Dan Caplinger – The silver market performed reasonably well in 2016, with the price of the precious metal picking up more than $2 to close the year at $15.88 per ounce. That in turn helped boost the prospects for silver-tracking investments like the iShares Silver Trust (NYSEMKT:SLV). But as much as investors appreciated the gains, they were a far cry from the highs above $20 per ounce that silver posted earlier in the year. Looking forward to the coming year, investors want to see the price of silver in 2017 climb back toward the $20 mark, but those who follow the silver market aren’t sure just how much progress the metal can make. Below, we’ll look at what could move the price of silver in 2017.
The main difficulty that many people have in assessing the silver market is that it acts like a hybrid, showing characteristics of both precious and industrial metals. On one hand, even at prices that are less than 2% of the price of gold, silver is still roughly 100 times as costly as copper, putting silver in a gray area in the middle of the price spectrum. Historically, traders have seen silver as a precious metal, and many mines produce both gold and silver, further associating them in the minds of investors.
Yet in large part, silver is much more subject to supply and demand considerations than gold. Silver gets used in a wide variety of industrial applications, and that subjects it to the normal demand fluctuations of the global economic business cycle. In addition, mined supply of new silver plays a role in setting its price, along with the willingness of those who have stockpiled silver for investment or personal use to bring it back into the market when prices rise.
Even with those countervailing factors, silver traded largely in line with its precious metal counterparts during 2016. After a big gain linked to an early year stock market decline in 2016 and prospects for a potential collapse in the energy markets, silver climbed to its highest levels by mid-year. However, the final boost from the U.K. Brexit vote to leave the European Union didn’t lead to the economic chaos that some had predicted. By the second half of the year, excitement about silver waned, and fears of higher interest rates sent silver prices down more than $4 per ounce from their highest levels of the year.
As you can see above, there are two distinct camps among those following the silver market. Some believe that better conditions in the market will lead to substantial gains, while others see the current malaise lasting throughout 2017.
Most of those who are bullish about silver prices in 2017 point to silver’s capacity to decouple from the precious metals markets. In particular, excitement about silver’s industrial demand could be the driver for higher prices in the minds of some.
Helping to support that view are the latest calls from President-elect Donald Trump for greater spending on infrastructure and construction. If the U.S. moves forward with initiatives that are successful in driving greater activity on those fronts, then the use of silver could increase. At the same time, many expect that silver mining activity will fall in 2017 from year-ago levels, continuing a longer-term trend. Even with prices having bounced from their lowest levels, they’re still not high enough to make miners feel particularly enthusiastic about boosting production.
However, those who are negative on the prospects for silver prices in 2017 point out that the factors that traditionally hurt precious metals markets are poised to become stronger during the year. Late-year dollar strength in 2016 has typically pushed gold and silver prices lower. Moreover, with many expecting multiple interest rate increases from the Federal Reserve in 2017, the costs of holding positions in silver bullion are likely to rise from their rock-bottom levels of the past several years.
Also, the supply and demand factors that theoretically drive silver prices haven’t always matched up in the short run. Supply deficits in production of mined silver have been regular occurrences for most of the past 15 years, but that hasn’t prevented the silver market from having wild volatility swings over that time period.
Just about the only certainty with silver prices in 2017 is that they’re likely to feature substantial moves in both directions, as investors try to figure out changes in geopolitical and macroeconomic factors affecting the market. That might stop the forward momentum that silver generated in 2016, but it could also create opportunities for those who have higher hopes for silver’s prospects in the long run.
Dan Caplinger – Gold managed to rebound slightly in 2016, rising 8% and making back a bit of the lost ground that it had suffered in previous years. Nevertheless, the year-end closing price of around $1,145 per ounce was still far below the levels at which it has traded in the past. Over the coming year, investors would like to see gold’s modest upturn finally start to take hold and accelerate, producing gains for gold-tracking investments like the SPDR Gold Trust (NYSEMKT:GLD). Let’s look at how the gold market has fared lately and what it means for gold prices in 2017 and beyond.
Many are uncertain about the direction for gold prices in 2017. Last year, gold managed to post strong gains early in the year, as fears about the plunge in the energy markets and a big decline in the Chinese stock market sent many investors to the perceive safe-haven status of the precious metal. Around mid-year, gold had risen to more than $1,350 per ounce, and the Brexit decision in the U.K. to leave the European Union created even more nervousness about the global macroeconomic environment.
Yet by the end of the year, many of the potential struggles for the financial markets had disappeared. That led many investors out of the gold market, leading to the more than $200 per ounce drop in the final few months of 2016. In addition, the election of President-elect Donald Trump was followed by a big increase in interest rates, which created the specter of rising financing costs for gold investors and made the bond market look more attractive for new capital.
As a result of this price action, many of those who follow the gold market expect significant volatility in the price of the yellow metal in 2017. Depending on what actually happens with other financial markets, gold could see violent moves in either direction during the year.
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As you can see from the predictions above, there are a couple of different camps among gold market analysts. One sees little change from current levels, while the other believes that gold could manage to overcome the obstacles it faces and continue posting significant increases from current levels.
The primary reason why some see problems for the gold market has to do with macroeconomic conditions. The odds are good that interest rates in the U.S. will rise in 2017, yet inflation won’t be the main reason why the Federal Reserve tightens monetary policy. Rather, there’s an expectation that the Fed will move simply to bring interest rates back to a normal level of monetary accommodation, while seeking to prevent inflation from moving above its 2% target. If successful, that would take away the inflation justification for owning gold.
Moreover, higher interest rates in the U.S. have typically brought strength in the U.S. dollar. Because gold prices are measured in dollars, a strong dollar tends to put downward pressure on the gold price. We’ve seen that correlation in recent months, as the post-election rally in stocks sent interest rates lower while boosting the dollar’s value against major foreign currencies like the euro and Japanese yen.
At the same time, one thing that many investors think could support gold is the uncertainty about geopolitical actions in the year to come. The global perception of the U.S. president-elect has raised fears of changing global alliances and greater levels of conflict, and the rise of other populist leaders in various countries throughout the world suggests a growing trend toward nationalism. That could have implications for trade, which in turn could destabilize economies that rely on trade. Historically, such situations have been positive for gold.
In addition, not everyone is convinced that a rise in interest rates will come without inflation. Gasoline prices have already risen sharply from their lows last year, and despite the dollar’s strength, a greater emphasis on manufacturing in the U.S. could force companies to raise prices to offset higher labor costs. If inflation outpaces the Fed’s gradual rate hikes, then gold could respond positively.
Even when gold markets behave well, they rarely move in a straight line, and that’s likely to be more the case than ever this year. With surprises likely on multiple fronts, investors should expect gold prices in 2017 to be more volatile than usual, creating opportunities for those who believe in its longer-term prospects.
The price of gold has risen by over 3% in 2017. This already equates to three quarters of its total return from 2016, which shows just how strong its performance has been in the first handful of trading sessions in 2017. Looking ahead, the recent growth rate in the price of gold may not continue unabated. However, this year could be viewed as the best year in a generation for the precious metal thanks to the risks which the global economy faces.
Historically, gold has been viewed as a relatively safe asset. In various historical crises, investors and individuals have flocked to gold in order to preserve the value of their wealth at times of high inflation in particular. Although its value declined in the first part of the credit crunch, it quickly recovered as the combination of low interest rates and quantitative easing across the developed world began to take hold. While inflation has not yet been the end result of these policies due to the world’s deflationary trajectory in the last decade, that could be about to change.
The new US President could be described as a ‘radical’ in terms of the policies which he is apparently set to introduce. Although no specific details have yet been put forward, it seems likely that Donald Trump will seek to increase spending and reduce taxation. This is likely to have a positive impact on the US economy and could increase the rate of GDP growth, while also improving the employment prospects for millions of Americans.
However, the cost of these policies could be higher inflation. Although the Federal Reserve has stated that it plans to increase interest rates three times in 2017, this may be insufficient to hold back inflation. The first reason for this is the time lags which are present with interest rate changes. They normally take 6-9 months to have an impact. The second reason is that three rate rises simply may not be enough to hold back inflation if it spikes during the course of the year.
The uncertainty of a new and somewhat unpredictable US President is not the only risk facing global economic growth. The EU is enduring its biggest ever challenge, with the UK deciding to leave the political union and France likely to become increasingly lukewarm about the Euro after its election. China is also offering slower growth than it was a few years ago. When these risks are combined, demand for risk off assets such as gold could increase dramatically.
Clearly, gold had a poor end to 2016 and fell by over 10% in the last two months of the year. However, it looks set to not only reverse this fall, but to also make high gains during the course of the year. The risks facing the world economy are significant and inflation looks set to rise, both of which create the conditions for gold to have its best year in a generation.
Courtesy: Peter Stephens
Gold has hit the ground running in this young new year, a stark contrast to its brutal post-election selloff. Rather remarkably, these strong recent gains accrued despite literally zero gold buying from one of gold’s most-important constituencies. The American stock investors who almost single-handedly fueled gold’s strong bull market last year are still missing in action since the election. That means big gold buying is still coming.
All free-market prices, including gold’s, ultimately result from the balance between popular supply and demand. When supply outweighs demand as evidenced by investment-capital outflows, gold is forced lower. That’s exactly what happened after Trump’s surprise win in early November. When investors flee gold for any reason, including chasing record-high stock markets, the resulting oversupply really hits prices.
When the votes started to get tallied on Election Day’s evening, Trump pulled into a surprise lead in the biggest battleground state of Florida. Gold futures rocketed higher on that, soaring 4.8% to $1337 as the early results came in! But as the plummeting stock-market futures reversed sharply the next morning, that panic gold buying was quickly unwound. That kicked off investors’ subsequent mass exodus from gold.
Over the last decade or so, gold ETFs have grown to dominate gold investment. Their soaring popularity is the direct result of their unparalleled efficiency. There is no cheaper, quicker, or easier way for stock traders to move capital into this unique asset to gain gold portfolio exposure. So gold investment has increasingly shifted from the traditional holding of physical bars and coins to owning gold-ETF shares.
The 800-pound gorilla of the gold-ETF world has always been the American GLD SPDR Gold Shares. As of the end of Q3’16, the latest data available from the World Gold Council, GLD’s commanding lead among global gold ETFs is impregnable. GLD held 948.0 metric tons of gold bullion in trust for its shareholders, or a staggering 40.6% of the total holdings of the world’s top-ten physically-backed gold ETFs!
This dominance along with GLD’s extreme transparency make it the best proxy for investment-capital flows into and out of gold. Every single trading day, GLD’s managers release the total gold bullion this ETF is holding. This is done in extraordinary detail to placate anti-gold-ETF conspiracy theorists, down to the individual-gold-bar level including serial numbers and weights. This week’s list was 1305 pages long!
The day after the election, GLD’s physical gold bullion holdings were running 955.0 tonnes. But as the stock markets soared in the post-election Trumphoria surrounding hopes of lowering taxes and slashing regulations, investors started to flee gold. Gold is a unique asset that often moves counter to stock markets, making it an anti-stock trade. Thus gold investment demand collapses when stocks trade near record highs.
Investors simply feel no need to prudently diversify their stock-heavy portfolios with gold when the stock markets seem to do nothing but rally. So after Trump’s win, stock investors soon began to dump GLD shares at far-faster rates than gold itself was being sold. This differential selling pressure forced GLD’s managers to sell physical gold bullion to raise the necessary cash to sop up the excess GLD-share supply.
As a tracking ETF, GLD’s mission is to mirror the gold price. But GLD shares have their own supply and demand totally independent from gold’s, so GLD-share prices are always on the verge of decoupling from gold. The only way to maintain tracking is to shunt excess GLD-share supply and demand directly into physical gold itself. So GLD effectively acts as a conduit for stock-market capital to slosh into and out of gold.
Stock investors jettisoned GLD shares so fast in mid-November that this ETF’s holdings fell sharply for 11 trading days in a row. Every day GLD-share selling outpaced gold selling, so every day this ETF had to buy back the excess shares to offset that heavy differential selling. The money came from selling gold bullion, resulting in daily draws in GLD’s holdings. That short span saw GLD’s holdings plunge by 7.3% or 70.0t!
While this extreme selling moderated in December, it still continued relentlessly. Gold was driven down to $1128 the day after the Fed hiked rates for the second time in 10.5 years. While that was expected, the Fed officials’ rate-hike projections for 2017 were more hawkish than expected. That happened to mark the very bottom for gold, yet the heavy GLD selling persisted. That day GLD’s holdings were at 842.3t.
As of the Wednesday data cutoff for this essay, gold has rebounded 5.6% since then. It has rallied back up to late-November levels. A strong bounce out of extreme bearishness was inevitable, as I wrote that very week. But what’s wildly unexpected is since gold bottomed GLD’s holdings have fallen another 4.4% or 37.3t to 805.0t. GLD still hasn’t seen a single holdings build since the day after the election!
So gold somehow managed to rally sharply in recent weeks without any capital inflows from American stock investors. They not only weren’t buying GLD shares, they continued to aggressively sell them as evidenced by a couple big GLD-holdings draw days so far in January. This situation is remarkable, as it implies the investment gold buying hasn’t even started yet. That means big gold buying is still coming.
Some perspective is necessary to understand the supreme importance of GLD capital flows for gold’s performance. This first chart looks at gold and GLD’s holdings over the entire lifespan of this pioneering gold ETF. After its November 2004 birth, every subsequent year shows what happened to both its gold-bullion holdings and the gold price. Stock-market-capital flows via GLD have long dominated gold’s fortunes.
