaming companies in his International Speculator portfolio.
• Louis makes his living finding great gold stocks…
Before recommending a stock, he will visit a company’s mines…study rock samples…and grill management with hard-hitting questions.
This “boots on the ground” approach gives Louis an edge over most analysts. It’s helped Louis’ readers make huge gains this year. One of his picks is up 167% since September. Another is up 113% since July.
Louis expects to book even bigger gains in the coming years. Right now, he has 17 stocks in his portfolio that he says could rise 500% or more.
Gold stocks have cooled off…
Today’s chart shows the performance of GDX since the start of the year. As you can see, gold stocks had an explosive start to the year before cooling off. It’s now been almost a month since GDX set a new high.
This has some investors worried. Not us.
For one, we think gold stocks have entered a multi-year bull market.
Secondly, bull markets never move in straight lines. This is especially true for miners, which are some of the most volatile stocks on the planet. After gaining 108% from mid-January to late April, gold stocks were due for a pullback.
If you’ve been wanting to buy gold stocks or add to your holdings, now is a great opportunity. At the same time, we encourage you to use discipline when gold stocks take off again. As Louis often reminds his readers, don’t chase high-flying gold stocks. Let them “come to you” by buying on dips.
Courtesy: Justin Spittler
Every day, there are a whopping 5,500 tonnes ($212 billion) of gold traded in London, making it the largest wholesale and over-the-counter (OTC) gold market in the world.
To put that in perspective, Visual Capitalist’s Jeff Desjardins notes that more gold is traded in London each day than what is stored at Fort Knox (4,176 tonnes). On a higher volume day, amounts closer to total U.S. gold reserves (8,133.5 tonnes) can change hands.
How is this possible?
The infographic below tells the story about gold’s foremost trading hub, as well as the paper gold market in London, England:
London is dominant in global price discovery for gold.
In 2015, it accounted for roughly 88% of gold trade – most of which occurs between banks on behalf of their clients. Further, 90% of London trade is spot trading, which further emphasizes London’s importance in price discovery for gold markets.
While the high-level details of the market are visible, the individual mechanisms behind the London gold trade are less clear.There is very little detailed information provided on physical shipments, outstanding gold deposits or loans, allocated or unallocated gold, or clientele types. Trade reporting also breaks down at a more granular level, and datasets on the GOFO (Gold Forward Offered Rate) were also discontinued in January, 2015.
Almost all gold (95%) traded in London is unallocated and without legal title. This makes it easier to trade, but it also raises concerns about a market that is opaque to begin with. There are 5,500 tonnes of paper gold exchanging hands on paper each day, but there are only 300 tonnes of gold vaulted in London outside of the reserves for ETFs or the Bank of England.
What would happen if there was ever even a small rush to get the physical asset behind the paper? Is there a system in place for such an event, and how does it work?
Top-performing stock First Majestic forecasts metal at $140/oz. Silver prices will climb as users seek to lock in supplies, CEO says.
A major Japanese electronics maker approached First Majestic Silver Corp. for the first time last month seeking to lock in future stock, a sign of supply concerns that could boost silver prices ninefold, according to the best-performing producer of the metal.
“For an electronics manufacturer to come directly to us — that tells me something is changing in the market,” said Keith Neumeyer, chief executive officer of First Majestic, the top stock in Canada and among its global peers this year. “I think we’ll see three-digit silver prices,” he said, predicting the metal could surge to $140 an ounce by as early as 2019.
That’s a bold forecast. While silver prices have rallied 18 percent this year to leapfrog gold as the best-performing precious metal, it settled lower Wednesday at $16.26 an ounce on the Comex in New York and reached a record of just under $50 in 2011. The highest projection among analysts surveyed by Bloomberg is $57 an ounce in 2019.
“That seems aggressive,” Dan Denbow, a portfolio manager at the USAA Precious Metals & Minerals Fund in San Antonio, said by e-mail. “There has been a lack of investment in silver exploration, but with significantly higher prices you will get new supplies. The current cost curve wouldn’t support that price.”
Still, there are other optimistic signs for silver prices rising. Hedge funds expanded their bullish bets on the metal to an all-time high earlier this month. Because the commodity holds appeal both as a store of value as well as for its multiple industrial uses, it surged earlier this year on speculation that the pace of U.S. interest-rate hikes will slow and that Chinese manufacturing may be improving.
First Majestic is the second-biggest silver producer in Mexico, which supplies more of the precious metal than any other country. As such, the company has been a primary beneficiary of the silver rally after choosing not to diversify into other metals like many of its peers. The company earns more than 63 percent of its sales from silver and its share price has more than tripled this year, more than any other company on the S&P/TSX Composite Index. The stock closed Wednesday at C$14.33 in Toronto, giving it a market value of C$2.31 billion ($1.78 billion).
While long coveted for use in jewelry, coins and utensils, silver is increasingly in demand for its industrial applications. Last year, about half of global silver consumption came from such use, including mobile phones, flat-panel TVs, solar panels and alloys and solders, according to data compiled by GFMS for the Washington-based Silver Institute.
“Silver is not a precious metal, it’s a strategic metal,” Neumeyer said in an interview in Vancouver, where the company is based. “Silver is the most electrically conductive material on the planet other than gold, and gold is too expensive to use in circuit boards, solar panels, electric cars. As we electrify the planet, we require more and more silver. There’s no substitute for it.”
For a Bloomberg Intelligence overview of the silver market, click here.
Industrial demand is set to increase, driven by rising incomes and growing penetration of technology in populous, developing nations, as well as thanks to new uses being found for silver’s anti-bacterial and reflective properties in everything from hospital paints to Band-Aids to windows.
“Over the next 10 or 20 years, more and more people are going to be using these devices, and silver is a very limited commodity,” Neumeyer said. “There’s just not a lot of it around.”
Use of silver, including silver investment demand, coin sales and what goes into inventories to settle trades, has outstripped annual supply of the metal in every year since 2000, according to data from GFMS, a research unit of Thomson Reuters Corp. Still, not everyone agrees that the world is headed for a shortage of the metal.
“I would tend to disagree that silver is rarer than thought,” David Lennox, a resource analyst at Fat Prophets in Sydney. “Silver cannot be easily substituted but there’s been no need as it’s in abundance. I’d expect the search for silver would intensify and the search for substitutions would happen long before silver got to” $140 an ounce.
About 50 percent of global demand last year came from price-sensitive sources such as retail coins, jewelry and silverware, which would help curb price increases, said Erica Rannestad, a senior analyst at GFMS in Chicago. “Increased market penetration in emerging economies certainly will result in higher per-capita consumption of silver in industrial uses, but this is over the long run and would not happen overnight.”
Neumeyer said his company has no immediate plans for acquisitions, dividends or to take on any debt. The company raised C$57.5 million from a share sale earlier this month. It plans to use funds internally for development and exploration of its mines, which had suffered from underinvestment during the recent downturn. “The capital will be used to look internally,” he said.
Neumeyer acknowledges his forecasts aren’t always correct. First Majestic had estimated silver at $14 an ounce for this year’s budget. “I think I’ve been wrong every year for the past four or five years.”
Still, he’s unfazed by his past record.
“The silver rally is just beginning,” Neumeyer says. “What we’ve seen in the last two months is just the beginning of the next bull market.”
Courtesy: Natalie Obiko Pearson
Barclays, a multinational bank headquartered in London, owns one of the largest vaults in Europe used to store precious metals. But that won’t be the case for much longer.
Barclays recently signed an agreement to sell its storage facility to ICBC Standard Bank. This is a Chinese state-owned bank, considered to be the world’s largest bank when measuring based on assets.
While Barclays is moving away from the precious metals business, China is embracing it.
The vault, located in London, is in a secret location, but is said to be able to store up to 2,000 tonnes of metals. While it is used to store gold, silver, platinum, and palladium, the gold portion is probably the biggest story.
In terms of location, London is the biggest gold player in the world, boasting as the largest wholesale over-the-counter gold market in the world. It is little surprise that the Chinese government wants to have an even greater presence there.
China has already taken a seat at the London Gold Fix, which sets the benchmark price that is used worldwide for pricing gold products and derivatives.
We also know that China has been significantly increasing its gold reserves, although we still don’t know by how much for sure. If anything, its reported reserves are probably understated. And in just the last couple of years, China has overtaken India as the world’s number one importer of gold.
There is no question that Chinese officials see gold as an important asset for the future. It is less certain if China’s quest to put the yuan on the world stage is closely related to this involvement in gold.
China’s Currency and Gold
It was only late last year that the IMF announced that the yuan would be included in its Special Drawing Rights (SDR) basket of currencies.
Perhaps the big question here is whether China is getting involved more in the gold market in order to boost the yuan as a world reserve currency, or whether China is getting into gold as an alternative to the yuan.
There are many people who believe that the central planners in China are actually going to come up with some kind of a gold-backed currency. While I wish it were true, I think it is a long shot at this point, at least in the next several years.
While the Chinese government has liberalized its markets to a great degree over the last several decades, it is still an economy run by central planners. Unfortunately, the downturn in stocks last year in China showed the authoritarian nature of the politicians there, even in regards to economics.
The Chinese economy is heavily manipulated. The entire banking system is basically state-run. And the yuan is still not a freely floating currency.
It is hard to imagine that the Chinese bureaucrats – who are essentially mercantilists – would have the economic understanding to implement any kind of a gold-backed currency, even if they had the best of intentions.
The Chinese interest – some might say obsession – with the gold market these days probably has more to do with propping up the yuan. Even though there are no gold-backed currencies, central banks hold gold reserves for a reason. It is to help maintain a certain degree of confidence in their fiat currencies. In the case of China, it may also be a way to diversify a little, since it holds trillions of dollars in foreign currency reserves.
As an advocate of the free market, I am not sure whether to cringe or to cheer when I hear all of these stories about the Chinese government getting more involved in the gold market.
The banking system should be set free. The money used, along with the interest rates, should be determined by the free market. In a true free market, it is really unnecessary for the government to own any gold at all. It should be the people owning gold.
Still, given the situation of a mixed economy and fiat currencies, it is probably a good idea for governments to have gold reserves. If they are going to centrally plan the economy, they can at least get something right.
At the far end of the spectrum of socialism, we get the current situation in Venezuela where there is mass poverty and chaos. It is no surprise that gold reserves there have been dwindling down, as the government is trying to find any source of funds it can.
So the fixation on gold coming from Chinese officials is neither great nor horrible. It is a story of central planning, but it is diversification that can lessen the devastation of central planning gone wrong, which it always inevitably does.
Courtesy: Geoffrey Pike
The price for gold — and shares in gold miners — has taken a beating the last five years. You and I have lived through a painful and seemingly endless bear market. For several years, we’ve had little upside news about gold, silver and precious metal miners.
After a long, downward slide, however, gold prices have finally begun to climb higher. Right now is the perfect time to get back into gold and silver investments. And we have four recommendations to get you in on the ground floor.
Jim often speaks about gold moving to $10,000 per ounce or more. Most people just roll their eyes. They assume that it’s a made-up number or that he pulled it out of thin air. Actually, $10,000 is the result of some pretty straightforward math.
Here’s the five-year price chart for gold to illustrate where we’ve been. Let’s follow these graphic facts:
From a high near $1,900 per ounce back in 2011, gold prices steadily drifted downward until about December 2015, to under $1,100. Then in January of this year, the curve turned around.
Like Jim says, when we’re talking about the price of gold, we’re really talking about the dollar price of gold. A lower price in gold simply means the dollar is strong enough that you can buy the same amount of gold with fewer dollars. In December 2015, the U.S. raised interest rates, just like they’d said they would. This resulted in a stronger dollar and suffering U.S. economy.
Realizing their error, the Federal Reserve announced they wouldn’t raise rates again in March (a form of ease). The dollar stopped getting stronger and the downward drift of gold halted.
Then, on Jan. 20, Bank of Japan issued a report saying they were initiating negative rates and triggered gold’s latest upward march. Negative interest rates were an attempt to kick-start the economy by incentivizing people to spend their money, since they’d lose money by saving it in banks. I recall seeing that report. My first thought was: That’s nuts. People will stuff mattresses with cash and buy gold.
I was right. In January, gold prices began to climb, taking silver along for the ride. There was a run on safes in Japan so that people could store large amounts of cash and precious metals at home and avoid negative interest rates.
As gold and silver prices rose, mining shares soared across the world. Many major, intermediate and junior firms benefited. Long-suffering, die-hard precious metal investors enjoyed a pleasant winter and spring.
But does the price upswing of the past few months mean that we’re in for a new, longer-term era of strength in gold? Will higher gold prices support better returns for mining shares and related investments?
Yes. Here’s why…
Based on Jim’s analysis, the economic elites of the world want inflation, and they’re going to get it — one way or another. Rising inflation on a global scale will mean that currencies are worth less, so it will take more of any given currency to buy the same amount of gold.
Plus, everything that made the 2008 market crash so painful is even worse today. Consider the long-running drama of too much private and government debt (the same debt the government is hoping to erase with their manufactured inflation), “too big to fail” banks (just take a look at Nomi’s article), derivatives, fake-financial engineering by large companies and dodgy loans for housing, cars and college tuition.
These financial and monetary problems aren’t limited to the U.S., or even advanced economies like Europe and Japan. Entire regions across the world are in dire economic distress and mired in economic uncertainty.
What do people buy in times of economic uncertainty? Gold.
Last fall, the dollar got stronger and the price of commodities crashed. Earnings at almost all energy companies have fallen through the floor. Major companies like Exxon Mobil, Chevron, Shell and many more have been downgraded by credit rating agencies. Most coal companies are bankrupt. What was once a strong point of the North American economy is now weak.
Now think back to 2011 and high-priced oil from the Middle East, West Africa, Brazil and more. Or solidly priced commodities like iron ore from Brazil and South Africa. Or agricultural commodities like coffee, chocolate and soybeans from places as far afield as Ivory Coast, Vietnam and Argentina. If you were a commodity exporter, your existence was la vie deluxe.
That 2011-era commodity-energy windfall is not the case anymore. Far from it. Indeed, most globally traded commodities are currently in price doldrums. Because of that, many commodity-exporting, emerging-market nations are all but insolvent.
A broad cash flow crisis has hit the whole world due to low prices for emerging market commodities. This is why countries will be onboard with the plan Jim outlined for global inflation. They all desperately need their commodity export prices to go back up to stoke economic growth.
This is the perfect time to get back into precious metal. Gold is due for a new, upward run. And in my opinion, gold miners are going to be the most profitable way to take advantage of the rising price of gold and precious metals. That said, while gold mining stocks follow gold to a great extent, but they’re more volatile.
Jim has described gold mining stocks as a leveraged bet on the physical metal: When gold goes up, mining stocks go up even more. But when gold goes down, mining stocks may fall faster than the metal itself.
Courtesy: Byron King
It wasn’t much, a bit less than 4 tons to be exact, but today marked the first day in nearly a month that GLD reported a drawdown in gold holdings.
The last such occurrence was all the way back on April 25.
Considering the amount of gold that has been added since that time (66 tons), a 4 ton reduction is minor. What we will not want to see however is a PATTERN of falling reported gold holdings. That has been the one bright spot for gold that has held steady even in the face of weakness on the gold chart at the Comex. If this changes, then we have an issue.
Also, the mining shares were whacked so hard today that the HUI/Gold ratio took a pretty big hit. We will want to see how this fares as well.
Let’s recap what we have so far:
1.) Gold chart for Comex gold is bearish based on the indicators and the fact that it is trading well below its 50 day moving average
2.) The HUI to Gold ratio has fallen the last two days in a row.
3.) The HUI is sitting right on top of its 50 day moving average with its technical indicators in a sell mode
4.) GLD has just reported its first drop in gold holdings in a month.
These are objective facts that need to be considered by anyone trading the metal. Obviously, both gold and the mining shares have had a stellar run since January. That has come to an end for the time being. Whether this is just a correction in a larger trending move higher is unclear.
Look at the weekly chart and you will see why I am saying this.
Even after its sharp fall the past three weeks, it still remains above $1200 and above the former downtrending price channel that contained it for nearly three years. That is a positive.
The flip side is that the weekly ADX, which had been steadily rising since earlier this year, has now turned lower indicating that this is now a pause in the uptrend. The DMI lines still show the bulls in charge with +DMI remaining above -DMI. The two lines are moving towards each other which can now be expected since the ADX has turned lower.
We will get a better sense of the intermediate term prospects based on what those two DMI lines do should they come close to each other. If the +DMI reverses higher and the -DMI reverses and moves lower, then the uptrend stands a good chance of renewing. If not, well, that is another story.
I would say much depends on what the Forex markets do with the US Dollar. If the market becomes convinced that the Fed is indeed going to hike, that will support the Dollar and it should pressure gold. However, it is not just whether or not the Fed hikes; it is the tone they adopt and whether or not the market believes that the Fed has indeed made the transition into an interest rate raising posture moving forward.
Keep in mind that the Fed hiked rates for the first time in almost 7 years back in December. But look at what happened to the gold price. The reason?
Market players were convinced that it was a “ONE AND DONE” move for a while. In other words, the interest rate hike was over and done with and that was that. No one expected a sudden barrage of interest rate hikes in succession because the Fed said it was going to be data dependent. While they did state that they would like to get 4 hikes done in 2016, hardly anyone believed that was going to happen because the economic data was not strong enough. Even the Fed said as much!
Additionally, there were cross currents from overseas in the form of Emerging Market concerns, China woes, ECB woes and Japan woes, just to mention some! In that environment many believed that the Fed could not run the risk of sounding too hawkish because of where the US Dollar was trading. A strong Dollar, one up above the 100 level basis the USDX was causing problems.
Anyway, the big question the market is going to be asking is can the Fed indeed hike rates at a pace that would send the US Dollar higher with all the negative side effects from that or will any potential rate hike be it for a while once again? If the answer to that question becomes one in which the market believes a slow but steady tightening cycle has arrived, then it is difficult for me to see gold moving higher mainly because of the impact of a stronger Dollar and higher rates. If the answer to that question is the latter, then gold should recover as it did in December of last year when the Dollar actually began to weaken after that December rate hike.
The big thing to remember through all of this is something I have been saying over and over again” DO NOT GET MARRIED TO ANY VIEW OR POSITION”. Stay objective and keep your emotions out of things. Gold is an investment. it is an asset class that sometimes is in favor and sometimes it is not. Trading/investing is about making wise decisions to attempt to increase your wealth. It is not about joining in some sort of movement. Leave that for those who are more interested in “being right about things” ( in their own minds) rather than being successful. Do not forget this.
Courtesy: Trader Dan
The Royal Canadian Mint just published its Q1 2016 Report, and the silver bullion coin sales figures were stunning to say the least. Not only did sales of Canadian Silver Maple Leafs surpass its previous record during the third quarter last year, it did so by a wide margin.