While differential GLD-share buying and selling isn’t the only force moving gold, it is certainly one of the two primary ones along with American gold-futures trading. In general gold rises and falls based on the capital inflows or outflows via GLD as evidenced by its builds and draws. Gold almost always rallies in years stock traders buy GLD shares faster than gold, and conversely falls in years where they sell GLD faster.
In 2005, 2006, 2007, 2008, 2009, and 2010 gold rallied majorly on strong GLD builds. When investors want to prudently expand their portfolio gold exposure through adding GLD shares, this ETF’s resulting physical-gold-bullion buying propels gold’s price higher. This makes sense, as the more capital bidding on any particular asset the faster its price will rise. That’s simply supply and demand in action as expected.
2011 was the lone year since GLD’s birth where the gold price disconnected from GLD’s holdings. That year gold rallied another 10.2% despite a 2.0% GLD draw. But with a mere 26.2t move, that was also the least-volatile GLD-holdings year by far. So GLD’s holdings were essentially unchanged, certainly not down materially. That relative cessation of differential GLD-share buying or selling allowed gold to decouple.
2012 again saw a solid GLD build, and gold rallied in lockstep. By that point, GLD had never suffered a sustained draw. Gold ETFs are a double-edged sword, just as easy to sell as they are to buy. In early 2013 the Fed’s radically-unprecedented new open-ended third quantitative-easing campaign started to levitate the stock markets. So gold investment demand cratered as stocks seemingly did nothing but rally.
American stock investors dumped GLD shares with a vengeance that year, resulting in an epic 40.9% or 552.6t GLD draw! That wild unparalleled flood of gold-bullion supply spewed by GLD as it sold to raise the cash to buy back the excess shares offered hammered gold 27.9% lower. That made for gold’s worst year since 1981, soon after a gold popular mania failed. That extreme gold-ETF selling kept feeding on itself.
The more stock investors dumped GLD shares, the more gold fell. The more gold fell, the more investors wanted to dump GLD shares. That ugly episode proved that gold ETFs and their easing of capital flows into and out of gold would amplify both bulls and bears. 2014 and 2015 saw gold continue to fall as the differential GLD-share selling continued. GLD’s draws those years ran 89.2t and 66.6t, key reference points.
Despite the sharp post-election selloff driven by that Trumphoria stock rally, gold still advanced 8.5% last year. On Election Day it had been up 20.3% year-to-date! 2016 proved gold’s first up year since 2012. And not coincidentally, 2016 was the first year that saw a GLD build since 2012. And that 179.8t of gold buying GLD had to do last year was actually the third-largest GLD-build year in this ETF’s history.
So realize that stock-market capital flows into and out of gold via this dominant world-leading GLD gold ETF are critical. Gold rallies when stock investors are buying GLD shares faster than gold, leading to builds as that excess buying is shunted into gold. And gold falls when GLD shares are sold faster than gold, which forces this ETF to sell bullion to buy back its own shares. Gold only makes sense with this knowledge!
Unless you understand GLD’s commanding role, you can’t understand why gold has been where it’s been or going where it’s going. This next chart zooms in to the past couple years or so, and increases the analysis resolution to quarterly. The reason gold soared in Q1 and Q2 last year is because stock-market capital was flooding into GLD. And the reason gold collapsed in Q4 is because half of that capital fled.
Gold’s lone up quarter in 2015 in Q1 was the result of a GLD build. The other three quarters of that year saw gold fall on increasing differential GLD-share selling. Interestingly gold bottomed the day after the Fed hiked rates for the first time in 9.5 years in December 2015, at a 6.1-year secular low. Exactly a year later last month, gold again bottomed the day after the next Fed rate hike. It’s irrational to fear Fed rate hikes!
Gold then skyrocketed 16.1% higher in Q1’16 on a monstrous 27.5% or 176.9t build in GLD’s holdings. Gold investment demand quickly shifted from deeply out of favor to back in favor for one simple reason. The lofty Fed-goosed stock markets were rolling over into a correction-grade selloff as 2016 dawned. As the anti-stock trade, gold investment demand soars when stock markets materially weaken and stoke fear.
Gold’s first new bull market since 2011 was overwhelmingly driven not just by gold ETFs, but specifically by GLD alone. According to the definitive arbiter of gold supply-and-demand measurement, the World Gold Council, total global gold demand climbed 219.4t year-over-year in Q1’16. Thus GLD’s 176.9t build accounted for a staggering 80.6% of that jump! Traditional bar-and-coin demand merely rose 0.7% YoY.
So if American stock investors hadn’t flooded back into GLD in Q1’16 as US stock markets rolled over, there never would’ve been a new gold bull! Love it or hate it, the hard reality is American stock-market capital flows into and out of gold via GLD now dominate this metal’s price behavior. That became even more apparent in Q2’16, when gold rallied another 7.4% on another huge 16.0% or 130.8t GLD build.
Per the WGC, overall global gold demand climbed 139.8t YoY that quarter. That means GLD alone was responsible for a mind-boggling 93.6% of the world total! Again bar-and-coin demand was dead flat, the whole gold story was differential GLD-share buying. Indeed in Q3 gold stalled because that differential GLD-share buying ceased. Gold drifted 0.4% lower in Q3’16 on a trivial 0.2% or 2.1t GLD draw that quarter.
So realize that pretty much everything that happened to gold last year before the election was the result of stock-market capital flowing into and out of gold via the GLD conduit. Thus it shouldn’t be a surprise that the brutal gold selloff after the election was driven by extreme differential GLD-share selling. On Election Day, GLD’s holdings were actually only just 3.4% under their bull-market high seen back in early July.
That subsequent extraordinary 11-trading-day 7.3% GLD draw was driven by US stock markets surging to new all-time record highs per the benchmark S&P 500. Stock investors were so enthralled by Trump’s promises of lower taxes and less regulation that they lapsed into euphoria. Just as in 2013 to 2015, they figured why bother owning counter-moving gold if stocks are going to do nothing but rally indefinitely?
The resulting extreme differential GLD-share selling ultimately drove a massive 13.3% or 125.8t Q4’16 draw! Those stock-capital outflows were nearly equivalent to Q2’16’s 130.8t inflows. But gold didn’t bottom at Q2 levels since futures speculators joined the stock investors in aggressively dumping gold. Q4’s enormous 125.8t GLD draw dwarfs those 89.2t and 66.6t draws seen in the full years of 2014 and 2015.
With so much capital fleeing gold, forcing GLD to spew so much gold bullion into the market to buy back its excess shares offered, it shouldn’t be surprising gold cratered to a 12.7% loss in Q4. That was one of gold’s worst quarters ever, driven by one of GLD’s biggest draw quarters ever. Gold prices are driven at the margin by investment capital flows, and there is no bigger pool of gold investment capital than GLD investors’.
Given GLD’s ironclad dominance over gold prices, the disconnect between gold and GLD holdings in recent weeks is utterly stunning. Every day the first piece of data I check is what happened in GLD’s holdings the day before. They aren’t reported until evenings well after the markets close. So ever since gold started to rally in late December, I’ve been looking for GLD builds to resume. Yet they still haven’t.
As of Wednesday, GLD had not seen a single build in 42 trading days since the day after the election! That now rivals a 42-trading-day span in mid-2013 as the longest in history without any GLD builds. If you’d told me a month ago that gold could mount a nearly-month-long 5.6% rally despite not only zero GLD builds but a cumulative 4.4% draw, I would’ve laughed. That’s wildly improbable based on modern history.
Yet here we are. Gold’s bull market of 2016 is resuming after this metal’s 17.3% plunge mostly since the election, which didn’t breach the 20% new-bear threshold. And American stock investors not only didn’t drive it, but they are actively fighting it. That means the gold buying for investment hasn’t even started yet from the only group of global investors who really matter! Big gold buying is still coming via GLD shares.
American stock investors totally ignored gold in late 2015 until the US stock markets retreated decisively enough to crack the complacency bubble driven by record highs. GLD’s holdings fell to a 7.3-year secular low the day after the Fed’s first rate hike in nearly a decade in December 2015 as stock markets remained near records. It wasn’t until the stock markets started selling off that gold investment demand reignited.
Right after that December-2015 rate hike, the S&P 500 dropped 1.5% and 1.8% on back-to-back trading days. That relatively-minor selloff was enough to convince hyper-complacent stock investors that maybe owning a little gold to diversify their stock-heavy portfolios wasn’t a bad idea. January 2016 would see a lot more major S&P 500 down days with losses of 1.5%, 1.3%, 2.4%, 2.5%, 2.2%, and 1.6% as selling accelerated.
That heavy stock-market selling ultimately fueling a correction-grade 13.3% S&P 500 selloff was exactly what triggered last year’s new gold bull. And once that investment gold buying got underway, it took on a life of its own as investors love to chase winners. Even though the S&P 500 bottomed decisively for the year in mid-February, gold kept powering dramatically higher until early July on continued heavy GLD buying.
This precedent is exceedingly bullish for gold today. As I explained in depth in an essay at the very end of 2016, a major stock bear still looms. The US stock markets were radically overvalued before that crazy Trumphoria rally, which blasted them up to formal bubble valuations! Corporate earnings are simply far too low to support the high prevailing stock prices, which are purely the product of greed and euphoria.
Even if Trump proves a miracle worker, the much-anticipated lower tax rates and regulation-slashing is going to take some time to implement. I can’t imagine anything big happening on those fronts before late 2017 or early 2018 at best. In the meantime, the stock markets are long overdue for at least a 10%+ correction and more likely a 20%+ new bear. That will once again revive major gold investment demand.
If a 13% stock correction ignited a 30% gold bull in the first half of 2016, imagine what a real bear would do for gold prices. American stock investors are radically underinvested in gold today, with essentially zero portfolio exposure. So as stocks inevitably sell off as the impossible Trumphoria expectations inevitably lead to deep disappointment, there is vast room for American stock investors to diversify back into gold.
While gold has indeed looked impressive in recent weeks, we haven’t seen anything yet compared to what will happen when differential GLD-share buying explodes again. Gold’s upside in early 2017 truly has the potential to even exceed early 2016’s strong gains! The stock markets are far more precarious now than a year ago, and the more downside they suffer the more investors will shift capital back into gold buying.
This coming major new upleg in this young gold bull can certainly be played with GLD or call options on it. But the gains in the gold miners’ stocks will dwarf the gains in gold, since their profits growth greatly leverages gold’s upside. As I discussed in depth last week, we are already seeing that. Over that recent less-than-a-month span where gold rallied 5.6%, the leading gold-stock index already surged 21.0% higher!
The bottom line is big gold buying is still coming. American stock investors, the driving force behind all of gold’s major moves for years, haven’t even started returning to gold buying yet. The leading GLD gold ETF hasn’t seen a single build since the day after the election, and has continued to suffer major draws in early 2017. Gold’s sharp rebound out of its post-election lows despite a GLD-selling headwind is remarkable.
Just as a year ago, all it will take to rekindle gold demand from American stock investors is a correction-grade stock-market selloff. And one is way overdue and increasingly likely thanks to all the extreme distortions of valuations and sentiment the Trumphoria rally spawned. As stock complacency cracks, American stock investors will rush back to gold buying to diversify their portfolios and thus catapult it much higher.
Courtesy: Adam Hamilton
Silver was my tip for 2016 and its price was up 15 per cent year-on-year, albeit well off its peak gains during the year of 50 per cent.
That was better than the booming US stock market and double the gold price increase; and SILJ, my favourite junior silver producers Exchange-traded Funds, rocketed 177 per cent. But this may just be the start of something much bigger.
I’m not generally very excited by technical charts. The current 10-year gold and silver charts are an exception to this rule.
Basically 2016 looked like a repeat of 2008, and if 2017 looks like 2009, then the follow through is about a 60 per cent increase in the gold price this year.
For silver, whose price is almost always leveraged to the gold price, the price gain should be even more spectacular, doubling to US$30-plus an ounce if 2017 matches 2009. And if the pattern continues as it did until April 2011 then a spike to near $90 is in order in 2018, after a period of consolidation.
Another phenomenon we should be looking out for in gold and silver are the price spikes that would normally mark the end of what have been very long bull markets for these precious metals since 2000.
Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market author Jim Rogers, who spotted the 2000 bull market in commodities ahead of other analysts, says he has never known a bull market in any commodity to end without this sort of a price spike.
The 2011 spike in silver to $49, just shy of its 1980 all-time high, may well have been a fake top. It was just not confirmed by anything close to a spike in gold whose peak of $1,923 in October 2011 just looks like an interruption of a long upward trend. No price spike, no end to the trend, although that price spike must be near now.
Turning then to the fundamentals that drive gold and silver prices higher, what is it about 2017 that should make investors feel confident about the outlook?
It is true I was wrong-footed like many into thinking that Donald Trump’s election would herald a big rally for gold and a slump in stocks, while the reverse has happened.
However, it could well be that this analysis of uncertainty due to the maverick new president was just mistimed rather than misinformed. Once his inauguration is over on January 20, financial markets may head south while gold and silver may turn up.
There is also some muddled thinking about the outlook for US interest rate rises. Last year we got one rise instead of three promised. Will it be any different this year if the Fed decides to keep rates low as the uncertainty factor of president Trump becomes an issue?
Now any sign that the Fed is going to keep interest rates behind the inflation curve is positive for gold and silver. At the moment, a number of top analysts have several interest rates rises depressing the outlook for gold and silver. But this may either not happen, or inflation could prove more rapid than expected and have the same effect.
You don’t have to look far around the world for other sources of market instability in 2017: there is the UK’s Brexit from the EU coming up this spring and the effect of recent oil price gains on inflation. Besides the bullish run in major global stock markets is getting very old on historical precedent leaving valuations stretched.