Why is this such a big deal? Because Q1 2016 sales of Silver Maples topped the Q3 2015 record, without surging demand and product shortages. Last year, there was a huge spike in retail silver investment demand due to the supposed “Shemitah” or the collapse of the broader stock markets. Investors piled into silver in a big way as they perceived a year-end market crash was inevitable.
During last August and September, some websites stated 2 month delivery wait times for certain products such as Silver Eagles and Silver Maples. With the huge spike in demand, sales of Canadian Silver Maples reached 9.5 million oz (Moz) in Q3 2015. Although, once investors became more relaxed as the broader markets turned around, demand for physical silver investment cooled down. Thus, Silver Maple sales declined to 9.1 Moz in the last quarter of 2015.
However, something very interesting took place during the first quarter this year. Sales of Silver Maples jumped to an all-time record high of 10.6 Moz:
Actually, I was quite stunned by the figures published in the recent Royal Canadian Mint Report. Sales of Silver Maples jumped 1.1 Moz in Q1 2016 vs Q3 2015, with no real spike in overall retail investment demand. Which means, investors bought more Silver Maples in Q1 2016 than any other quarter in history.
Furthermore, if Silver Maple sales continue to be this strong, the Royal Canadian Mint is on track to sell over 40 Moz compared to the 34.3 Moz in 2015. If Silver Eagle sales also continue on their strong trend of 1 Moz per week, the U.S. Mint could sell over 50 Moz of these coins. Together, these two official mints could sell over 90 Moz of Silver Eagles and Maples in just one year.
This goes to show investors who are frustrated by the short-term price moves of gold and silver, that the market continues to purchase record volumes of these official coins… regardless.
That being said, the precious metal community needs to focus on the Mid-Long Term fundamentals of buying and holding gold and silver. Precious Metals analysts would serve our industry better if we forgo the HYPE and $50 Silver & $2,000 Gold This Year MANTRA.
I do believe the value of the precious metals will rise to levels much higher than we can imagine, but it will come when the Greatest Financial Paper Ponzi Scheme finally collapses. So, it’s best to continue focusing on the fundamentals, rather than short-term price predictions.
Russian oil exports to China more than doubled in April 2016 compared to numbers from the same month last year, according to a report by Russia’s state-run news agency Russia Today.
By the calculations of General Administration of Customs for the People’s Republic of China (PRC), the 52 percent year-over-year increase amounted to a transfer of 4.81 million metric tons between the two BRICS countries. In March, the imports reached 4.65 million tons.
Two of the PRC’s three major oil suppliers—namely, Saudi Arabia and Iran—saw their Chinese oil orders decline year-over-year. Saudi Arabian oil imports fell by 22 percent to 4.12 million tons, and the Iranian figures dropped by 5.1 percent to 2.76 million tons in the same monthly comparison.
China’s third major supplier, Angola, increased its business with China by 39 percent to 3.98 million tons in an April year-over-year analysis.
A recent report by the International Energy Agency (IEA) said Russia had overtaken Saudi Arabia as China’s leading supplier of crude oil at the end of last year. Russia Today’s analysis says its home country’s exports to the PRC had more than doubled over the course of the past years—an increase equivalent to 550,000 barrels a day.
The “oil friendship” between Russia and China is two-sided: the Polish Centre for Eastern Studies said China became Russia’s main oil customer in 2015 as well.
New projects worth several billion dollars between Moscow and Beijing have led the two countries to cooperate closely regarding energy industry issues.
Sergey Andropov, the Vice President of Russia’s sole oil transport company, Transneft, announced in March that China had agreed to buy 27 million tons of oil from Russia in 2015. The substance will be transported through the Eastern Siberia-Pacific Ocean (ESPO) pipeline, which was built in 2011 as a project between Rosneft, Transneft, and China National Petroleum Corporation (CNPC).
An estimated five million tons of oil runs through the pipeline every year, and new plans will soon increase that number to 15 million tons a year.
Long-term contracts will lock in China’s status as a major importer of Russian crude over the upcoming years as the PRC’s consumption increases along with its development.
Courtesy: Zainab Calcuttawala
The world’s #1 producing nations for platinum and copper are facing a common problem this week. And latest developments suggest this issue could be a potentially explosive one.
The challenge is labor negotiations in the mining sector. With both the world’s top platinum miner South Africa, and top copper producer Chile facing tough talks with strong local unions.
South Africa’s powerful platinum mining group Association of Mineworkers and Construction Union (AMCU) said last week it is beginning internal meetings as of last Thursday. To decide on pay demands the union will put to platinum mining companies during upcoming wage talks.
The AMCU demands will be critical for South Africa’s platinum sector. With the union being the largest in the industry — serving major miners including Anglo American Platinum, Lonmin, and Impala.
The union is meeting now because its current two-year pay agreement with those companies expires at the end of June. Which means the next several weeks are likely to see some intense negotiations — especially given that the last round of wage talks in 2014 ended in a 5-month strike that crippled South Africa’s platinum sector.
At the same time, Chile’s copper sector is facing a similar issue. With the country’s national mining body Sociedad Nacional de Minería (Sonami) noting that over half of the country’s largest miners are facing labor negotiations soon.
Sonami’s president Alberto Salas said at a recent industry event that over 50 percent of Chile’s largest miners are due for wage talks over the next 12 months.
That includes the world’s largest copper miner, Codelco — which faces negotiations with 9 different unions across its various operations. Anglo American also has talks upcoming with 4 unions, while miners like Antofagasta, Kinross, BHP Billiton and Glencore all have separate labor negotiations scheduled.
Most of these companies have indicated that wage offers are likely to be restrained — given the current lower copper price. Watch for the reaction of the unions to these offers, and for any signs of brewing unrest that could impact production in both of these critical countries.
Here’s to talking it out.
Courtesy: Dave Forest
First it was Stan Druckenmiller, now it’s George Soros. Following billionaire former hedge fund manager Druckenmiller’s announcement that gold was his family office fund’s largest currency allocation, we learned last week that his old boss, billionaire investor George Soros, purchased a $264 million stake in Barrick Gold, the world’s largest gold producer, after liquidating $3.5 billion in U.S.-listed stocks. Additionally, he disclosed owning call options on a gold ETF.
Soros’ investment can be held up as further proof that sentiment toward gold has decidedly shifted positive, following the challenging last three years.
London-based precious metals consultancy Metals Focus just released its Gold Focus 2016 report in which the group calls an end to the gold bear market that began in late 2011, after the metal hit its all-time high of $1,900 per ounce. “We are optimistic about gold over the rest of this year and our projections see it peaking at $1,350 in the fourth quarter,” the group writes. Global negative interest rate policy fears have reawakened investors’ confidence in gold as a reliable currency and store of value.
The group adds: “In the near term, there may well be some liquidations of tactical positions.” This is to be expected, especially around the start of summer, based on historical precedent.
We’ve noticed that mining companies which have deleveraged their balance sheets this year have been some of the biggest gainers. Barrick, now Soros’s largest U.S.-listed allocation, started 18 months ago.
Glencore, Teck Resources and higher-risk junior producers such as Gran Colombia bounced off the canvas after being knocked down.
Gold equities always have a higher beta than bullion. Usually a ±1 percent move translates into 2 to 3 percent in gold stocks.
Regardless of it being a bull or bear market, there are still fairly predictable intra-year trends in the price of gold. Below is an updated composite chart of the metal’s historical yearly patterns over the last five, 15 and 30 years, courtesy of Moore Research.
In all periods, gold contracted in May to early summer, then rallied in anticipation of Ramadan—this year beginning June 4—and India’s festival of lights and wedding season. India has one of the largest Muslim populations in the world, and for at least 5,000 years they’ve adhered to the tradition of giving gold as gifts during religious and other celebrations. .
Predictably so, the yellow metal has retreated somewhat this month, following its best start to a year in 30 years and its best-ever first quarter for demand. As I told Daniela Cambone during last week’s Gold Game Film, this pullback provides an attractive gold buying opportunity
The five-year period decoupled from the other two starting in mid-autumn, but the annual losses in 2013 (when the yellow metal fell 28 percent), 2014 and 2015 skewed the data. Metals Focus sees gold following its more typical trading pattern this year, possibly climbing to as high as $1,350 an ounce
In the near-term, gold is threatened by a rate hike, possibly as early as next month’s Federal Open Market Committee meeting. The metal fell to a three-week low this week on hawkish Fed minutes. If the Fed ends up delaying a hike, it could give gold the chance to take off.
One of the concerns the Fed has right now is the depreciation of the Chinese renminbi. In a special report, CLSA estimates it could fall as much as 25 percent before rebounding somewhat. Because the trade volume with China is so massive, the fear is that it could affect the U.S. economy
This would have many obvious negative consequences. For one, because China’s oil contracts with the Middle East are denominated in renminbi, not dollars, Middle East suppliers would be hurt.
CLSA points to several winners, however, including investors. The devaluation could very well “represent the best opportunity to buy Chinese assets that investors have had since the financial crisis,” the investment banking firm writes. China’s materials sector, local exporting producers and mainland gold producers should also benefit. The renminbi will “inevitably” fall, CLSA says, “irrespective of economic fundamentals, as a free market works out what it is worth.”
It’s little wonder then that, in the meantime, the country’s consumption of gold has skyrocketed in recent years as it vies to become one of the world’s key gold price makers. (Remember, China just introduced a new renminbi-denominated gold fix price.)
In addition, it was reported last week that Chinese bank ICBC Standard just purchased one of Europe’s largest gold vaults from Barclays, located in London, for $90 billion. This will help give the country greater control over gold transactions around the world, about $5 trillion of which are cleared in London every year
Likely to help gold this summer are geopolitical events, specifically the potential “Brexit” next month when U.K. voters decide on whether to remain members of or leave the European Union.
Various analysts have warned that such an event could trigger a crisis with both the euro and pound, which might spread to other economies. A recent Bank of America Merrill Lynch survey found, in fact, that the idea of a Brexit has risen to the top of global investors’ worries. What’s more, no consensus was reached during a meeting among G7 nations this past weekend on how to deal with fiscal policy, other than to take a “go your own way” approach.
In the past, gold has been used as a hedge against the risk of not only negative interest rates but also inflation.
High inflation might also be coming to the U.S. thanks to the Labor Department’s new regulation on overtime pay, which doubles the eligibility threshold from $23,660 a year to $47,476 a year, on condition that the worker puts in more than 40 hours a week. It’s estimated that the ruling will affect 2.2 million retail and restaurant workers, among others.
President Barack Obama’s heart is certainly in the right place by wanting to boost workers’ wages. But it’s important to be aware of the unintended consequences that have often accompanied such sweeping edicts throughout history. We could end up with rampant inflation as companies will have little choice but to raise prices to offset the increased expense. Again, having part of your portfolio invested in gold and gold stocks, as much as 10 percent, could help counterbalance inflationary pressures on your wealth.
Courtesy: Frank Holmes
Conditions for a rate increase by the Federal Reserve are “on the verge of broadly being met,” Eric Rosengren, president of the Federal Reserve Bank of Boston, told the Financial Times … According to an article on Sunday, Rosengren told the FT he was getting ready to back tighter monetary policy as economic and financial indicators had become more positive. -Reuters
The more you find out about how central banks operate, the stranger the system seems.
Gold has moved down of late while stocks have been mixed. But the last time the Fed raised rates in December, stocks nearly collapsed.
Are we supposed to believe this time round there will be a different outcome? According to some at the Fed, the answer is yes.
Eric Rosengren explains that “economic and financial indicators [have] become more positive in the US.
How does he know? We’ve examined these sorts of indicators and they seem exaggerated, tending to show progress where there is none.
Here’s an elaboration from John Crudele in The New York Post (late 2014):
The economy isn’t really doing what the statistics say it is doing. Our nation’s economic statistics are nipped and tucked, massaged, managed, fabricated and dolled up. In short, our statistics are wrong and Main Street folks know it. Here’s what a Wall Street hedge fund mogul, Paul Singer, head of Elliott Management Corp., told his clients the other day:
“Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth,” Singer wrote. “When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.”
Is Rosengren aware of these manipulations? It doesn’t seem to matter. For some reason, he’s sure the US economy is headed in the right direction:
“I want to be sensitive to how the data comes in, but I would say that most of the conditions that were laid out in the minutes, as of right now, seem to be … on the verge of broadly being met,” said Rosengren, a voter this year on the Fed’s policy-making Federal Open Market Committee.
Minutes of the Fed’s April meeting released last week showed Fed officials believed the U.S. economy could be ready for another interest rate increase in June.
Not even Bloomberg believes this time. In an article entitled Behind the Fed’s Faulty Logic on Interest Rates, Ramesh Ponnuru argues that, “The Fed shares the widespread view that the prolonged period of low interest rates we have been experiencing is abnormal and needs to change.”
And then there is this:
Central bankers may also want more room to maneuver in the event of a recession: It won’t be able to reduce interest rates very far if they are already low, so why not raise them when the economy is doing well?
The article points out that the Fed doesn’t seem very flexible when it comes to inflation targeting. Its two percent inflation target seems like a “ceiling” according to Ponnuru.
This means that the Fed will take proactive steps when it comes to damping price inflation, and these could damp economic activity as well.
We’ve argued that like other central banks the Fed cannot be aggressive about interest rates because the US economy is in what might be characterized as a depression. What else do you call it when 90 million Americans are not seeking formal work within the system?
It could be that Yellen and company understand that further economic blows are on the way. These will call for further rate cuts. And they are racing to raise rates beforehand.
This assumes that the Fed is not willing to pursue negative interest rates, and that is probably a good assumption. Negative rates would greatly complicate the Fed’s position as regards the American public and the alternative ‘Net media.
Ponnuru comes close to arguing this as well. He writes, “… Higher interest rates are an end in themselves. That dubious assumption seems like the only way to make sense of the Fed’s current plan.”
Will the Fed actually follow through? Sometimes, the speculation alone accomplishes the purposes that Fed has in mind. For instance, the gold price against the dollar immediately suffered from rate-hike speculation.
At some point – as this past December – the Fed will have to act or lose credibility.
Conclusion: Another hike will likely have a negative equity impact, just as in December. Will gold then continue to move down … or will it be the “last asset-class standing.” We would suggest the latter rather than the former. Right now, the markets seem to have it backwards.
Source: Daily Bell
Coming up David Morgan, the Silver Guru and publisher of The Morgan Report joins me to break down the recent market action in the metals. David also explains why he believes 2016 is going will be a pivotal year and why he thinks the coming year or two will go down in the records books.
Mike Gleason: I’m happy to welcome back our good friend, David Morgan, of TheMorganReport.com. David, it’s always a pleasure to talk with you. How have you been?
David Morgan: Mike, I’ve been well and thank you for the interview.
Mike Gleason: We’ve seen some very positive and encouraging market action in the metals this year with silver up close to 19% year-to-date, and gold up 18% as we’re talking here on Thursday morning. Although, the precious metals are pulling back sharply this week. Assess the market action so far here in 2016, and talk about what’s driving this recent pullback.
David Morgan: Well, early on, I stated that we would see a good 2016. I still believe that. Obviously, we got off to a great start. Gold had its best first quarter in like thirty-five years, and that’s not me saying it. That is like Reuters, Bloomberg, mainstream financial media. That’s a fact. However, that’s based on percentage terms. In other words, it’s had a huge run up on a percentage basis, but from a very low level. And the same thing with silver. So one, they were just really oversold. It’s been way overdone as far as time duration. I mean, silver’s been in the doldrums for almost five years, gold around the same amount of time, slightly less.
Time wise, it probably was due. Sentiment wise is very difficult, because even though fundamentals are important, and I look at them very carefully, technicals are a tool that is useful most of the time, I use that as well, but the hardest thing in any market is to get the psychology, because that’s what really drives markets. Markets are based on what people think the future is going to portend, and based on that, you’re going to get a move in a market.
Because of that fact, what we’ve seen is a sentiment change, and it’s only because the market was so washed out, particularly the mining shares. The mining shares were at a mathematical formula I don’t really want to go into, but if you go by what the probability is of them to be that low relative to their true value was unbelievable. Certainly a good time to buy, but you had to have some patience. Obviously, all that’s come up. And so the real reason that it’s coming off now is believe it or not a couple things. This is more opinion than fact because how do you put psychology on a chart? Or, how do you put psychology into a fundamental analysis? You don’t. But when you have forty years in this market, and not only this market, but the markets. I mean, stocks, bonds, and all this stuff. I mean options, ETFs, whatever. So the idea was two things for me. I called it. I said to my subscribers that one, I saw January as a given. You’d see a strong move up in January, and probably into April, and maybe through April.
This was kind of ongoing as I issued each report for the month, I extended that, because I had better data to work with, and also on the premium service, where I actually use my voice in the charts and whatever else I’m going to show to the website members. And I showed them that sediment was too high, and the Commitment of Traders was at an all-time high relative to the year 2000, and that I thought this was it. That was at $18 silver, and $1,300 on the gold. Lo and behold, that’s what’s taken place.
I will not tell your listeners what I think the bottom is going to be. I say, “think,” because no one knows. My members know. Also, there’s a lag. Because the shares have gotten really ahead of themselves, I also warned everyone to please don’t let all these profits slip away, because I just put out an update on the blog that what we really have in the shares, and these are top shares, a lot of them, not just little, small companies, have gone up the equivalent of silver going from $15 to $45. These shares have gone up that much in a percentage basis.
Where do you think your business would be, Mike, if silver had gone from fifteen to forty-five? I mean, almost anyone that’s ever bought it over the last five years would be sitting on a profit, except for a very few that paid more than forty-five, which would only be for a few days. So everybody would be singing the praises of silver right now. That, of course, isn’t what took place. We got a nice gain. We got a twenty-percent gain. We got, basically, touched under $14. We’re sitting toward I think sixteen-and-a-half or so. I haven’t looked, but I looked just before we got on the show. The mining shares have just been on fire. Now they are starting to sell off, and they will continue to do so. However, when the bottom in silver and gold take place, which isn’t going to be a new low, in my view, I really don’t believe that’s going to happen, the shares will sell off, but they will not go to their lows. They will hit an intermediary point and then they will start back up.
Mike Gleason: Yeah, certainly, you got to think it’s constructive. You don’t want to see markets go straight up in the air. It’s good to see some backing, and filling, and some sideways consolidation, and corrections. I think that’s a healthy market, and we’re certainly getting that here now.
Now expanding a bit on the mining shares, in your book, The Silver Manifesto, you advocate starting with a core position in the physical metal itself before looking at things like mining stocks. Now, we need to point out that while gains in the miners can be exponential, the losses can also be crushing. But as more and more money flows into the paper based gold and silver instruments, whether it’s the ETFs or the mining stocks, it seems we could really see this thing feed on itself and run higher. And instead of the 100% advance that we’ve had this year in the gold stock mining index so far, we could see it run up to 200%, 300% or higher. How should an investor approach the mining sector from an investment point of view? Because your flagship newsletter, The Morgan Report, is focused on this very subject.