So if you accept this contrarian view of gold and silver and 2017, how should you best play it for maximum advantage?
Gold will always be the steady choice, but silver is the natural outperformer when it comes to serious bull markets as we saw last year. It is a tighter market than gold with less supply and thus far more susceptible to speculative investment flows.
Over time if you track the ratio of the price of silver to gold, you will find it fluctuates between an extreme of x80 and lows of x40. This ratio shrinks as a bull market accelerates and is just over 70 now.
Thus silver is the better buy. That said, you will need a strong stomach because silver tends to be very volatile. But if you want to up your game then the way to go is to buy the stocks of silver producers or exploration companies, or a silver ETF like SILJ.
For when the price of silver rises, the profits of these companies will grow even faster due to their fixed costs against a higher selling price. That worked brilliantly in 2016 and it should work again in 2017.
Courtesy: Peter Cooper
2017 silver PV energy demand to ease from record, threat of copper substitution…
SILVER’S USE in photovoltaic cells will hold strong in 2017 according to leading analysts, becoming an ever-more key source of demand and lagging only last year’s new record offtake from the solar energy sector.
Whether 2017 silver prices rise or not however, PV panel manufacturers will continue to reduce the quantity of silver pasted on to the front and back of each cell, a trend starting with the precious metal’s spike towards $50 per ounce in 2008-2011.
Research is also now pushing to substitute the precious metal with much cheaper copper.
Thanks to the slowdown in new PV installations planned for 2017, “This year we expect demand for silver from the PV segment to ease slightly,” says specialist consultancy Metals Focus, “although the global total will remain comfortably the second highest on record” behind 2016.
Analysts GFMS – a division of news and data providers Thomson Reuters – say that the solar energy sector bought 11% more silver last year than 2015, the only major use to grow on their latest estimates for the Washington-based Silver Institute of miners, refiners, retailers and industrial users.
That bucked the silver market’s overall 9% decline in total demand, led by the precious metal’s daily price averaging a rise of that same percentage in 2016.
With jewelry, silverware and most notably silver investment demand falling last year, total industrial use grew 3% on Metals Focus’s latest data, with that record-high demand for silver from the photovoltaic sector “a key driver”.
So-called “thrifting” continued however, with the leading new PV cells needing only one-fifth as much silver last year as a decade before according to October’s update from International Technology Roadmap for Photovoltaic (ITRPV).
The silver now used in new PV cells costs just less than 5 cents at current prices.
Spot prices to buy PV cells bottomed in December at 36 cents per watt, or around $1.45 per cell, according to data from Bloomberg, with the growth of installed capacity and new competition worldwide forcing some manufacturers to sell products at a loss.
“Silver accounts for 15-25% of the total manufacturing cost of PV panels,” according to a December report for the Silver Institute from metals analysts CRU.
“Therefore it has become a main focus in cost reduction.”
“Efforts by fabricators to reduce silver loadings in PV cells started in 2011,” says Metals Focus, pointing to the metal’s jump near all-time record high prices that Spring.
Average silver loadings per cell have sunk from more than half-a-gram 10 years ago to barely 0.1 grams for ‘best in class’ PV products according to industry data.
Continued thrifting in 2016 now means that “growth in silver [PV] offtake was lower than the 25% headline rise” in new solar energy capacity worldwide, but “the pace of thrifting has slowed down notably during the last couple of years.”
“Given the current state of knowledge,” said Dr.Arno Stassen, Staff Technologist of the Photovoltaics Business Unit in Singapore for Germany-based bullion and specialist refiners Heraeus in 2015, “it is inconceivable that the precious metal silver could be replaced, since no other material fulfills the requirement for ‘cost in relation to performance’ in a comparable manner.
“Silver is also excellent due to high process stability.”
But research into substitution continues, and “you’re [now] seeing some investment in replacing silver with copper,” Reuters quoted John Smirnow, secretary-general of the Global Solar Council, in late 2016.
Despite the shift from so-called ‘thickfilm’ to ‘thinfilm’ cells after the 2011 price spike, “Metallization pastes/inks containing silver and aluminum are the most process-critical and most expensive non-silicon materials used in current technologies,” says ITRPV of crystalline silicon photovoltaics, the most common type of solar panel.
“Paste consumption therefore needs to be reduced…It is extremely important, because the price of silver is expected to remain high.”
So while silver “is expected to remain the most widely used front side metallization material for c-Si cells,” it faces a genuine challenge from less expensive copper according to Dr.Jutta Trube at ITRPV, forecasting that mass production is likely to start in 2018, coming to account for 25% of the market by 2026.
The gold miners’ stocks are rocketing higher again after suffering a rough few months. Following sharp selloffs on gold futures stops being run, the Trumphoria stock-market surge, and a more-hawkish-than-expected Fed, this battered sector had largely been left for dead. But strong fundamentals in gold stocks finally overcame the dismal herd sentiment last week, paving the way for this sector to shine again in 2017.
This “shine again” assertion likely seems dubious to casual observers, since the gold miners’ stocks suffered a miserable Q4’16. The leading HUI NYSE Arca Gold BUGS Index plunged 21.1% in a quarter where the benchmark S&P 500 broad-market stock index surged 3.3%. Naturally gold miners’ profits are fully dependent on gold prices, and this metal fell 12.7% in Q4 which proved one of its worst quarters ever.
Thus no sector has been more out of favor in recent months than precious metals. Gold and therefore gold-stock bearishness abounded, with bullish outlooks dwindling near nonexistent. But viewing gold stocks solely through the extremely-distorted post-election lens is a serious mistake. Despite their sharp Q4 selloffs, this sector as measured by the HUI led the markets by still soaring 64.0% higher in full-year 2016!
If any other sector like technology or financials or even energy had seen such dominating performance last year, the financial media would be endlessly extolling it. But not gold, it’s just too contrarian. 2016 was a solid year for gold, with its 8.5% rally nearly catching the S&P 500’s 9.5%. As of Election Day, gold was still up 20.3% year-to-date which trounced the 4.7% of the S&P 500. Gold really did shine last year!
The highlight of gold’s first up year since 2012 was certainly the first half. Between a 6.1-year secular low in mid-December 2015 on highly-irrational Fed-rate-hike fears and early July, gold powered 29.9% higher in its first bull market since 2011. And over roughly that same 6.5-month span, that leading HUI gold-stock index soared 182.2% higher! Gold stocks’ stellar performances dominated the markets last year.
Nearly a year ago as the HUI fell to miserable 13.5-year secular lows, I advised that a major new gold-stock bull was imminent. Last January’s gold-stock prices were fundamentally absurd relative to this sector’s underlying earnings power even at then-prevailing gold prices. A similar extreme sentiment-distorted pricing anomaly just happened last month. So 2017’s gold-stock setup is just as bullish as 2016’s proved!
Sadly most traders succumbed to the recent groupthink bearishness to foolishly bury their heads in the sand regarding gold stocks. The same thing happened a year ago. Speculators and investors alike are always ignoring the most-beaten-down sectors which usually have the greatest upside potential. So it’s incredibly important to get up to speed on gold stocks as 2017 dawns, before they are bid far higher again!
Maintaining perspective is the key to overcoming the dangerous herd emotions of greed and fear. They convince traders to wrongly buy high and sell low, ultimately leading to catastrophic losses. But armed with the big picture, it is much harder to fall into the trap of extrapolating recent performance out into the indefinite future. This first chart looks at the gold-stock bull over the past year rendered in HUI terms.
After nearly tripling in just over a half-year by early August, the red-hot gold stocks were indeed due for a serious correction as I warned in July. Infected with rampant greed and wildly overbought, this sector soon sold off hard in August. Sharp corrections in bull markets are totally normal and very healthy, as they bleed away excessive greed to keep sentiment balanced. After that gold stocks stabilized in September.
But as October dawned, an anomalous adverse event slammed them out of the blue. The gold-futures speculators who dominate short-term gold trading must deploy stop losses to protect themselves from these hyper-leveraged trades. They had a big mass of stops set near $1300, which had proven strong support for gold since it soared in late June on that Brexit-vote surprise. That was a logical level to protect capital.
After drifting lower in late September, gold finally slipped into that futures-stop-infested zone around $1300 in early October. The consequential stops triggering soon cascaded, and gold’s sharp selloff became self-feeding. The resulting mass stopping quickly spilled into gold stocks, causing the HUI to plummet 10.1% on October 4th! While painful, that surprise event was an extreme anomaly that wasn’t sustainable.
Indeed gold stocks soon stabilized again, with buyers returning near their key 200-day moving average and parallel bull-market-uptrend support in October. Gold and its miners stocks climbed on balance right into election night, when they soared in futures and overseas trading as Trump took the lead in Florida. All pre-election market behavior strongly suggested gold would surge if Trump somehow managed to win.
American gold futures blasted 4.8% higher from that afternoon’s close on election night, hitting $1337. And over in Australia gold stocks were soaring 15%+! But later that very night as Clinton conceded to virtually eliminate the risk of a contested election, the US stock markets started to rally sharply out of limit-down 5% S&P-500-futures losses. And as the anti-stock trade, gold was hammered on that stunning reversal.
Gold is a unique asset that moves counter to the stock markets, making it essential for diversifying stock-heavy portfolios. Gold investment demand naturally surges when stock markets weaken, as gold’s gains help to offset stock losses. But when stock markets seemingly do nothing but rally indefinitely, investors soon forget about prudently diversifying portfolios. So sharp stock rallies temporarily kill gold demand.
As gold dropped in the days after the election surprise on the Trumphoria stock-market rally, the gold stocks were blitzed again with another mass stopping. On November 10th and 11th, the HUI plummeted 7.8% and 8.0%! These horrific losses were the final straw for most gold-stock investors, destroying their will to remain in such a volatile sector. So gold stocks went from loved in mid-2016 to despised in mid-November.
But again perspective is crucial. How often does a radical outsider like Trump run for and actually win the US presidency? Nothing like that has ever happened before. Any market selloff driven by an extreme anomaly is never sustainable. Gold stocks didn’t plunge because their fundamentals were failing, but because an epic surprise post-election stock-market rally seduced investors out of gold back into lofty stocks.
Again since that extreme gold-stock selloff was purely sentimental and had nothing to do with the hard fundamental realities of the gold-mining industry, these battered stocks quickly stabilized. Despite the stock-market euphoria and resulting gold antipathy, the HUI ground sideways for an entire month from mid-November to mid-December. The unjustified extreme gold-stock selling had largely exhausted itself.
But on December 14th, the Fed surprised on the hawkish side so gold and gold stocks took another hit. While traders had universally expected the Fed to hike rates for the second time in 10.5 years, they did not expect elite Fed officials to forecast three more rate hikes in 2017 instead of two previously. So yet again gold stocks were crushed in emotional fear-drenched selling, ultimately pummeling the HUI to 163.5.
Those were essentially February levels, last seen on the first trading day of March. While that post-Fed selloff wasn’t an extreme anomaly like the early-October and post-election ones, it was devastating to already-tattered gold-stock psychology. An astonishing 2/3rds of gold stocks’ bull market in the first half of 2016 had been erased! The gold miners were universally hated, the pariahs of the investment world.
But that didn’t make any sense at all. As of its very closing low the day after last month’s Fed decision, the gold stocks as measured by the HUI were still up a fantastic 47.0% year-to-date! That compares to just 10.7% for the S&P 500, and this sector likely remained the top performer in 2016. In any other sector in all the stock markets, traders would be salivating at buying the dip after such a supremely-anomalous selloff.
Instead of fretting about a 42.5% drop over 4.4 months largely driven by two unrepeatable events, traders should’ve been remembering gold stocks’ powerful first-half gains. Back in July and August when the gold stocks were high, investors and speculators alike were falling all over themselves to deploy capital to chase gains. But they were nowhere to be found when these miners’ stocks plunged to fire-sale prices.
I can’t help but marvel at this glaring disconnect. I’ve spent decades actively speculating in the stock markets, and have shared our contrarian research via my financial-newsletter business for 17 years now. The most-shocking revelation I’ve learned is how susceptible to groupthink psychology the vast majority of investors and speculators are. They love to buy high when greed reigns, but refuse to buy low as fear mounts!
Last summer traders were eagerly rushing to buy gold stocks high, to chase the strong gold-stock gains. Yet just a few months later when these very-same elite gold miners were deeply on sale for 40%+ off, these same traders who loved them last summer wanted nothing to do with them. What is so hard to understand about buying low and selling high? Buying low means embracing fear when few others will buy.
Fully wrapped up in popular bearish sentiment, traders totally lost sight of the gold-stock fundamentals in much of November and December. I did my best to help them overcome that, spending long weeks in late November and early December digging deeply into hard gold-mining fundamental data from these companies’ just-published third-quarter financial reports. Yet that super-important research fell on deaf ears.
I dug deeply into the top 34 component companies of each of the dominant gold-stock ETFs, the GDX VanEck Vectors Gold Miners ETF and the GDXJ VanEck Vectors Junior Gold Miners ETF. It turned out in Q3’16 these elite GDX major gold miners reported average all-in sustaining costs of $855 per ounce. And the elite GDXJ junior gold miners weren’t much worse at $911 per ounce. These numbers are crucial.
All-in sustaining costs reveal what it costs the gold miners, individually or as an industry, to maintain and replenish their current operations. Between Election Day and year-end, the gold price averaged $1177 per ounce. Extending to all of the dismal Q4’16, that climbed to $1218. And even at worst after the Fed decision, gold only briefly fell to $1128. None of these gold levels were remotely close to threatening $855!