David Morgan: Right. Well I go into great detail. I’ve never put it in the public domain, although I probably could, but anyone that’s followed my work, more than just a cursory level, in other words, listen to more than maybe three interviews, I basically do, and I’ll repeat what you said, Mike, is you have to start with the core positioning. You need to have physical metal, or else you’re really not a metals investor. I’m very hardcore about that, and I’m not a bullion dealer, as you well know. Then, after that, you want to mitigate risk with the reward. The best place for that is top tier, unhitched, cash rich mining companies. Then, you go in the mid-tier, and then you can speculate. That’s how we run The Morgan Report from its inception. That’s your best ability for the average investor, even a sophisticated investor, to make the most money with the least risk. And of course, there’s other methods that you can use. But that’s how you do it. That’s how you employ it.
Now, when you are a website member, I have the flagship, read this first document called, How To Use The Morgan Report. I go through a hypothetical, “If you have this kind of liquid net worth,” and I give a number, “then ten percent of that would be devoted to the sector, and you would have this much in gold coins, this much in silver coins. You’d have this much in the top tier.” So I go through it in an example now. Then, of course, I state not one size fits all. If you’re young, no kids, no responsibilities, huge income, you might devote a little more to this speculative side, that kind of thing. So how to build a position that’s going to be very, very beneficial to your financial health when this next leg really goes. And every time that I give this information out, one out of ten will either comment, or call me, or usually email me and thank me that it was a well-reasoned approach.
The problem is people hear me, or others – there are others out there, many of them are very good – but they decide that precious metals is the only way to go, and they allocate too much to that class. Not only too much to the precious metals, but some just go into the shares only and the wrong kind of shares. And so these are problems that I want everyone to avoid. Of course, again, coming back to my responsibility, I outline it very specifically. I probably overdid that, Mike, but it’s important to me because I don’t want to drill on about me, I want to make this about your questions, but I made all these mistakes, at a much younger age. And because of that, I learned from my mistakes. I don’t want anyone that’s working with me, that subscribes, that I have any influence on, they don’t have to do what I say, but I’d sure like them to listen to make up their own mind.
Mike Gleason: Well, I’ll certainly sing your praises. You’ve always had this fantastic way of maintaining a level head throughout the last few years. You’re not just pumping hype all the time. And I’ve always respected that about you. You’ve been there, you’ve done that, and I think all that experience people can really gain a lot from, so kudos to you on that.
So once again, and sadly, the news this week and the big driver in the markets has been the Federal Reserve and their rhetoric. Comments about how the Fed was this close to raising in April, came out the other day. That certainly hurt the metals markets, as the tone has turned hawkish for the moment. The on again, off again interest rate raising program is apparently back on for now, and the prevailing thought is that we’ll see them raise the Fed Funds Rate in June.
David, to me this is just so ridiculous how the markets can continue to hang on every word the Fed utters. One has to wonder just how much longer they’re going to be able to cry wolf on raising interest rates, and then come up with a reason to not do it at the last minute, just as they have at every meeting since that paltry 25 basis point hike last December, which was the first hike in nearly a decade. What are your thoughts on the Fed, its credibility, and where they go from here?
David Morgan: Well, it goes back to our initial opener – to psychology. Every time the Fed makes this pronouncement, this rhetoric, good word, then you get this knee jerk reaction, and it’s all psychological. I think it’s really contrived, not only what’s contrived out of what the Fed utters, what Janet (Yellen) has to say, or one of the Fed governors, but also what the mainstream will do with it. They basically have the most money so they can move the markets the easiest. And I think it’s basically contrived at this point. Going further on to discussion, because most people that listen to shows like yours are awake and aware, they know what’s absolutely meaningless. So I think the Fed has lost credibility, not only with the people that really are savvy investors, because most savvy investors have a position in real assets, not necessarily precious metals, although most do, but oil, or real estate, or something tangible.
Most beginners are usually not as well diversified. In other words, they’re not as seasoned as an investor. They don’t have as much experience. Doesn’t mean that some of these young guys or girls can’t just really rip it, and some do, but back to what you said. This is at the point of crying wolf. I think the Fed’s really been discounted quite a bit. I mean, if you look at what’s happened, and Mike, I’m not telling you anything you don’t know, I’m just addressing myself and the listeners. The dollar has been shoved off to the side more, and more, and more. It continues to be so with the BRICs and the circumventing the SWIFT system for settlement on electronic transfers, and what the Asian Infrastructure Investment Bank is doing and plans to do to really build infrastructure and build things that are of value to the human race.
The dollar’s losing clout, so the only way that they can make the dollar look good at this point and I’ve written about this, and I’m kind of standing alone here, is to do this interest rate increase. Of course so talking about it moves markets. Whether or not they actually do it, well show me, don’t tell me. So they’re losing it. Really only way they can gain, I wouldn’t say credibility, although it might have some increase in credibility, is to actually raise rates again. I don’t rule that out, as bizarre as that sounds, Mike. Again, I’m one of the few that thinks this could happen. I’m not saying it would happen, but if everyone is getting out of the dollar, and all of these other currencies are in negative interest rates, and you’re in positive, where do you think the money’s going to flow?
And that’s actually, if you analyze it from my perspective, means that that’s how desperate they are, because to get people that are getting out of the dollar, such as China, for example, selling like a trillion dollars worth of treasuries in a very short amount of time, and not moving interest rates up. How does that happen? Well, it happens because these markets are so manipulated, that’s how. But nonetheless, this is what’s taking place, and so to get credibility back into the dollar, then it’s like a third world country, or an emerging market currency. It’s like, “Well look we’re paying ten percent interest.” Look at what Deutsche Bank’s doing (laughing). Sorry for the laugh, but it’s well earned. I mean, Deutsche Bank is so desperate, and they’re just teetering on the very edge that they’re giving us five percent return if you put some cash in with them.
What I knew back in the 80s was that when the interest rates went to like 17% to 20% on the short to long range on the U.S. debt, on the T-bill to the treasury bond, people didn’t really think that an interest rate is a function of not only return, it’s also a function of risk. In other words, when you borrow money from the loan shark, he doesn’t charge you 2%, he charges you 20%, which means it’s a very high risk investment. And I saw the risk, and was basically over-educated, because I thought, “This might be it. This could be the end of the dollar.”
Of course I was dead wrong. The best thing you could have done was to cash out of gold and go into the bond and stay there for thirty years plus, which is where we’re at right now, which means we’re at the opposite end of the spectrum. Right now what you want to do is you is you want to short bonds and go long gold. Will that be the trade for the next thirty years? I doubt it, but the biggest trade out there will be shorting the US debt market.
Mike Gleason: Switching gears here a little bit. When we spoke in early March, we talked about how gold was outperforming silver, and you were a bit concerned at the time by that, because we do like to see the whites leading the yellow. Now, silver played major catch up there in April, and we saw the ratio go from as high as 83 to 1 in February, all they way down to about 71. It’s now about 76 as we’re talking here, thanks to this week’s pullback, which has bumped it up a bit. What is this improvement in silver’s performance versus gold tell you, this week’s pullback notwithstanding?
David Morgan: Well, the confirmation was very key, and it happened, as you said. And I was concerned, and not overly. I felt silver would eventually do it. It had me kind of on the edge of my seat. What it says when the ratio starts to move in the favor of silver, which it has as you outlined, it’s another confirmation that we are in the beginning of the bull market again. So you have the confirmation of price action, you have the confirmation of mainstream financial press touting gold to the positive, you’ve got the confirmation of the gold, silver ratio dropping in favor of silver. So these are more and more hard facts, not opinions, that people can rest assured that the worst is behind us and brighter days are ahead of us.
Mike Gleason: Our mutual friend, Steve St. Angelo, at the SRSrocco Report, put out a great article just recently, highlighting the massive amounts of North American coin demand between all the sales of the Silver Eagles and Silver Maple Leafs. There’s literally not enough silver mined in the U.S. and Canada to supply the ounces needed to just mint these two sovereign coins on an annual basis, which is a huge difference from where we were ten or fifteen years ago. The U.S. has recently become a net silver importer, and you have to wonder just how much of the white metal is out there based on the surging demand, not just from coins, rounds, and bars, but also from the industrial side of things. So what’s the latest on the supply demand situation in silver? Are we going to start seeing a shortage, David?
David Morgan: Not for a while, in my view. It’s a very studied one. In fact, Mike, I did a webinar for free and for fun for everyone called “Is There A Silver Shortage.” I went through it. Anyone that signed up for the webinar was able to attend that for free. If they weren’t on the call, then they missed it, and we moved it into our members only part of the website, so any website member can see that. Steve and I are close, but the truth of the matter is, it depends on how you look at it. I mean there’s two ways to look at it.
The Silver Institute looks at it one way, and CPM Group looks at it a different way. Before I get started there, I want to digress and say that we are going through both studies right now. The Silver Institute, I think, is $225, and the CPM one, is I think, $160. You’re looking for those two prices combined for about what an annual subscription of The Morgan Report is. We don’t only read them, we study them, and we analyze them, and we put that out in the June issue, so that’s what we’re going to do.
You’d be saving yourself, even if you’re that interested in the silver market, which The Morgan Report does much more than the silver market, Mike, as you know, but certainly it is one of my main studies, so we’re going to go through it for everybody in the next issues. But having said that, the way CPM looks at if you’re in a silver shortage or not is our above ground stocks of silver building or dwindling. And they’re building. The above ground stocks are building higher and higher and higher. If you go back to the low, which I did in this webinar, the low point was in 2006, and there was about 500 million ounces of fine silver above ground. Now, ten years later, we’re at about two-billion ounces above ground, so we’ve gained one-point-five billion ounces in the last decade.
So CPM says we’re not in a shortage, that the above ground silver supply’s growing. If you go to what Steve writes about, and the way The Silver Institute looks at it, they’ll tell you that we’re in a deficit. From the way they analyze the market, they have every right to say it that way, because what they state is that if you look at total demand on an annual basis, versus total supply, which means mining supply and recycling combined, then that number is a lower number than the total demand number by like 120 million ounces, and therefore, on an annual basis, you are in a deficit. Where’s that 120 million ounces going? It’s going into the above ground stockpiles. In other words, it’s going into the pockets of investors, be them individuals or be them sovereign well funds, or nation states, or whatever. Although, no real nations buy silver for monetary purposes, but it’s the investment demand. So is that a deficit? I’d say yeah, it probably is, but does it add to the above ground stockpile? The answer is yes it does.
Mike Gleason: Yeah, interesting answer. I guess maybe one of the follow ups on that is that silver might be going into strong hands right now, and it’s going to take much higher prices to pry that silver out of those hands. I guess you could maybe make that case as well, but it’s all part of the discussion.
David Morgan: Let’s inspect that case, if I could jump in again. I mean, this may worry some silver investors because they don’t really understand markets that well, excuse my arrogance, but it’s true, because first of all, if you thought it through, you’d never buy gold. I mean, gold’s always adding to the above ground supply, every year, and yet you’ll see in articles that gold’s in a deficit. Again, by the metrics I just outlined it is. What it really means is like any investment, it’s not so much what the supply is, it’s like a stock. We can use a stock as an example. It’s not so much how many shares are issued, it’s how they’re held and what the float is. So if IBM, for an example, has got numerous shares out there, but a lot of them are held by institutions and individuals, and the float is the amount that’s willing to be sold at today’s price. If that’s very small, then any supply or demand change will have a pretty strong effect on the price.
So I just want to outline what you’re saying, because it’s very important. This is how markets move. What’s interesting particularly about silver, and investments in general, is it’s counter-intuitive. The higher the price goes, the more people hold on. Why? Because they don’t know how high is high. They’re going to either hold what they have and wait for the price to continue higher, or buy more on the way up, which is a momentum play, which is how most of these computer programs are constructed now. So there’s a lot that can happen regardless if it’s above ground stocks are building or not. I’m just trying to be honest here. I’m just telling the truth, letting people know, because there’s a lot of let’s say … I don’t want to say it’s misinformation, but it’s not well explained information on the internet. Is that a fair statement, Mike?
Mike Gleason: Yeah, certainly. Then, of course, the investor psychology piece that you talk a lot about is very hard to quantify, and one that you do have to account for. Bu it’s difficult to pin down as to exactly which way that’s going to go.
David Morgan:Let me get in again. Where it’s going to go, it’s going to go in the financial record books. That’s where it’s going to go. It’s going to go to a place that even silver bulls like me, I wouldn’t say never dreamed of, but because of everything that’s gone on in the financial system et al, at large, with the Fed, and all other central banks, the European Central Bank, what’s going on, and the only mitigation to that, of course, is the BRICs. What they’re trying to do to mitigate the problem of give an option to the financial community at large, which means the world, with an alternative to the Anglo American dollar, denominated financial system. When this this cracks further, and it’s cracking as we speak with Deutsche Bank, as I mentioned a moment ago, there’s going to be a run to gold like you’ve never seen before.
What does that mean? It means that there’s only maybe less than 1%… and it’s hard to get a really good number. I’ve seen the numbers and they’re like a fraction of a percent, but I’ll just use 1% as an example. So if 1% is invested in gold, and there’s 99% invested in the bond market, stock market, real estate, and everything else that you can invest in, and another 1% wakes up and wants to get in the gold, because they want to sell their real estate, or they want to get out of the bond market, or the stock market’s going down, this is going to take that float, that small, small amount that’s available, and it will be bid up into the stratosphere.
So it’s really difficult to put a paper price. Then, if you have a synergy effect, where people are dissing the dollar at a point where they really don’t want to use it for settlement anymore, because there’s another Bretton Woods type of situation being talked about, not necessarily taking place, but the financial markets are in such disarray that gold can’t be controlled anymore, that’ll add fuel to the fire. So you can see where I’m going. I’m stating that I believe, and I don’t know, it’s not a fact, it’s a strong opinion, a very studied opinion, a very thoughtful opinion, that that’s where we’re going to go. We’re going to go into this place, and it’s not going to last long either. I don’t see it happening in 2016. Although, I think everything fundamentally and foundationally will be set up this year. And I think looking back from a perspective of let’s say, two or three years out from now, you might be able to pinpoint it to like September 2016, and say, “Wow. That was the place when Deutsche Bank did this.” I’m just using them, I’m picking on them, but it could be any of these major banks.
Or financial institutions, or derivatives markets, or so many ways that this could happen. And that’s, “Oh my goodness, that’s where it happened. That was really the precursor that set off this huge run to gold.” Of course the run to gold is a warm up to the run to silver, because once gold starts taking off, and it may lead, and it may not, but I believe it will, then people will panic. And people that can’t afford gold because now it’s moving to $2,000, $3,000, $4,000, $5,000, people will say, “Oh my goodness, I’ve got to get myself something.” Silver’s the next best bet from that perspective. And there’s a lot less of a float in the silver market than there is in the gold market. Although, that could vary, but that’s the idea.
Mike Gleason: I know you always said about how the biggest move, 90% of the move can come in the last 10% of the time period. That’s absolutely something that people should keep in mind when it does go. I think it’s going to go quite quickly.
Well, great stuff as usual, David. We always appreciate hearing your thoughtful analysis here on the Money Metals podcast. I’m sure we’ll be talking again real soon. It’s shaping up to be a very interesting year. We’ve got the Presidential election coming up. There’s obviously some craziness going on there that’s likely to drive markets, more Fed policy decisions, unfortunately. Lots to talk about.
Now before we let you go, please let folks know a little bit more about how they can follow you there atThe Morgan Report. You’ve alluded to that already, but this is a great time for people to dive in deeper into the metals. Please let people know how they can get on your email list, and also about some of the things that you’re doing there at The Morgan Report, those webinars and so forth.
David Morgan: Yes. Just go to TheMorganReport.com and get into our free email list. It’s on the right hand side of the page. All we need is your first name and your primary email address. When you do that you will get our update information. You will also be kept abreast on at least a weekly basis of these type of free webinars that I’ll be doing. In fact, the next one I’m going to do, I’m pretty certain, will be that 90% of the move in the last 10% of the time. Don’t lose faith, the biggest gains are ahead of us. I really believe that. I can prove it happened. I can prove the past. I cannot prove the future. I could be wrong. I’ll say that publicly, and I’ve said it for years. But markets always accelerate at the end. You can look at the tech wreck, you can look at the housing bubble. This is how markets move. The metals markets are no different, other than the psychology of the metals markets is different.
Because, as I said before, and it’s probably overused, but there’s no fever like gold fever. Most people believe in God, or they don’t. There are some atheists out there, that’s fine, I’m free-market, you want to believe there isn’t a God, that’s fine with me. But remember, gold is God with an L in it. It really touches everybody, even people that diss it, people that continually downplay it. It does affect them. What’s going to be interesting is some of these financial hosts that are more, let’s say, establishment than me by far, that have dissed gold the whole way up, when they start talking about, “You should own a little gold.” That will probably be the time where were approaching that $10,000 level that Jim Rickards talks about. That might be time to look for an asset change. That’s going to be difficult too, but we’re here to help. We’ll be writing about it, and Mike, again, thank you for the interview.
Mike Gleason: Well, David, thanks so much. We really appreciate it. Hope you have a great weekend. Take care and we’ll talk to you again soon.
Submitted by: Mike Gleason
The world’s elite silver miners just finished reporting their operating results from 2016’s first quarter, and they were impressive. This industry continued to drive its costs lower even as silver finally started mean reverting out of mid-December’s deep secular low. The silver miners are beautifully positioned to enjoy soaring operating profits as silver’s young new bull market continues gradually marching higher on balance.
Silver mining is a tough business geologically and economically. Primary silver deposits, those with enough silver to generate over half their revenues when mined, are quite rare. Most of the world’s silver ore formed alongside base metals or gold, and their value usually well outweighs silver’s. According to the just-released World Silver Survey 2016 by the venerable Silver Institute, silver largely remains a byproduct.
Last year production from primary silver mines accounted for just 30% of the global mine supply. Well over 2/3rds of the 886.7m ounces of silver mined in 2015 was simply a byproduct from base-metals and gold mining! And as rare as silver-heavy deposits supporting primary silver mines are, primary silver miners are even rarer. Most silver-mining companies have multiple mines, including non-primary-silver ones.
This isn’t simply due to the geological constraints in finding and developing silver-dominant deposits. The cash flows silver mining generates are relatively small compared to other metals. While base metals are far less valuable, they are found in vastly greater quantities. And while gold is much rarer, it is worth radically more than silver. So it’s even challenging for miners to derive the majority of their revenues from silver.
In Q1’16, silver prices averaged just $14.90 per ounce. That’s pretty dismal, just 0.9% higher than Q4’15’s $14.77 average which was the worst for any quarter since Q3’09’s $14.72. Meanwhile gold averaged $1185 per ounce in Q1’16, a far-superior 7.3% higher than Q4’15’s $1105 trough which was gold’s worst quarter since Q4’09’s $1099. These Q1’16 average silver prices really help highlight silver mining’s economics.