Even on gold’s worst day in Q4, the elite gold miners of GDX were still earning big profits of $273 per ounce. That equates to an amazing 24% profit margin that most industries would sell their souls for. At the Q4 average gold price, these earnings were fully a third higher at $363 per ounce! Yet the irrational fear was so great that gold stocks were battered back to prices first seen in July 2003 when gold traded near $360.
Stop and think about that for a second. Just a couple weeks ago, in a quarter where the gold miners likely earned $363 per ounce mined after all expenses, their stock prices were trading at levels first seen 13.4 years earlier when the entire gold price was less than current profits! The only words that come to mind to describe this are ridiculous, ludicrous, and absurd. The recent gold-stock prices weren’t righteous.
Being so close to year-end, I didn’t expect the new investment buying to flood into gold stocks until the new year. But it’s always important to get deployed before everyone else catches on, as that’s when the buy-low opportunities are the greatest. And out of the blue on no news, gold stocks started rallying on the day before the long Christmas weekend. That strong contrarian buying persisted for most of last week.
And as 2017 dawned this week, investors immediately started looking for deeply-undervalued sectors to position in for this new year. And the still-beaten-down but-quickly-recovering gold stocks won a sizable portion of those capital inflows despite their tough fourth quarter. As of the middle of this week, in less than 3 weeks since its extreme post-Fed low the HUI has already catapulted an amazing 17.6% higher!
As always the stocks of the smaller gold and silver miners with superior fundamentals we specialize in enjoyed gains amplifying those seen in the major miners dominating the HUI and GDX. And despite the sharp rebound gold stocks have seen in recent weeks, they are just getting started. Odds are this sector will once again prove one of if not the best-performing sector in all of 2017, building on 2016’s strong gains.
As of the Wednesday data cutoff for this essay, the HUI was still only trading at 192.3. That merely took it back to levels seen in the immediate post-election plunge. The gold stocks still remain well below their strong 200dma and bull-market-uptrend support zones, and 32.3% under their early-August bull-market high per the HUI. The gold stocks’ upside potential from here remains vast, as evidenced on all fronts.
In addition to battered technicals, gold-stock sentiment was crushed to hyper-bearish levels late last year. It will take a long time and a lot of rallying to eradicate that excessive fear and restore sentiment balance to this sector. And fundamentally, gold stocks remain wildly undervalued relative to the profits they can spin off at prevailing gold prices. A quick proxy for that is the HUI/Gold Ratio, rendered here.
I’ve often discussed this chart extensively in the past, including nearly a year ago when calling a new gold-stock bull the very week 13.5-year HUI lows were witnessed. In a nutshell, the HUI/Gold Ratio distills the key fundamental relationship between gold prices, gold-mining profits, and therefore gold-stock price levels into a single line. Gold-stock prices tend to trade in a range relative to underlying gold levels.
On the day after the Fed’s hawkish surprise last month, the HGR fell to 0.145x. In other words, the HUI closed at 14.5% of gold’s close. Outside of the extreme record HGR anomalies seen in the last half of 2015, that was among the lowest HGR levels ever. Back in mid-January 2016, the HGR briefly fell to an all-time low of 0.093x. But such crazy lows are unsustainable sentiment-driven anomalies, temporary distortions.
As of the middle of this week, the HGR has still only recovered to 0.165x. From 2009 to 2012, which were the last normal years between 2008’s stock panic and 2013 when the Fed’s radical QE3 started to levitate the stock markets and crush gold, the HGR averaged 0.346x. So merely to mean revert back up to normal levels relative to today’s prevailing gold prices, the HUI still needs to rally another 109% from here!
But that’s far too conservative for a couple major reasons. All mean reversions out of extremes tend to overshoot proportionally in the opposite direction. So the abnormally-low HGR levels in recent years driven by extreme fear will almost certainly yield to abnormally-high levels in coming years fueled by excessive greed. A proportional overshoot yields a topping HGR target of 0.599x, for another 262% HUI rally.
And gold itself isn’t going to remain at the artificially-depressed low levels seen since the election. Gold-futures speculators will return with a vengeance as the wildly-overcrowded long-US-dollar trade reverses dramatically in 2017. And gold investors will flock back as the bubble-valued US stock markets inevitably roll over into their long-overdue bear. Thus gold is looking at 2017 gains far better than those seen last year.
As gold mean reverts higher, gold-mining profits greatly leverage and amplify its gains. Gold-mining costs are largely fixed when mines are planned. That’s when engineers decide which ore bodies to mine, how to dig to them, and how to process that ore. This determines how much capital investment is necessary to bring mines online, huge fixed costs. After that, variable operating costs don’t fluctuate too much.
Plugging higher gold prices into any HGR target, either an unlikely strict mean reversion or a very-likely proportional overshoot, yields commensurately higher gold-stock price targets. The math is simple. Take any gold level you find likely in the coming years, multiply it by 0.346x or 0.599x, and you get the HUI levels that can support. The battered gold stocks are likely only just starting a mighty new multi-year bull market!
You can certainly ride the coming massive gold-stock gains in those leading GDX and GDXJ gold-stock ETFs. But at best they will mirror sector gains, as they are over-diversified and held back by too many underperforming gold stocks with inferior fundamentals. A carefully-handpicked portfolio of elite gold and silver miners with superior fundamentals will see gains dwarfing those of the gold-stock ETFs and indexes.
The bottom line is gold stocks are really set to shine in 2017, as early trading is already proving. This sector was just battered to fundamentally-absurd price levels in the wake of the election surprise. With gold-mining earnings remaining strong, the recent gold-stock lows were fully driven by extreme bearish sentiment. Such fear anomalies never last, always paving the way for massive mean reversions higher.
The latest one has already started, and gold stocks still have easy potential to at least double from here even at low prevailing gold prices. But as the overbought stock markets and US dollar inevitably reverse lower this year, gold’s own bull will resume. Higher gold prices will greatly increase the profitability of gold mining, and fuel a major new multi-year gold-stock bull. As always the early investors will earn fortunes.
Courtesy: Adam Hamilton
Scientists are creating a new silver catalyst to purify the air that can decompose toxic carbon monoxide and other harmful substances into harmless components, an advance that could help fight smog in cities like New Delhi and Beijing.
This nanostructure catalyst may be effective even at room temperature and could be used as a filter for ventilation.
“Silver catalysts are less studied than other catalysts made with particles of precious metals—gold, platinum, and palladium,” said Gregory Mamontov, senior researcher at the Laboratory of Catalytic Research at Tomsk State University in Russia.
“However, they can be just as effective in the oxidation of harmful volatile substances and cheaper by a factor of 10,” said Mamontov.
The researchers have synthesised a particular type of silica gel—SBA-15, which consists of 6-10 nanometres diameter nanotubes of silicon oxide, and used it as a basis for preparing the catalyst.
“Each nanotube is used as a nanoscale reactor. Inside, we conduct the synthesis of silver particles and cerium oxide smaller than three nanometres,” said Mamontov.
“After that, each nanotube with particles becomes the catalyst. Our task is to distribute the particles inside the nanotubes and to organise special interactions between them that will provide a high catalytic activity in the oxidation of harmful substances,” he said.
“It is assumed that the catalyst obtained in the form of powder or granules can be put into air-cleaning devices in homes, offices or production halls,” Mamontov said. “In this case, it is not necessary to heat it, because this catalyst, in contrast to many analogues, is active and stable at room temperature,” he said.
This catalyst will primarily be effective against carbon monoxide and formaldehyde, but can also degrade other harmful, volatile substances into harmless components, researchers said.
“First of all, such a catalyst will be in demand in industrial areas and cities to fight industrial emissions and smog from forest fires, which also contains a large amount of carbon monoxide,” said Mamontov.
“In addition, the catalyst can be adapted to neutralise the gas discharges of chemical plants and the exhaust systems of automobiles,” he said.
Source: Deccan Herald
Silver prices continue to be under pressure for all the wrong reasons. Don’t be shocked if this sentiment changes sooner rather than later, and we see a silver rush.
Investors must pay attention to inflation to see where silver could go next. You see, silver prices have a very strong relationship with inflation. As inflation increases, silver prices move higher as well, in multiples.
As it stands, in the United States, inflation—and inflation expectations—are moving up very quickly. For instance, look at the chart below. It shows the year-over-year percentage change in monthly inflation figures posted by the U.S. Bureau of Labor Statistics (BLS).
Since January 2015, we have seen inflation in the U.S. move higher. In November 2016, inflation stood at the highest level since late 2014.
Chart courtesy of Federal Reserve Bank of St. Louis
Here’s the thing: if you pay attention to the inflation expectations going forward, they are making silver an even more compelling opportunity.
Please look at the chart below of five-day forward inflation expectations below. Saying the very least, inflation looks much higher going forward than it is today. Inflation expectations have soared over 50% in a matter of months.
Chart courtesy of Federal Reserve Bank of St. Louis
With all this said, don’t be too naïve to think that’s it for inflation.
Dear reader: you must remember what happened after the financial crisis of 2008 and 2009. The U.S. Federal Reserve jumped in to boost the U.S. economy and save the financial system, and started to print money. This was called quantitative easing.
Through this, the fed printed roughly $3.0 trillion out of thin air. This caused monetary inflation, which occurs when the amount of money in an economy expands quickly.
But know that after monetary inflation, price inflation usually follows. This is when the price of goods and services start to go higher. Why? There’s a lot more money chasing a similar number of things. Currently, we see that the five-year forward inflation expectation rate is around 2.10%. This could go much higher.
In the last eight years, the government measure of inflation, the Consumer Price Index (CPI) has increased 14.35%.
In this same period, silver prices have increased 44.33%.
If you do the simple math, for every one percent increase in inflation in the U.S., silver prices increased over three percent.
Given the inflation expectations, and the amount of money that’s been printed since the financial crisis, if we assume the CPI increases 25% in the next eight years; we could be looking at silver prices soaring 75%.
Keeping all this in mind, silver miners could be the best place to be when silver prices soar. If there’s actually a 75% move in silver prices over the next several years, it wouldn’t be shocking to see some silver stocks surging 750%.
Courtesy: Moe Zulfiqar
Gold prices have dropped from $1,340 an ounce in September to around $1,130 as of this writing. The cause is the strengthening USD and the recent rally in the U.S. stock market that followed Trump’s surprise victory.
Plus, most people now expect at least a few rate hikes by the Fed. Gold rarely fares well in a rising real rates environment. Many investors wonder if gold has entered a lasting bear market. Or if this is the time to buy while prices are low.
The world is focused on the prospect of rising interest rates. Yet, the market is pricing-in modest rate increases. Here is why:
Fed Chair Janet Yellen highlights that the Fed policies will continue to be accommodative
Following the Fed’s December 13 and 14 meeting, Yellen acknowledged that the Fed is in a wait-and-see mode. Based on recent progress on the employment front, it is planning tightening. It asserts that these are modest adjustments.
Yellen thinks the damage done to the economy by the financial crisis and recession can be fixed with robust aggregate demand and a tight labor market. So far, Yellen and her fellow Fed governors have not been hawkish. This is in spite of the belief the market does not foresee that the Fed will pursue an aggressive tightening policy.
Years of loose monetary policy—coupled with Trump’s infrastructure, de-regulation, and fiscal plans—could unleash a time of economic expansion which would likely include inflation. Based on the Fed’s past behavior, we expect them to be slow to hike rates and catch up. Real rates may turn negative. It would be very favorable for gold prices.
Yellen pointed to negative interest rates as another tool if economy slows
There is also a very real chance the U.S. economy will not continue to move upward. It may even slip back into a recession. We are in the seventh year of economic expansion. Historically, we are overdue for a broad-based market contraction.
In spite of the hope that followed Trump’s win, it is possible that the honeymoon will be short lived for their administration. The challenge facing the U.S. and world economies are plenty.
The U.S. economy is in the headwinds of a strong dollar and over-indebtedness. Lower taxes and increased spending could tip the scale and cause a recession.
Abroad, political tensions in Russia, Syria, Iraq, and Ukraine are ongoing. Europe is in social crisis as they are dealing with a huge wave of immigration. Also, the European banking system is creaking under various strains. Add to this the risks of increasing nationalism and trade wars possibly started by Trump, and the next few years could be unstable to say the least.
Yellen is already on record as saying that negative interest rates are just “another tool in the arsenal.” All it would take is a couple of quarters of negative growth and the Fed would have “to do something.” Negative interest rates are likely one of the last tools in their arsenal. This is why Yellen has already been preparing us for that possibility.
We are in a unique situation today, in that any action from the Fed is unlikely to affect gold prices. Yellen’s comments over the last few months demonstrate that the Fed will only hike rates if they feel compelled to do so.
The Fed Chair also made it clear in remarks a month or two ago that she would not be afraid to use negative rates if the economy entered a recession.
Either inflation or negative real rates would definitely be a plus for gold prices.
Of course, if the economy really starts to show strong growth, the Fed will begin a series of rate hikes to put the brakes on inflation, but we anticipate them to be reactive.
In either case, we believe real interest rates will remain negative—or at best near zero—in both scenarios. This makes a very strong case for holding gold at current prices.
Add to this a very volatile geopolitical environment, fragile economies worldwide, and excessive levels of debt across the globe: the case for gold as insurance and also as a solid long-term investment is as strong as ever.
In fact, the current price decline may be one of the best opportunities for contrarian investors to move cash into a very attractive but unloved asset class.
Courtesy: Olivier Garret
We are fortunate today to be joined by Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors. Just recently Mr. Holmes received another award from the Mining Journal and was named America’s Best Fund Manager for 2016, one of many awards he’s received now in the mining industry for his fantastic track record. He is also the co-author of the book The Gold Watcher: Demystifying Gold Investing and is a regular guest on CNBC, Bloomberg, Fox Business, as well as right here on the Money Metals Podcast.
Frank Happy New Year to you and it’s great to have you back with us and thanks for joining us again.
Frank Holmes: It’s good to be with you all and yes, Happy New Year and wishing everyone buckets of laughter and gold this year.
Mike Gleason: Well to start out here, we’ll talk about gold specifically and I want to get your comments from a technical analysis standpoint in the gold market as we begin the new year. I know you’re pretty optimistic about where prices may be headed saying that gold was significantly oversold at the end of the year. You wrote a great piece recently for your website on the subject. So, if you would please share with our listeners why you’re looking for a reversal and a move higher in the metals.
Frank Holmes: One of the things we like to do is try and remove the emotions of markets and apply some basic statistical analysis. One of the most simple ones is the oscillator and it’s looking at the rate of change over a specific time period. In 60 trading days which we published on and that’s looking over a basically 90 calendar days which is a quarter. You go back over 10 years, 20 years, and it doesn’t matter if gold was in a micro-rising trend or a falling trend, things will overshoot both to the upside and to the downside.
There are these extreme pivot points that investors should look at and what we’ve seen here is that gold is down two standard deviations. That’s just forecasted over the next 60 trading days, the odds are they have a 90% of a probability of a reversal back to the mean. It also comes at year end and usually gold rallies in January going into the Chinese New Year, so it appears that we start this rally.
Mike Gleason: Yeah we’re certainly looking good here as we’re speaking on Wednesday of this week. The first week of the year does appear to be positive for metals which of course is a nice sign for many folks who’ve been worn out over the last few months with the price action. On one of the fundamental drivers you watch carefully when it comes to the precious metals is real interest rates. We’ve talked about that a lot with you. All other factors aside higher real interest rates tend to weigh on gold prices because gold doesn’t generate a yield.
We’ve seen yields move higher since November and that is one of the factors weighing on the metals. We have the Fed targeting three to four rate hikes in 2017 but we know that what they say and what they do are often two very different things. Last year at this time, Janet Yellen was telegraphing four hikes and delivered one and that was in the final month of the year. So what is your outlook for interest rates in 2017?
Frank Holmes: I think that they backed up very quickly and I think that we’re going to have inflation. Historically whenever you have such a big fiscal stimulus and it’s very demand focused domestically, domestic demand, and we’ve this short in the small cap stock arena, then the odds favor that inflation will be higher. Here the magic is, how high can rates stay ahead of inflation without stifling a recession? And I don’t think they can go much higher, and I think that’s the inflection point.
Right now if you take a look at the spike in the short two year government bond, which most currencies trade off of, you see an extra 80 bases points – an unexpected rally in that yield. And that would have basically on a debt rollover take the debt servicing up to 3.5% of GDP. So, I think that that would be fragile to say the least. I think the other things where investors need to recognize is that if Trump does go with his tariffs and doing all this stuff, some of these thoughts are out there, this will trigger inflation and we’re going to see gold participate in a big rally.
The last thing I want to share with the investors was that this time last year when everyone was so bearish and bleak and gold started this rally. The gold stocks that cleansed all themselves to balance sheet and started on a spectacular run. When they were up 40% most of Wall Street was telling me, “Oh, it’s up too high.” I would do interviews and it’s up 80% and, “Oh that’s up way too high.” Now, our funds are up 100%, “That’s just impossible.” And still we’re up, or gold (stocks) were up 70% I think for the past year and that was still too high.
We still have this per base of negativity towards gold and talking down gold as an asset class. I think that that’s another factor that lends itself that we can get this surge of short covering in gold stocks.
Mike Gleason: Leading me right into my next question. Last year was a real rollercoaster for the mining industry. You obviously follow that sector very closely, so will 2017 look more like the first half of 2016 for the miners where they ascended rapidly and the environment was very positive? Or will it look like the second half of the year when they pulled back and gave back much of those gains? Basically how are things setting up for the mining sector this year?
Frank Holmes: It’s a good question. When you do time series analysis that is, what is the core relation over 20 trading days between gold and the gold stocks? We’re talking about a 95% core relation. So if you want to understand the gold stocks you really have to understand the price the gold and where the direction it’s going. Our forecast in gold stocks most times is a forecast on gold.
What the difference is currencies and right now the cheapest gold stocks in the world on an operating cash flow enterprise value are populating in South Africa and Australia. If you take a look at to the multiples as compared to North America and if you look at just having a basket of those names last year and rebalancing them and being a scavenger even though the gold rally was taking place, buying the cheapest operating cash flow to enterprise value, you far outperformed everything, the top 10 names.
In running a mutual fund we have to have at least 21 names and it ends up being more. Coming back from the thought process, I think you need rally in gold, we’re going to see those countries where their currency is weak so therefore labor costs are weaker but they’re getting U.S. dollars even if the dollar is stronger and gold prices and U.S. dollars, they have a margin expansion.
Mike Gleason: Speaking of the currencies obviously one of the major headwinds for gold over the last several months has been the strong U.S. dollar. What are you looking for there in the currencies? Is the dollar likely to weaken versus the other fiat currencies around the world? And how does that weigh in on the Fed’s policy as well?
Frank Holmes: I think the next 100 days it’s going to be very important. One thing about Trump, he is taking speed as being a very important factor in how he’s looking at capital markets. So,I think we’ll have a better feel in the first 100 days.
Mike Gleason: The Deutsche Bank market rigging case has been in the news recently. What are your thoughts there Frank? Will we finally get somewhere with this manipulation thing this time? What we’re reading related to this case is pretty damning and the rigging was pretty blatant.
Frank Holmes: Yeah, it really is. But I think we need to remember is that there’s some relationship with the Fed and these banks. They’re taking it on the chin. Deutsche Bank has been beaten up everywhere, accused for everything and when I went to go back for a tax rebate, the IRS came back and went back to the year 2000 to say they didn’t reclaim properly some private companies that they had invested in.
It appears that no matter what they do the Washington DC is going after Deutsche Bank. So it could be from gold, it could be for mortgages. It could be for anything that they’ve done from LIBOR, et cetera. But I do think what it’s showing you is that they recognize that the gold futures market is leveraged sometimes 25 to one. And it doesn’t take much money to knock the price of gold around especially if there’s a Chinese holiday and trigger stop losses and push gold all around within the future’s market until all of a sudden the cash market opens. So, I think that that exposes that between all the banks of how they can play games with the future’s market around the physical market.
Mike Gleason: How serious do think manipulation is specifically in the metals market Frank? Do you believe this will lead to a meaningful impact on the price as more comes to light and some of the perpetrators get punished?
Frank Holmes: I think it’s always going to happen. It’s a matter of how you get it exposed is key. And I think that there’s more and more sophisticated technical tools that people are using and looking for fund flows to better engage it. But in the beginning of October 2016 in the first week when China was closed and is now the biggest gold bullion buyer in the world and has now become the gold price maker not the taker, it was a fragile-like market and the future’s market hit all these stop losses.
I think there will always be guys out there playing that game. And you just have to recognize that if there’s a holiday coming up, a major holiday in China then you can expect that’s time when gold can be played with. I think that that’s just a reality.
I think that the governments all try to manipulate interest rates so they can borrow cheaply and deploy capital for their own government programs and all the employees they hire. So, I think that you’re always going to deal with this and part of investing is almost, dust off the book, The Art of War by Sun Tzu and where he says, “Strategy without tactics is the slowest route to victory and tactics without strategy is a noise before defeat.” So, make sure that you’ve got a strategy and tactics and that you understand gold markets and when they’re more liquid then not.
Mike Gleason: Yeah, very good advice and a great book as well. Getting back to the miners a little bit I just want to talk about some of the supply-demand situation here. We’ve got lower prices again. Is the mining industry going to maybe consolidate a little bit? Are we going to see less supply coming online as result, less exploration? What do you think there? What kind of impact do you see that having on price and maybe putting in a price floor if we have supply really dwindling?
Frank Holmes: I think I wrote a book and gave some charts in my recent Frank Talk. It looks like they’re calling 2019 as a peak for the gold because there’s been a massive cut back in the past five years of exploration. Each year it just makes it more difficult to have a discovery and bring something on stream. The process from discovery to getting an ounce of gold out of the group, which use to take eight years is now pushing 20 years. I think this is a new reality and it’s good to have clean air and clean water but it has become very extremely difficult to explore, to develop, and to maintain gold production.
Mike Gleason: Well as we look ahead into 2017 here just being several days in at this point, what stories do you see developing that metal investors are likely to be talking about… because in 2016 the focus was on the big price rally in the first half of the year, Brexit and the Presidential election. In the months ahead we’ll find out something about what Trump can actually deliver when he takes office.
Meanwhile it looks like trouble is still brewing for the establishment in Europe, the banking sector there doesn’t look too healthy and they certainly have not resolved the debt crisis in places like Greece. And of course we’ve got the Deutsche Bank market rigging case that does as it plays out could potentially make waves in the metals markets. What are you guessing will be the big stories of 2017 Frank?
Frank Holmes: Pac Man. So, this thought process that gold supply is going to be dwindling and peaking shortly. You’re going to see big caps buying small caps and big caps have to merge or go after the mid-caps. I think that stocks have become undervalued. You’re going to see more and more merger activity and aggressive acquisitions this year.
Mike Gleason: Well, as we begin to close here Frank, anything else that you’re looking for this year? What kind of year do you think it will be for investors especially those of us who focus on the metals and miners?
Frank Holmes: I’ve always recommended 10% in bullion and gold. And they out-performed. Gold stocks far outperformed last year against the S&P 500. And gold bullion also did fairly well in a rising interest scenario. So, I think the thought process of always having 10% and re-weighting and rebalancing is just prudent for investors.
And stay optimistic. MIT did a study on the significance of optimism and if you’re pessimistic, you can’t see opportunity as readily as other people that are optimistic. So, I think for our health both physically and financially stay optimistic.
Mike Gleason: Very good advice for sure. It’s always wonderful insights as usual Frank. We really enjoy hearing your thoughts and we really appreciate your time once again. Now, before we let you go, please tell our listeners a little bit more about your firm and your services if they’re not yet familiar. And then also how they can follow you and your fantastic Frank Talk blog?
Frank Holmes: Well, thank you that’s very kind words. USfunds.com. Subscribe to the Investor Alert or Frank Talk and you’ll get weekly commentaries on different commodities and the world of oil or Russia, Eastern Europe, China, et cetera, we comment on that. And we also have top world class short term muni-funds and muni yields still appear to be more attractive than buying short term government (bonds).
We have a thought process that it’s important to be balanced and have some munis and that’s another way to play the infrastructure. So go to USfunds.com.
Mike Gleason: Well, real stuff as always and really appreciate it Frank. Thanks so much. Have a great New Year and look forward to catching up with you again before long.
Frank Holmes: In a 100 days.
Mike Gleason: Well, that will do it for this week. Thanks again to Frank Holmes.
Submitted by: Money Metals
You could say gold miners struck gold in 2016. The group, as measured by the NYSE Arca Gold Miners Index, finished the year up an amazing 55 percent, handily beating all other asset classes shown below.
Miners were followed by commodities at 25 percent and silver at 15 percent. Gold finished up 8.6 percent, its first positive year since 2012, when it gained 7.1 percent. (Keep your eyes peeled for our forthcoming annual periodic table of commodity returns, one of our perennially popular pieces!)
I find it curious that many in the financial media continue to have a bias against gold, even though it generated better returns in 2016 than 10-year Treasuries and the U.S. dollar, which performed half as well. And when it was up as much as 28 percent in the summer, they still didn’t have anything positive to say, arguing it had gone up too much.
(Gold traders, on the other hand, have a much different opinion about the metal right now. A group of traders recently surveyed by Bloomberg revealed they are the most bullish on gold since the end of 2015, soon before it rallied in its best first half of the year since 1974. The traders cited geopolitical concerns, both in the U.S. and Europe, as well as stronger demand in 2017.)
And isn’t it interesting that the same media figures who are biased against gold are usually the same ones who seem to have only disparaging things to say about Brexit and President-elect Donald Trump? What they don’t realize is that if Brexit and Trump succeed, so too do the U.K. and the U.S. Are they hoping Brexit and Trump will fail so they can be proved right?
The smart people realize personal politics must be put aside. Despite supporting Hillary Clinton during the primaries, Warren Buffett now says he is behind the president-elect—because he knows that if the U.S. does well, he does well too. Despite campaigning hard against Trump, President Barack Obama says now we should all be rooting for Trump, regardless of our politics.
But back to gold. Coming up on January 28, we have the Chinese New Year, when demand for the yellow metal historically has risen, along with prices. This will be the year of the fire rooster, one of whose lucky colors is gold.
Throughout 2017, the precious metal should be supported by even deeper negative real rates, which could fall to their lowest level in two years as inflation outpaces nominal interest rate increases, according to UBS. In October, Federal Reserve Chair Janet Yellen suggested there might be some benefit in allowing inflation to exceed the central bank’s target rate of 2 percent before another hike is considered, which is good news for gold. Numerous times in the past I’ve shown that the yellow metal has tended to rise when real rates—what you get when you subtract inflation from the federal funds rate—fell into negative territory.
“Federal Reserve interest rate hikes could weigh on gold prices in the near term,” according to UBS’s house view. “But as real rates fall more deeply into negative territory through the next year, we expect prices to rise toward $1,350 an ounce.”