A mid-sized silver miner might produce 10m ounces annually, which is worth $149m at Q1’s average silver price. Yet a mid-sized gold miner producing 300k ounces a year can generate revenues 2.4x higher at $356m. These comparisons hold even with silver’s accelerating new bull so far in Q2’16, which has produced much-higher average silver prices of $16.64 quarter-to-date compared to $1255 for gold.
Despite silver’s excellent 11.7% increase in average prices so far this quarter, that mid-sized silver miner would still only see yearly sales of $166m at these levels. That compares to $376m for that mid-sized gold miner, still 2.3x higher. The cash flows silver mining spins off at these low silver prices often aren’t sufficient to sustain mid-sized mining operations, so elite silver miners have been actively diversifying into gold.
While mining more gold makes the silver miners much stronger financially, it also dilutes their exposure to silver which is the main reason investors buy their stocks. Unfortunately there are effectively no pure silver miners left anymore in the mid-tier and major ranks, and very few among the small but super-risky silver-mining startups. Silver miners’ increasing gold operations certainly complicates analyzing them.
Their Q1’16 reports weren’t due out until 45 calendar days after quarter-end, and as usual these miners generally like to push that legal limit. So this is the first week where comprehensive Q1’16 operating and financial data across the silver-mining industry is available. I always like to dig into these quarterly reports to get a handle on how this industry is faring fundamentally, which helps me make investing decisions.
I want to look at the elite silver miners’ results, the biggest and best companies out there with the most-widely-held stocks. And they are all owned by the overwhelmingly-dominant silver-stock ETF, which is the SIL Global X Silver Miners ETF. As of this week SIL had $286m in assets. That was a whopping 6.2x larger than its next-biggest competitor’s mere $46m, the SLVP iShares MSCI Global Silver Miners ETF.
But since there aren’t that many silver miners out there, SIL also includes 9 of SLVP’s 10 holdings. As of the middle of this week, this flagship SIL silver-stock ETF had 21 holdings. SIL is the leading way for stock investors to invest in silver stocks today. I painstakingly analyzed the top 17 of these component companies’ Q1’16 quarterly reports this week, which collectively accounted for 96.0% of SIL’s total weighting.
13 of these top silver miners as determined by SIL’s managers trade in the US and Canada, and 12 of them had published their quarterly results by the middle of this week. The lone straggler was Silvercorp Metals, which had its fiscal year-end on March 31st. Because full-year results must be fully audited by a CPA firm before filing, that final fiscal quarter’s deadline is extended to 90 days. So there’s no Q1 data yet.
The remaining 4 top SIL-included silver miners trade in the UK and Mexico. Like much of the world, they report in half-year increments instead of quarterly ones. And since most companies have fiscal years matching calendar years, these half-year reports usually come after the ends of Q2s and Q4s. So Q1s and Q3s generally have little or no financial data reported, but sometimes production updates are given.
I dug through all available Q1’16 results from these elite top 17 components of SIL and fed a bunch of data into a spreadsheet for comparison. The table below highlights some of the most relevant. Any cell left blank means that particular company didn’t report that piece of data. Usually companies’ weightings in the top ETFs don’t change very much, so I was surprised to see a major reshuffling at the top of SIL.
Because of that 90-day post-quarter-end filing deadline for quarterly results ending fiscal years, Q4’15 results of these elite silver miners couldn’t be analyzed until April. A few weeks ago I published an essay on silver miners’ operating results in that critical secular-trough quarter. Their actual performance in those miserable silver conditions was an important baseline from which to compare recovery quarters.
Back in mid-April Tahoe Resources was SIL’s largest holding at 12.1% of this ETF’s weight, but by this week that had dropped to 10.8%. More interestingly Pan American Silver’s weighting rocketed from just 5.5% in mid-April to the pole position at 12.3% by this week! I can’t recall seeing a faster shift in a major ETF’s weighting of an elite company, and these ETFs’ managers almost never discuss their decision processes.
I suspect this major shift was a gold thing. Tahoe Resources issued new guidance in early April after its acquisition of Lake Shore Gold was completed. It now expects to produce a midpoint of 400k ounces of gold this year along with the previously-forecast 19.5m ounces of silver. At prevailing prices near $1250 and $17, this yields gold revenues of $500m this year which are much higher than silver’s at $332m.
Mighty Tahoe, which was spun off by Goldcorp to create a totally-pure primary silver miner operating one of the world’s largest silver mines in Guatemala, is now a primary gold producer. Unfortunately, silver revenues running around 40% of total sales for these elite silver miners are pretty common. I calculated the percentage of revenue that each elite SIL company actually generated from silver sales in Q1’16.
The methodology to determine how pure these silver miners are is pretty basic. Their silver production in the first quarter was multiplied by silver’s average price, or a company’s actual average realized silver price in Q1 if they happened to report it. Then that result was divided by their total revenues. Since silver lagged gold’sinitial big advance like usual in Q1, I figured that the SIL miners’ silver purity would drop.
And that was indeed the case, as is evident in the fifth column below after each company’s symbol, the exchange its stock is traded on, its weighting in SIL, and its market capitalization. The average percent of sales generated by actual silver mining in Q1’16 fell to 44.9% from Q4’15’s 47.5%. As silver’s young new bullcontinues to outpace gold now that it is underway, I expect this percentage to start rising again.
Silver prices generally rising faster than gold’s on balance should help offset these elite silver miners’ ongoing diversifications into gold mining. Rather interestingly, the ranks of true primary silver miners which generateover half their revenue from silver actually grew to 7 in Q1’16 from 6 in Q4’15. These majority-silver companies’ percentages are highlighted below in blue. Hecla Mining just joined this club.
For investors logically buying silver stocks because they want leveraged exposure of silver-mining operating profits to silver’s upside, the greater the fraction of companies’ sales derived from silver the better. If a company generates less than a third of its cash flows from silver, I don’t think it should even be considered a silver miner. At that point silver is simply a byproduct within the total operations of that company.
SIL’s managers ought to jettison the diversified mining conglomerates like Fresnillo, Industrias Penoles, and Polymetal no matter how much silver they produce. Their stock prices naturally don’t follow silver. SIL would be a radically-better investment for silver exposure, really the only reason investors buy it, if companies were only included that generate over 40% of their sales on a trailing-twelve-month basis from silver.
This rest of the columns in this table focus on the operating fundamentals for the elite silver miners of SIL. This includes Q1’16’s cash costs per ounce produced, all-in sustaining costs per ounce, and AISC guidance for full-year 2016. After that is cash on hand at the end of Q1, cash generated from operations in Q1, and finally each company’s actual Q1 silver and gold production. These silver miners all mine gold too.
Collectively these top 17 SIL silver miners produced 74.5m ounces of silver in Q1. With global silver mine production now running about 221.7m ounces a quarter per that latest Silver Institute report on silver’s fundamentals, these major silver miners account for about 34% of world production. But take out those 3 non-silver-centric conglomerates, and that drops to 41.0m or around 18%. Primary silver miners are rare.
Back in Q4’15, many investors questioned the very viability of this industry. By mid-December just days before the Fed’s first rate hike in 9.5 years, silver slumped to a brutal 6.4-year secular low of $13.69. But as the silver miners’ actual Q4’15 operating results later proved, that was never a threat. Q4’15’s average cash costs for the elite silver miners of SIL were just $6.68 per ounce, far below even silver’s deep lows.
Cash costs are the acid-test measure of what silver price the miners need to break even and cover their ongoing cash operating expenses. These include all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. Silver miners can survive as long as silver prices remain above their cash costs. And in Q1’16, average cash costs fell 10.3% to just $5.99 per ounce!
A big factor in this was the surging gold prices, which resulted in higher byproduct credits to offset silver-mining expenses. It’s pretty impressive to see cash costs drop so dramatically in a quarter where silver’s average price edged just 0.9% higher to $14.90. As long as silver remains above $6, which is impossibly low given its fundamentals today, any talk of silver miners might not being able to survive is foolish.
But cash costs are misleading, as it takes far more expenditures to run a silver-mining company as a going concern. All that silver mined is constantly depleting deposits, so new ones have to be found and developed to maintain production levels. And old exhausted mines have to be reclaimed. So in June 2013 the World Gold Council released the far-superior all-in-sustaining-cost metric to measure mining costs.
All-in sustaining costs include everything necessary to maintain and replenish silver-mining operations at current production levels. This includes all direct cash costs of mining silver, along with all corporate-level administration that always should’ve been included in cash costs. But AISC go far beyond that to encompass the entire mining cycle, making them a far-more-realistic representation of true silver-mining costs.
They also include exploration for new silver to mine, the enormous mine-development and construction expenses necessary to bring new mines online, remediation, and reclamation. As long as prevailing silver prices remain above all-in sustaining costs, silver miners can continue to produce at current levels indefinitely. And rather impressively they plunged dramatically in Q1’16 among the elite SIL silver miners.
Their average AISC of just $10.28 per ounce were 21.8% lower than Q4’15’s $13.14! That’s amazing, leading to soaring operating profits for these elite silver miners in Q1’16. In the fourth quarter, silver’s $14.77 average less the $13.14 AISC average drove silver-mining operating margins of just $1.63 per ounce. That’s tight, too low for comfort for an industry that has to contend with silver’s wild price volatility.
But in the first quarter, $14.90 average silver less those much-lower $10.28 AISC led to vastly healthier operating margins of $4.62 per ounce! That was a mind-boggling 183% higher! This revelation ought to be the final nail in the coffin for the idea that silver stocks’ enormous gains so far this year haven’t been fundamentally justified. Just the opposite is true, soaring operating profits righteously supported soaring stock prices.