Since Election Day, domestic stocks have rallied 6.5 percent while gold has dropped as much as 7.6 percent. What this means is gold is looking extremely undervalued compared to the S&P 500, which should appeal to value investors.
Look at the gold-to-S&P 500 ratio below. The lower the ratio, the more undervalued the metal is compared to blue-chip stocks. In fact, gold is at its most undervalued in at least 10 years right now.
Technically, gold still appears oversold, down almost one standard deviation now. As you can see, it’s moving back to its mean for the 60-day period, but there’s still time to capture potential growth.
Commodities were the second-best asset class last year because manufacturers and trade are showing improvement.
Global manufacturing expanded for the fourth straight month in December, reaching 52.7, its highest reading since February 2014. The individual U.S., Germany, Japan, and eurozone PMIs all hit their highest posts in at least a year, building on a strengthening uptrend that’s been in place since September. International trade volume expansion hit a 27-month high, according to Markit. And despite the “negative” consequence of Brexit, the U.K. Manufacturing PMI posted an amazing 56.1, up from 53.4 in November.
As for commodities, I’m pleased they’ve shown resilience in the face of a strengthening U.S. dollar. CLSA analyst Christopher Wood touched on this very topic in his recent edition of “GREED and fear,” writing that “the renewed dollar strength post Trump’s victory has not been accompanied by renewed commodity weakness. Rather the reverse has happened, with copper rallying, for example, on presumed hopes of increased demand triggered by Trump’s infrastructure policies.”
China’s commodities trading volume has also been impressive, maintaining its rank as the world’s heaviest for the seventh consecutive year.
Of course, price appreciation for commodities and natural resources is inflationary for consumer goods. Because of possibly rising gasoline prices, U.S. drivers are expected to spend about $52 billion more at the gas pump this year compared to 2016, according to GasBuddy’s 2017 Fuel Price Outlook. Three-dollar gas will likely become a reality again in several large cities, including New York, Los Angeles, Chicago and Seattle.
Whatever you end up paying, make it a point this year to stay optimistic. Not only does being optimistic help you stay healthy, both mentally and physically, but it also allows you to see the opportunities that others might not.
Courtesy: Frank Holmes
Does either of the above preclude the other? In other words, if we expect gold prices to reach $7000 per ounce, and we are correct, does that mean that we can’t reasonably expect gold prices to go as low as $700 per ounce? Conversely, if we are predicting or expecting gold prices to continue the current decline, and even breach $1000 per ounce on the downside, can $7000 per ounce, or anything even remotely close to that number, be a reasonable possibility?
I do not think either one precludes the other. In fact, I think it is entirely possible that we can see both figures. And not necessarily spread over an inordinately long period of time, either.
Here is a possible scenario that would allow that to happen.
As the US dollar continues to strengthen, the US dollar price of gold continues to decline. This is clearly evident in the price action of gold since its high point of approximately $1900 in 2011. There is no way to know for certain how long the current dollar strength will last. At some specific price point the two (US dollar, gold) will find equilibrium. And it is reasonable that if ongoing dollar strength takes gold below $1000, it might come to rest somewhere between $860 – 890. In January, 1980, gold peaked at $850. Revisiting that number is plausible, and well within the realm of realistic speculation. And, yes, there are technical indicators that point to gold prices as low as $680-700.
But what type of economic conditions might accompany the reality of that price projection?
I think the consensus is that an ongoing stronger US dollar would be accompanied by a stronger economy. That makes sense. But what if it doesn’t happen that way? What if the economy continues to struggle even more? Remember, we have been subjected to huge creations of money and credit over the past eight years. And that is on top of similar policies and actions by the Federal Reserve over the past one hundred years. Is our economy strong enough to weather the effects of attempted normalization/withdrawal? And, furthermore, have we already ‘killed the patient’?
I believe that is exactly the question that is plaguing the Federal Reserve. And the very reason they have struggled with firm decisions on altering their accommodative expansion of money and credit. This is most obvious in their lack of decisiveness regarding interest rates.
Regardless of that, whatever the Federal Reserve has done – or hasn’t done – since 2011 (when Gold peaked at $1900) has been interpreted positively, generally. At least as far as the US dollar is concerned. Otherwise, we would not have seen the US dollar price of gold drop over that time to its current level of $1170.
But even with a stronger US dollar, the economy still struggles. And there are indications that it could get worse. Regardless of the Fed’s attempts to avoid it, deflation is a very real possibility. An implosion of the debt pyramid and a destruction of credit would cause a settling of price levels for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than currently. It would translate to a very strong US dollar. And much lower gold prices.
Those who hold US dollars would find that their purchasing power had increased. The US dollar would actually buy more, not less. But the supply of US dollars would be significantly less. This is true deflation, and it is the exact opposite of inflation. Of course, this would be accompanied by a complete collapse of any and all forms of real estate, commodities, stocks, etc. – pretty much any asset or item denominated in US dollars.
The most severe effects would be felt in the credit markets and in any assets whose value is primarily determined and supported by the supply of credit available. Things would be much worse than what we experienced in 2008-12. The biggest difference would be that the changes would result in depression-like conditions on a scale most of us can’t even imagine. And the depression would likely last for years, maybe even decades.
Imagine, if you will, that groceries, gasoline, and house rent cost half of what you now spend. Whatever cash you have, or is available to you, would buy twice as much. And you would have money available for other things. Deflation, in and of itself, is NOT a bad thing. Unfortunately, you might not have a job. Or you might live in an area which experiences social unrest. Also, there could be disruptions in transportation and the orderly supply and delivery of various goods and services.
As far as gold prices are concerned, the value will be determined by seeking a level that is inversely in accordance with whatever level of strength the dollar achieves. For example, if purchasing power of the US dollar increases by one hundred percent, generally speaking, then we can expect a fifty percent decrease in the US dollar price of gold.
It is quite reasonable to expect any and all of the things mentioned above.
What will make things worse will be intervention and interference by government.
Government hates deflation. And not because of any perceived negative effects on its citizens. It is because the government loses control over the system which supports its own ability to function. Inflation, fractional-reserve banking, enhanced supplies of money and credit are intentional creations of government. They are used to fund and reinforce the operation and grandiose plans of government.
Hence, we can expect government to respond decisively to any series of events which resemble those previously described. Their intentions would be clear. All efforts would be focused similarly to those employed in our previous brush with financial disaster just a few years ago. But don’t expect similar results.
The events themselves are a logical end result of a financial system which has overdosed on artificial stimulation; not entirely dissimilar to an addict’s reactions to long-term drug abuse.
Since each successive financial ‘fix’ requires a stronger dose to maintain the expected results, and since the ongoing systemic damage is cumulative, we reach a point that demands recognition of the problem, and then painful steps to resolve it successfully. The government and the Federal Reserve will not ever acknowledge the harm their policies have caused. And they will never take the steps necessary to ‘save the patient’.
And even if the attempt were made, the shock to the system would likely ‘kill the patient’ at this point. At best, they might be able to postpone the inevitable rejection.
What government definitely will do is ANYTHING AND EVERYTHING that they think will minimize, end, and reverse events which would bring about deflation.
Which is exactly what they did eight years ago. And they succeeded temporarily in keeping the patient alive. But we don’t really know how much systemic damage was done (i.e. exactly how much money and credit were created, how big is the Fed’s balance sheet and how badly inflated are the numbers, how under-capitalized are the banks). I assure you, it is much worse than anything we have been told.
Similar events today would bring about the price collapse in various markets which we discussed, as well as usher in deflation and a full-scale depression. All of this would be resisted on every front by government and the Federal Reserve. They would literally launch an all-out financial war (and maybe another real war, too) by opening the money and credit spigots full force in a futile attempt to reverse the credit implosion and negative price action of critical assets.
In effect, their efforts and intentions would be similar to those observed during the Great Depression of the thirties. The results, at best, would be similar (not productive), too. The depression in our scenario would also last much longer than needed. And the price declines which are necessary to correct the excesses of the past and cleanse the system would be countered every step of the way by regulations and programs of dubious value. The efforts of government would actually worsen things and prolong the suffering.
It is more likely, though, that the results would be much worse than anything we could expect. Even a relatively strong US dollar would be unable to survive the onslaught. In their efforts to ‘save the patient’, the government would ‘kill’ the dollar. We would likely find ourselves awash in money and credit created without regard to potential damage. All in order to stave off the inevitable results while ignoring their curing effects on a very ill economy.
As the reality of the ‘new’ Depression sets in, the failure of initial efforts by government will be seen more clearly. They will then step up their efforts. Damage to the US dollar would be reflected in the US dollar price of gold which could easily go from $700 to $7000 in months, maybe weeks.
By that time, the US dollar price of gold will be meaningless. What will be more important is owning physical gold. The turmoil, social unrest, and economic upheaval that accompanies a complete repudiation of the US dollar will probably set us back 50-60 years – or more – on a lifestyle basis.
So, if you are one of those who thinks that $7000 gold prices are right around the corner, better plan accordingly.
Courtesy: Kelsey Williams
Stephen McBride writes: Since reaching multi-year highs in July, gold has plummeted 17%. Having risen 22% in the first seven months of 2016, many believed the yellow metal had moved too far, too fast.
They were right.
Gold’s fall quickened post-election, caused by an uptick in optimism about America’s future. The economy was seen as ready to “take-off” in 2017 once Trump’s pro-growth policies kicked in. The Fed’s December rate hike just added fuel to the fire.
But I wonder, how solid is the reasoning behind the rose-colored glasses?
Let’s start with a look at the Fed’s rate hike.
The quarter-point rise was seen as a vote of confidence in the economy from the Fed. Though the increase itself is tiny, it was the Fed’s projection for three more rate hikes in 2017 that moved markets higher.
However, it will be very difficult for the Fed to “go-it alone” on monetary tightening. Although the economic picture in the US is improving, weak global growth looks set to continue. This is likely to weigh down the Fed’s plans for 2017. Divergent monetary policy would create large premia between US yields and those offered by Germany or Japan. This will cause massive inflows into US assets, thus sending the dollar soaring higher.
Higher rates also mean the cost of holding gold is higher as it earns no yield. This is certainly a negative for gold. Long term, though, higher rates could actually be positive for gold.
The yield on the 10-year Treasury has risen 85% from its July lows, and many now believe the 35-year bull market in bonds is over. All signs seem to point in that direction, but there’s a problem.
US government debt is fast approaching $20 trillion, which equals 105% of GDP. Even with record-low interest rates, 6% of 2015’s budget was spent on just interest payments. Given its elevated debt levels, the government can ill-afford to have its budget deficits blown up by rising borrowing costs. If the Government’s fiscal-follies come to the forefront as they did in 2011, the Fed could be forced to reverse course.
This is closely linked to the second reason for optimism—fiscal stimulus.
A Proposal Too Far
If rates continue to rise, it would greatly boost the cost of funding Trump’s proposed $500 billion infrastructure package. Given that markets have already moved based on this, if it failed to happen, it could be very negative. It would also pass the growth-baton back to monetary policy. If we learned anything in 2016, it was that unconventional monetary policy alone cannot spur meaningful growth.
The two other policies to complete Trump’s “growth-trifecta” are tax cuts and scaled-back regulation.
The regulatory cuts shouldn’t be too hard to enact and will be very good for economic activity. However, if higher interest rates cause government deficits to explode, tax cuts would be out of the question.
As you can see, many of the reasons behind the cheery outlook are unsound and may not come to fruition. If they don’t, Trump’s term in office could echo that of the man he had hoped not too—President Obama. Obama enjoyed a honeymoon period based on the “Hope and Change” he promised. When the changes failed to arrive, confidence was lost.
For Trump, a loss of faith in the ability to make good on his promises would have an adverse impact on business and consumer confidence—and the markets.
In light of the reasons behind gold’s fall, is the logic for owning it still valid?
In 1912, J.P. Morgan proclaimed, “Money is gold and nothing else.” 104 years on, I would argue the reasons to own gold today are as strong as any time since.
Gold is the only financial asset that is not also someone else’s liability. Quite a good quality to have when total liabilities in the US are more than 3.5 times GDP.
The belief that the Federal government couldn’t fund its then $15 trillion in liabilities helped gold prices skyrocket in 2011. That concern is even more valid today, yet the gold price has fallen. Over the last five years, gold investors have learned that what is inevitable is not necessarily imminent.
The reasoning behind gold’s latest decline rests on a shaky foundation of assumptions. If things don’t go according to plan, it could create uncertainty, and that will benefit gold.
At $1,140 per ounce, gold has a lot of potential upside. However, given the strong economic position the US enjoys relative to the rest of the world, US assets are also poised to do well in 2017. So, gold should be used as a diversification tool, making up a portion—not all—of your portfolio.
The major lesson of 2016 is that nobody can predict the future.
Courtesy: David Galland
Gold investing sentiment among Western private investors came into 2017 with the strongest end of year reading for five years, according to research by BullionVault.
Demand for the precious metal – which is generally seen as a safe haven investment in times of economic and market uncertainty – also set a four year record by weight in 2016, which confirmed the upturn in sentiment as prices rose across the year.
Against the US dollar, gold gained 9.1 per cent last year, the first annual gain since 2012, rising 12.7 per cent in Euros and jumping 31.6 per cent for UK investors as sterling sank amid the Brexit vote.
The Gold Investor Index hit a half-decade high in November at 59.3, and ended 2016 at 55.5 – higher than the previous 12 months’ average of 54.3, and well above the 53.0 reading of December 2015.
The index measures the number of people starting or adding to their own private gold holding against those reducing or selling entirely.
If the number of net buyers exactly matched the number of net sellers across the month it would read 50.0.
BullionVault’s Gold Investor Index hit a series peak of 71.7 in September 2011, and bottomed at 50.5 over winter 2014 to 2015.
In total, net of investor selling, the gold demand from BullionVault users, whom 89 per cent of live in North America or Western Europe, was also the strongest in 4 years by weight, totalling 2.7 tonnes.
This represented 52 per cent more than 2015’s demand.
In contrast, silver holdings grew to a record 647 tonnes as 2016 demand reached almost 100 tonnes, 70 per cent ahead of 2015.
The Silver Investor Index fell back to 53.3 last month from November’s level of 56.2, ending 2016 just shy of the previous December’s 53.5 reading.
According to BullionVault’s data, Zurich was the most popular location for buying both metals.
The city accounted for 64 per cent of 2016’s net gold demand and 80 per cent of net silver investing against London, New York, Singapore and Toronto.
Adrian Ash, head of the research desk at BullionVault, said: “Looking ahead, 2017 calendars are packed with political and financial risk events, from Donald Trump having to negotiate a new US debt ceiling in March to the raft of Eurozone general elections starting this spring.
“These dates will focus the broader investment stresses of slowing growth, growing debt and nascent inflation.
“Gold and silver are likely to regain favour with fund managers, but private investors aren’t waiting for consensus to turn around. They continue buying financial insurance at a discount to the Brexit peak hit last July.”
Courtesy: Ruth Gillbe
Last year’s big surprise in the world of gold was the failure of prices to move higher. Even strong physical demand for the metal and election-related uncertainties following Trump’s surprising victory could not underpin a sustainable rise in the price. Instead, expectations of higher interest rates, an appreciating dollar, and record-high equity prices held the yellow metal down.
Now, it seems gold may have finally turned a corner . . . with prices for the yellow metal beginning their long march upward, a long march that will eventually carry the metal to new historic highs.
But, even if the latest rally turns out to be another false start, I remain super-bullish for the long term.
As I’ve said many times, I don’t like making short-term predictions about the future price of gold. People who do are usually very lucky or very wrong. In the short run, financial markets, including gold, dance to their own tune – and short-term forecasts, even when based on serious analysis, are often wrong.
That said, I still think there is a real chance the price of gold will recover much of the ground lost since hitting its all-time high near $1,924 an ounce in September 2011.
But the longer-term outlook is another story!
Over the long run, however, fundamentals do matter . . . and, over the long run, we feel increasingly comfortable with our long-term bullish forecast of gold prices rising to unimaginable heights. If not this year, the chances of gold soaring will rise from year to year.
Indeed, contrary to the disappointing experience of the past year, the price of gold is likely to zoom much higher in the years ahead, perhaps doubling or even tripling from recent lows by the end of president-elect Trump’s four-year term.
Here are some of the reasons supporting my audacious long-term forecast:
Strong hands: In recent years we’ve seen a shift in gold ownership from weak hands to strong hands, from American and European hedge funds and other institutional investors to Asian hoarders – both private-sector buyers and central banks.
When sentiment in Western markets turns more favorable toward gold, those investors and speculators who were quick to sell or short the metal for a quick profit on the way down will find it difficult to restore their long positions except at increasingly higher prices.
In other words, a shrinking supply of readily available gold will be insufficient to satisfy rising demand for gold from many of those who not long ago were eager sellers.
Moreover, the contribution to new supply coming each year from global gold-mine production is now shrinking – and is set to continue declining for the next five-to-ten years. Gold mining is a high-risk endeavor with the time from exploration, development of new discoveries or expansion of existing mines, and eventual start of production, a multi-year endeavor.
Asian demand: China and India are, by far, the world’s biggest buyers of gold with each country’s annual demand near or above 500 tons. Despite year-to-year fluctuations, their voracious appetites for gold will continue to grow as their economies grow and their middle and wealthy classes expand.
China’s government is intentionally pursuing pro-gold policies, taking concrete steps to develop its domestic gold-market infrastructure by encouraging the development of domestic physical and futures markets. And, it’s central bank, the People’s Bank of China, has bought, on average, roughly 15 tons each month in the last dozen or so years.
India is a much different market for gold. The yellow metal is deeply embedded in Indian culture and religion – and serves as a vehicle for saving and accumulating wealth in lieu of distrusted Western-style financial institutions. Over the years, the government has tried to discourage gold demand by imposing onerous regulations and import taxes – but the more it tries the more people want to hoard the metal.
The Indian government’s recent effort gain more control over its banking system by recalling 500 rupee and 1000 rupee banknotes will further damage confidence in the government and financial sector – and raise long-term interest in gold as a store of value.
Growing Islamic demand for gold: Another potentially significant source of demand for the metal – with possibly huge price consequences – is the recent relaxation of Islamic Sharia law with regard to gold and the associated regulatory changes that will make possible investment in physical gold and other related assets by millions of religious Muslims around the world who, until now, eschewed gold. Many have great wealth – but strict interpretation of Sharia law has heretofore limited or prevented their investment in the metal.
Submitted by: Jeffrey Nichols
The United States Mint’s American Eagle gold bullion program had a huge year in 2016, with a year-end sales total that is the highest since 2011.
The United States Mint finished off 2016 American Eagle gold bullion coin sales with its slowest month of the year, but that didn’t prevent the year-end total from being the highest since 2011.
December saw 29,000 ounces of American Eagle gold bullion coins sold, a low total likely due to production of the 2016 version of the coin being halted in November. 2016 sales overall ended at 984,500 ounces.
That tops the previous four years, which featured the following year-end totals:
2015: 801,500 ounces
2014: 524,500 ounces
2013: 856,500 ounces
2012: 753,000 ounces
In 2011, however, the Mint sold 1,000,000 ounces of American Eagle gold bullion coins.
In 2016, November was the high month for sales.
The 147,500 total ounces of the gold bullion coins, which range in weight from one-tenth ounce to an ounce, sold during the month of November were more than the total ounces sold in any other single month since July 2015, when 170,000 ounces were sold.
Since the start of 2013, only two monthly totals other than July 2015 surpass November 2016 in terms of ounces of American Eagle gold bullion coins sold — January 2013 and April 2013.
In fact, only nine of the 48 months since the start of 2013 have posted American Eagle gold bullion coin sales that have surpassed 100,000 ounces.
Monthly American Eagle gold bullion sales have risen consistently since July, when only 38,500 ounces were sold. In August, 58,500 ounces were sold. In September, the total was 94,000, and in October it reached 116,000 ounces.
Will the strong trend continue?
Hard to say. While gold has been a hot investment throughout most of 2016, the price of gold has fallen from more than $1,300 in early November to $1,159 as of Jan. 4, 2017.
The falling value of gold may slow the pace of sales as purchasers wait for a bottom to be reached. Or it could be that the bottom has just about been hit, and purchasers will be looking to add gold on the cheap.
Mint officials announced Nov. 30 that production of 2016 bullion coins had ended, but indicated the Mint would continue selling remaining inventory until it is depleted.
The Mint will begin accepting orders from authorized purchasers, without allocation, for the 2017 American Eagle and American Buffalo gold bullion coins on Jan. 9.
The United States Mint sold fewer American Eagle silver bullion coins in 2016 than in any year since 2012.
All good things must come to an end.
For the United States Mint in 2016, it was a string of record-setting years for sales of its American Eagle silver bullion coin.
The final 2016 tally from the Mint reports sales of 37,701,500 ounces of American Eagle silver bullion coin during the calendar year, which is down sharply from record-setting 2015 sales that finished at an even 47,000,000 ounces.
That 2015 total bested 2014’s 44,006,000 ounces sold, which itself had set a yearly record at the time.
The 2016 total is the lowest since 2012, when 33,742,500 ounces were sold.
Huge demand had led to the record-setting annual sales totals in 2014 and 2015, and as you can see in the infographic below, American Eagle silver bullion coin sales in the early months of 2016 continued the strong trend.
However, sales have been sliding since May. In July, the Mint lifted the weekly allocations that served as buying limits used to portion out the available inventory to its authorized purchasers. Those allocations were put in place in 2015 as demand for the silver bullion coin skyrocketed. The approved dealers are the only customers who buy bullion directly from the Mint.
But the price of silver surged to over $20 per ounce in July, and authorized purchasers began sitting on stockpiles of the silver coins, which led to slower Mint sales to these buyers.
As of Jan. 4, 2017, Kitco reports the price of silver at $16.38 per ounce.
Only 240,000 ounces were sold in December 2016.
Mint officials announced Nov. 30 that production of 2016 bullion coins had ended, but indicated the Mint would continue selling remaining inventory until it is depleted.
The Mint will begin accepting orders Jan. 9 from authorized purchasers, without allocation, for the 2017 American Eagle silver bullion coins.
The curse has been lifted, for now at least. After putting in three consecutive losing years following more than a decade-long streak of gains, gold regained its luster in 2016 with a 9% year-over-year increase. Of course, gold’s gains were considerably higher earlier in the year, with the precious yellow metal nearly hitting $1,400 per ounce from a 2016 low of $1,050 ounce. As we begin 2017, gold prices will be looking to build upon the $1,151 per ounce starting point.
However, Wall Street and investors have little time to dwell on the past, no matter how much they might enjoy seeing assets increase in value. With 2016 now in the books, it’s time to turn to 2017 and examine what catalysts could be moving the gold market this year. In no particular order, I’d suggest physical gold and gold mining stock investors pay close attention to the following three market movers.
It probably comes as little shock that the leading catalyst for physical gold in 2017 is likely to come down to what the Federal Reserve does with interest rates.
As a quick refresher, physical gold has no dividend. On the other hand, interest-bearing assets such as a savings account, bank CD, or U.S. Treasury bond do have near-guaranteed nominal return rates. In recent years, with the Fed keepings its benchmark federal funds rate near a historic low, the nominal returns on these interest-bearing assets were often lower than the national inflation rate. In layman’s terms, it means that even though investors were netting a positive nominal return from buying a CD or Treasury bond, they were still losing real money because of inflation outpacing their gains. In this scenario, the opportunity cost of giving up the near-guaranteed gain in order to buy gold, which may or may not offer the chance of a greater return, is low. A low opportunity cost favors strength in gold prices.
However, the Fed has raised its benchmark rate twice over the past 13 months. Though its federal funds target rate is still historically very low, the nominal returns on interest-bearing assets is beginning to rise, increasing the opportunity cost of forgoing these near-guaranteed returns in exchange for owning gold. If rates were to continue rising, the demand for physical gold would likely take a hit, hurting the mining companies that produce gold as well.
The latest consensus estimate suggests that the Fed will raise rates by 25 basis points three separate times in 2017. If this prediction comes true, gold could certainly have its struggles as some investors switch out of the yellow metal and into perceived-to-be-safer interest-sensitive assets. But keep in mind that we entered 2016 with the expectation of four interest rate hikes and received just one. These are “estimates” for a reason.
Long story short, the Fed will hold a lot of weight on the movement of gold prices in 2017.
Another major catalyst is going to be the Donald Trump presidency. In general, uncertainty is one of the biggest gold catalysts, and there’s no shortage of uncertainty with Trump, who has no political or military experience, set to take the highest office in the land.
Trump’s agenda is pretty broad. He wants to completely overhaul the individual and corporate income tax system, implement $1 trillion worth of infrastructure spending over the next decade, and repeal and replace Obamacare, the health law of the land. While a traditional Republican president may have had no issues making this happen with both houses of Congress under Republican control, Trump may not be so lucky. He alienated a number of his party members during the campaign, meaning that passing legislation could prove a lot tougher than expected.
In particular, the widest uncertainties revolve around what might happen with his individual and corporate tax reforms. Since the U.S. is a consumption-driven economy, the expectation is that putting more money back into the pockets of Americans by simplifying the U.S. tax code to just three tax brackets, as well as making the tax environment friendlier to domestic businesses and foreign investment with a 15% peak corporate income tax, will increase GDP growth. Simultaneously, it’s also likely to reduce federal revenue and increase the national debt. How these figures will play off one another is anyone’s guess at this point. Can Trump get his tax plans passed? If so, is 3% GDP growth per year achievable? These are questions where the answers will probably take two years or more to flesh out.
We will, however, find out whether Trump can make good on his promises to enact reforms in 2017. If Trump has even the slightest struggles getting his legislation passed through Congress, I would view it as a positive for gold prices.
The final catalyst for gold prices is a real wildcard in 2017: India.
In 2015, China replaced India as the largest importer of gold in the world, but that hasn’t stopped or slowed the desire of India’s residents to hoard the precious metal. Instead of purchasing Indian bonds or buying stock, most of India’s residents who have savings purchase gold jewelry as a store of wealth. In 2015, India purchased 700 tons of gold for jewelry, yet it mines just two tons of gold annually.
India’s appetite for gold is great news for precious-metal miners and physical gold, but it’s creating a growing problem for its government. As reported in The ConversationOpens a New Window., since most of its people have their wealth saved in gold jewelry (which isn’t nearly as easily monetized as gold bars) as opposed to rupees, the estimated 20,000 tons of gold in aggregate savings doesn’t increase the lending power of its banks. Or, in easier-to-understand terms, India always seems to be running a deficit as a result of its hefty gold imports, and it’s a drag on the country’s economic growth.
Its government has tried to introduce a plan that allows people to trade in gold for interest-bearing bonds to increase the lending power of its banking system, but after two such attempts, it only wound up netting 14 tons of gold in return.India’s response might be to ratchet up import taxes on gold, which could have an adverse impact on gold demand. Of course, the lower gold prices go, the more attractive they might appear to India’s citizens, which could lead to a counterbalancing effect on the import tax. In fact, India’s 2015 imports of gold rose 12% despite an increase in the gold import tax.