Unfortunately the silver miners themselves don’t expect Q1’16’s low AISC to persist, as their average AISC projection for all of 2016 is much higher at $12.79. But I suspect this year’s actual AISC will come in much lower than those forecasts. The silver miners made their 2016 guidances way back in early January before gold and silver started powering higher. So those projections assumed very-low prices all year.
A great example is First Majestic Silver, the purest major silver miner in the world today with 69.5% of its first-quarter revenue from silver. It forecast its full-year-2016 guidance for AISC back in mid-January, and assumed silver and gold averaging just $14 and $1000 this year! As gold’s new bull continues to power higher, rising byproduct credits for gold will lower silver-mining costs far more than widely anticipated.
In addition back in January when 2016 outlooks were calculated, investors remained very worried about this industry’s survivability so they were overwhelmingly focused on costs. The management teams at the silver miners have big incentives to overestimate cost projections to ensure they can beat them later. So actual AISC in 2016 are likely to be considerably less than the conservative inflated estimates published.
But even if this industry really does have AISC up near $13, the potential growth in operating profits as silver inevitably mean reverts higher is still massive. Remember that silver prices like 2015’s were a total anomaly driven by the Fed’s stock-market levitation crushing demand for alternative investments led by gold and silver. Silver’s average prices in 2014, 2013, and 2012 were way up at $19.05, $23.80, and $31.19.
So even at $12.79 AISC for this industry, the potential operating profits soar to $6.26, $11.01, and $18.40 per ounce as silver mean reverts back to normal levels from recent years as gross market distortions from the Fed’s machinations gradually unwind. Those represent profits growth of 36%, 138%, and 298% even at much-higher AISC on mere 28%, 60%, and 109% uplegs in silver from Q1’16’s average price level!
Naturally Q1’16’s surging operating profits for silver mining fed strong operating cash flows for most of these elite silver miners, helping maintain hefty cash treasuries even after Q1’s positive silver-price action encouraged these companies to start spending on expansion again. The silver miners continued to generate impressive cash flows from operations even while silver’s average price stayed near Q4’15’s trough.
So even though silver didn’t do much in the first quarter as its new bull market lagged gold’s, the silver miners’ fundamentals improved considerably. Higher gold prices generated higher byproduct credits for the elite silver miners, lowering their costs. And that trend is going to continue. At a $1255 average so far in the second quarter, gold is up another 5.9% at this point. So silver-mining costs should keep falling.
On top of that, silver’s average price so far this quarter at $16.64 is a huge 11.7% higher than its average level in the first quarter. Much-higher prevailing selling prices combined with costs still trending lower should make for amazing silver-mining profitability in Q2’16. We won’t know for sure until 3 months from this week when those operating results are fully filed, but the outlook is very bullish halfway through Q2.
So silver miners’ upside from here remains vast, in terms of both profits and stock prices. Investors can take advantage of any silver weakness to buy aggressively, as this young mean-reversion silver bull is likely to run for years. The coming massive gains in silver stocks can certainly be ridden through this leading SIL ETF, which indeed contains the world’s biggest and best silver miners. But SIL has problems.
SIL’s managers have really diluted their ETF’s upside to silver by including those mining conglomerates that derive the great majority of their revenues from metals other than silver. And though SIL’s holdings have to be generally weighted by market capitalization, it takes much bigger capital inflows to boost a larger silver miner than a smaller one. And the biggest silver miners are increasingly diversifying with gold.
So SIL’s silver-bull-market performance is going to seriously lag that of the best of the elite silver miners. An expertly-handpicked portfolio only including the companies with superior fundamentals leveraged to silver is going to trounce the silver-stock ETFs’ gains. So investors willing to do their homework and buy individual stocks instead of settling with the leading silver-stock ETFs are going to enjoy big outperformance.
The bottom line is the world’s elite major silver miners enjoyed a very strong first quarter in fundamental terms. Even while silver continued to languish near secular lows, silver-mining costs fell sharply as gold rallied and boosted byproduct credits. This led to massive growth in silver-mining operating profits in Q1’16, more than justifying the powerful surges the silver-mining stocks have enjoyed in recent months.
And this explosive silver-mining profits growth is likely only starting. As gold and silver continue their mean reversions higher on balance in the coming years, the fundamentals of silver mining will improve dramatically. Stable or even-lower costs due to higher gold byproduct credits combined with far-higher selling prices will create a fundamental nirvana for the silver miners. Their stocks still have enormous upside.
Courtesy: Adam Hamilton
Continuing a trend that started last year, central banks around the world are dumping US debt at a record pace.
Central banks sold off a net $17 billion in US Treasury bonds in March. Sales set a record in January, hitting $57 billion. China, Russia, and Brazil led the way, each dumping at least $1 billion in US debt in March alone.
So far in 2016, global central banks have jettisoned $123 billion in US debt. Last year, they sold off $226 billion. According to the Treasury Department, central banks are selling US Treasuries at a pace not seen since at least 1978.
Once the biggest buyer of US debt, China is now selling Treasuries at what CNN calls an alarming rate:
Between December and February, China’s central bank sold off an alarming $236 billion to help support its currency, which China is slowly letting become more controlled by markets and less by the government. In March, China sold $3.5 billion in US Treasury bonds, Treasury data shows.”
Head of international fixed income at Federated Investors Ihab Salib said fear and economic instability is driving the selloff:
There’s still this fear of ‘everything is going to fall apart.’”
CNN Money said the selloff of Treasuries may be an effort to “prop up their currencies:”
By selling US debt, central banks can get hard cash to buy up their local currency and prevent it from losing too much value.”
But many of these central banks aren’t just purchasing local currency. They are buying gold.
As we reported yesterday, central banks have gone on a gold-buying spree, with China and Russia leading the pack. According to the World Gold Council, Russia increased its gold reserves by 45.8 tons in the first quarter of this year. That was 52% higher than the same period in 2015. China purchased 35.1 tons between January-March, adding to the 103.9 tons it bought through the second half of last year.
Notice these are two of the countries dumping US debt the fastest. The strategy seems pretty clear – sell US treasuries and keep buying gold.
This makes sense in a world of perpetually low and even negative interest rates, coupled with rampant economic uncertainty and a looming recession. The yield on Treasuries and other sovereign debt becomes less and less attractive in a low-rate environment.
So, if central banks are dumping US Treasuries, who’s purchasing them? It appears US and foreign firms are the primary buyers. This seems to indicate the private sector is not buying all of the sunshine and roses Washington is selling when it comes to the US economy and is seeking the “security” traditionally offered by US government bonds. Last fall, Casey Research analyzed the current dynamics in the bond market and reached a similar conclusion, reporting “looming warning signs” in the US “wonderland economy.”
The Federal Reserve and US government central planners have built a house of cards on a foundation of debt . What is going to happen when nobody wants to buy US Treasuries anymore? Will the house of cards eventually come crashing down? Perhaps that is the real fear driving countries like Russia and China to dump US debt and keep buying gold.
Courtesy: Samuel Bryan
We’ve been hearing about strong jobs growth for months. And it’s true. There are lots of new jobs. It’s a good thing too, because a lot of people need two or three to make ends meet in today’s economy.
The Fed is hinting strongly at an interest rate hike in June. In fact a lot of people have taken it as a foregone conclusion that the US central bank will definitely hike rates next month.
But as Peter Schiff pointed out on his recent podcast, the Fed didn’t say it is going to raise interest rates in June. Fed officials said they would consider a rate-hike appropriate if certain things fell into place.
One of the factors the Fed relies heavily on in its “data-dependent” decision making process is the employment picture. As Peter said – it isn’t good. The April numbers were not encouraging:
Everybody expected 200,000 jobs to be created; I’m sure including the Fed. We only got 160,000. More importantly, the internals were lousy. We had the big drop in labor force participation. We revised down the previous jump up in average hourly earnings. It was a lousy report.”
Still, the mainstream media talks constantly about a “strengthening economy” and a certain interest rate hike next month. But every once in a while, it pulls back the curtain. CNN Money did that the other day, reporting the truth on the actual condition of the US jobs market. It revealed the “job growth” Obama keeps crooning about as a sham. In fact, there are more jobs, but they are part-time jobs.
Erlinda Delacruz used to work full-time in manufacturing. The job offered health benefits, four weeks of paid vacation, and a salary that supported a “good life.” Now she works 60 hours a week at three part-time jobs, barely making ends meet. Sadly, her story isn’t unusual:
Delacruz is one of 2.1 million Americans working multiple part-time jobs, matching the all-time high set in 2014. What’s unclear is how many of these workers choose to work multiple part-time jobs or feel forced to by their circumstances. The evidence suggests the latter. Part-time work has become a huge worry for experts who watch the US economy. There are 6 million part-time workers who want full-time jobs. It’s well above its pre-recession average of about 4 million workers.”
Peter has been talking about this for months. Just last March, Peter made this exact case in an interview on Fox Business.
These are lousy jobs. These are low-paying jobs. These are Trump voters. These are Sanders voters. That’s why they’re there – because they have a part-time job and it’s lousy, and the pay is lousy. Eighty percent of these jobs are service-sector jobs, many of them are minimum wage jobs. You can’t raise a family on these jobs. Many kids can’t even move out of their parents’ houses because they can’t get a job.”
So much for the Obama jobs recovery.
You should keep this in mind when you hear pundits trumpeting the strong job market. It should also give you pause when you hear talk about a “certain” interest rate hike in June. As Peter pointed out, there were a lot of ifs in the Feds’ meeting notes.
Courtesy: Samuel Bryan