India’s policies as the second-largest importer of gold could definitely impact the gold market in 2017.
Courtesy: Sean Williams
Precious metals are an important component of every investor’s portfolio, and while gold often gets all the hype, another precious metal will be a much better bet in 2017: Silver.
The market for silver continues to tighten as supply has failed to keep up with demand for much of the past decade. Silver is used in all facets of modern life, including electronics, medical devices, engines, batteries, solar panels, LED lighting, semiconductors, touch screens, dentistry, and nuclear reactors. The list goes on.
Demand for silver is up by more than 35 percent since 2009, while supply only grew by a little more than 10 percent. In 2015 alone, global demand for silver exceeded supply by roughly 129 million ounces, or about 11 percent of overall demand. With silver consumption set to expand indefinitely, the supply deficit will continue to put upward pressure on prices in the years ahead.
The set-up here is fantastic because indications are that we are on the edge of another bull run at a time when silver mining stocks are significantly undervalued. Silver prices had a good run for most of 2016, but have fallen back in recent weeks as the dollar has strengthened and uncertainty surrounding the U.S. presidential election abated. But the pause in the run up in prices will be brief, offering investors an appetizing entry point for a crucial commodity in today’s globalized economy.
Silver may be down 10% from its peak of $20.67 in Q3, but the sell-offs were based on sentiment, not fundamental reality—and this is exactly where smart investment finds opportunity. The strongest documented indication of this is the Q3 earnings of silver miners, which only the savviest of investors are picking up on. Pan American Silver (NASDAQ:PAAS) reported Q3 earnings of an impressive US$43.4 million—up US$9.2 million over the previous quarter—just for starters.
Silver mining costs have plunged and it’s a brilliant time for a new silver company—Silver One (TSXV: SVE & OTC: SLVRF)—which has just acquired 100% interest in three silver plays in Mexico, the largest silver-producing country in the world. It also helps that Silver One has the strong support of a mining legend and has financing in place to move aggressively on exploration and development.
In the pre-bullish environment, investors will be looking to developers in the right place at the right time who can cash in on low-cost mining to scoop up and develop new pure play properties.
We’re sitting right now in the middle of an anomaly that fundamentals dictate will correct itself very soon. Once undervalued silver starts climbing higher again and capital starts pouring in, pushing prices higher, the low-buy opportunities will fade.
1. The Global Silver Lining: A Precious Metal Premium
Global investors are magnetically drawn to precious metals in times of uncertainty and instability. Global tensions are as high as they were in the 9/11 aftermath, when precious metals soared phenomenally as everyone hedged bets against global instability.
An incoming U.S. president who is inflation-bound will also give silver a boost—as will a definitive ‘Brexit’ orchestrated by the British prime minister, and the generally explosive global situation. When all else fails around us, silver (and gold) are the rising saviors.
2. Mining Costs Plummeting
While average silver prices in the earlier bull run this year jumped from US$14.86 to US$20.67, the costs to produce it per ounce have dramatically dropped over the past four years, starting at US$22.26 in 2012, dropping all the way down to an amazing US$10.10 as of the end of September 2016.
This is the cushion that’s not only kept silver miners from nose-diving in the post-election period, but has also kept them remarkably profitable.
But let’s look at Mexico, specifically. If Endeavor Silver (NYSE:EXK) is anything to go by, we can see where Silver One might go. Endeavor owns three underground silver and gold mines in Mexico’s Durango and Guanajuato states and saw its costs fall 24% to only US$11.47/ounce in Q32016, at a time when silver was going for upwards of US$19.ounce.
Keith Neumeyer’s First Majestic Silver also realized an impressive all-in sustaining cost decrease of 27% to $10.52 per payable silver ounce on its Mexican silver production. First Majestic also realized an average silver price increase of 30% to $19.72 per ounce
3. Fantastic Fundamentals
The Silver Institute says that physical silver has seen a major deficit over the past three years as a result of the closure of base metals mines. At the same time, the Institute sees investor demand on the rise, alongside industrial demand. The Institute is even more bullish on silver than it is on gold.
But here’s where it gets even more interesting for silver: The uses for silver are seemingly countless. From use in anti-smog devices in China, to medical uses and the solar industry, the demand for silver has a much brighter future than even the immediate fundamentals suggest.
4. Three 100% Plays in the World’s Best Silver Venue
Silver One has acquired 100% interest in three key silver plays in the biggest silver-producing venue in the world—Mexico. Three of the world’s 10 biggest silver mines are in this country.
In late September, Silver One scooped two past producing mines and a strategically located, high-potential silver exploration property. The two past producers have historic resources, amounting to 10 million ounces of silver on one and about 4.7 million ounces on the other. There is potential further upside here with good high-grade lead zinc.
• La Frazada, Nayarit, Mexico
A historical mining venue, La Frazada has two known parallel silver-rich quartz veins running for over 1800 meters with three known mineralized shoots outlined to date. A 2008 technical report calculated a historical measured and indicated resource totaling 583,000 tonnes at 250 g/t Ag, 0.87% Pb, and 2.44% Zn plus historical inferred resources of 534,000 tonnes at 225 g/t Ag, 0.92% Pb, and 2.62% Zn. Silver One’s current geochemical sampling program and future drilling program could prove additional upside here.
• Peñasco Quemado, Sonora, Mexico
Just 60km south of the US-Mexican border, Peñasco Quemado saw a 2006 drilling program outline a historical measured and indicated resource of 2.57 million tonnes at a grade of 117 g/t Ag for a silver resource of 9.63 million ounces. Previous mining activities consisted of high grade underground exploitation and a 10,000 tonne open pit operation that reportedly averaged around 250 g/t silver. Geochemical sampling is underway to not only outline possible extensions to areas of know mineralization, but to potentially outline new targets for drill testing in 2017
• Pluton, Durango, Mexico
This mine is right next to a major, active silver producer—Excellon (TSX:EXN) in Mexico’s famous Mapimi Mining District and nearby Ojuela Mine.
5. Pure Play, All the Way
This is a pure play, and in the silver arena, this is hard to come by. The fundamentals for a pure play are much clearer. With silver outperforming gold year-to-date, pure exposure to silver is ideal. On November 25, the SPDR Gold Shares ETF (GLD), which tracks gold prices, jumped 12%, while the iShares Silver Trust ETF (SLV) rose 19% on the same day. This looks set to stay on track, setting the stage for an advantage for miners offering pure exposure to silver.
6. Dream Team Backed by a Mining Legend
Investors tend to follow mining legends around—so does money. In this case, the attraction is Keith Neumeyer, whose played founding roles in three major mining success stories First Quantum Minerals (TSX:FM, LSE:FQM), First Majestic Silver Corp. (TSX: FR, NYSE: FG) and founder and Chairman of one of Silver One’s early investors, First Mining Finance (TSXV: FF). This is where investors look first for real value.
Then they dig deeper into the rest of the team—looking for that perfect combination of experienced geologists, explorers and ideally someone with access to the inside track in Mexico. Silver One has all of that.
CEO Greg Crowe is a trained geologist with a brilliant, 30-year track record in exploration and mining, having served as Entrée Gold Inc. (NYSEMKT:EGI) CEO for 13 years and playing a crucial role in the Oyu Tolgoi mining JV with giant Rio Tinto’s (NYSE:RIO) partner, Turquoise Hill Resources (formerly Ivanhoe Mines).
Silver One Chairman Luke Norman is a founder of Gold Standard Ventures, a key explorer in Nevada whose shareholders include GoldCorp (NYSE:GG) and OceanaGold (NASDAQ:OCANF).
The inside track is also channeled here: When Silver One acquired the three Mexico plays, they also got former First Mining Finance (OTCQX:FFMGF) director Raul Diaz, a Mexican-American with actionable knowledge of the playing field in this venue.
7. Fully Financed, with Access to Future Capital
Not only is Silver One’s financing in place to meet its near-term objectives, but it’s also got strong access to capital for its ambitious development and expansion plans—because further acquisitions are definitely part of the game here. The company’s connection to First Mining Finance, which owns about 7% of the company, certainly doesn’t hurt when it comes to raising capital. Silver One did an original CAD$500,000 capital-raising phase and then another CAD$2.5 million—and the plan is to continue that in 2017.
8. All About Explorers
Last year’s bull market might have been focused on producers, but Q42016 and as we head into the New Year, it’s an explorers game all the way. As silver seems set to ride the bull, there is a shortage of high-quality, pure play silver miners.
9. Fast Movers
Silver One was only founded some four months ago, and it’s already scooped up three major Mexican silver plays and raised around CAD$3 million. It’s has momentum, right out of the gate, that’s hard to compete with. When it comes down to the actual work, too, the company has moved quickly on exploration, with comprehensive geochemical sampling presently underway. It’s hard to keep up with them, but look out for results from this sampling in the second half of January.
Right now, they’re hot on the acquisition trail reviewing numerous potential acquisitions and driving to announce something new in the first quarter of the New Year.
10. Timing is Leverage
For any investor, the real money to be made is in the early stage of development. For silver miners, they’ll be looking for low costs, ambitious growth plans and funds to back it up with a clear path to future capital. Silver One ticks all of these boxes, and the undervaluation of this new venture makes for a unique low-buy opportunity. But the bigger picture is about silver itself, which could continue to out-perform gold and while next year is likely to see both precious metals rise, the consensus seems to be that silver will maintain the lead.
Courtesy: James Burgess
Truth be told: we are moving toward a complex global economy. Pay attention to gold prices. The yellow precious metal could be the biggest beneficiary.
Here are three things that are currently taking place that could have significant positive impacts on gold prices. They shouldn’t be ignored by investors, whatsoever.
Not too long ago, the U.S. Federal Reserve increased its interest rates again. Going into 2017, we are told that there will be several more rate hikes. Don’t for a second think that this will go without consequences.
The Federal Reserve is the only central bank among major central banks that is raising its rates. Others are keeping them low and/or printing more money. For example, the European Central Bank (ECB) and Bank of Japan (BoJ) have both set their benchmark rates below zero (in negative territory) and are printing new money with no clear end in sight.
This disparity among central banks could be very dangerous. We could see severe volatility as a result, and investors could find refuge in the yellow precious metal, hence much higher gold prices.
Disparity among central banks could cause capital outflows from low-interest-rate countries to higher-interest-rate countries, and a significant amount of capital dislocation.
Central banks used to be known as institutions that hated gold. Their sentiment since the financial crisis of 2008-2009, however, has changed completely. The central banks that didn’t have gold before the crisis have been buying it. Those that already had significant amounts of gold are hoarding it.
In the first three quarters of 2016, central banks purchased 271 tonnes of the yellow metal. In 2014 and 2015 combined, central banks purchased over 1,150 tonnes of gold for their reserves. (Source: “Gold Demand Trends Q3 2016,” World Gold Council, November 8, 2016.)
Why are central banks buying gold? Know that gold brings down the volatility in their portfolios (foreign reserves). Central banks also have huge buying power, and they could take gold prices much higher.
If you haven’t noticed yet, it may be time to pay attention now: currencies around the world are witnessing wild swings. Look at the chart below, showing the performance of major currencies: the Japanese yen (black), the Canadian dollar (blue), the British pound (red), and the euro (green).
Chart courtesy of StockCharts.com
Just by looking at the chart above, you see that investors and consumers in Japan, for instance, have lost roughly 35% of their buying power since 2012. Won’t they be looking to find a place that protects them from a downside? Gold could do this.
Don’t look at gold prices from a U.S. dollar perspective alone. Think global when looking at the precious metal. Lower currency value could lead to much higher demand for gold.
In addition to this, pay attention to the emergence of new currencies like Bitcoin (BTC). They could have an impact on gold prices as well.
I will be bold and say this: for every day that gold prices remain subdued, the precious metal becomes an even better opportunity.
Looking at the fundamentals of the gold market, over the past few years, there has been a significant amount of improvement. And, there have been new developments that suggest gold could have a much brighter future ahead.
If you listen to the mainstream media, it will have you convinced that gold isn’t even worth a look. Ignore this rhetoric.
Keeping everything in mind, I am not ruling out $2,000/ounce gold prices in the next few years. It’s possible.
Courtesy: Moe Zulfiqar
Cook: People that have been holding silver for several years are beginning to lose patience. What do you say to them?
Butler: The facts surrounding silver have never been more bullish.
Cook: Such as?
Butler: Over the last few years, enormous changes have recast and transformed the silver market.
Cook: Can we have an example?
Butler: In only a few years, JPMorgan has accumulated the largest hoard of silver in the history of the world.
Cook: How does that compare with the Hunt Brothers in 1980?
Butler: They have five to six times as much as did the Hunts, maybe more.
Cook: How do you prove that to people who doubt you?
Butler: I’ve been watching JPMorgan like a hawk for the past five years. In their COMEX warehouse, where the amounts they hold are made public, they have 80 million ounces. That’s almost as much as the Hunts had or Warren Buffett when he bought up silver in 1998.
Cook: Are they still adding?
Butler: Yes, every chance they get. They are the biggest stopper or receiver of silver deliveries on the COMEX. This month that could be 7½ million ounces. Also 3 million ounces were sold out of the SLV last week which I’m sure they took. They do it in such a way that it doesn’t have to be reported. They are masters of the game and they just keep adding without anybody knowing it but you, me and our readers.
Cook: Where are they keeping all this silver?
Butler: One place would be their London warehouse where they have pushed out all the other entities who used to store there. In addition, there is no shortage of warehouse space around the world. The beautiful thing about owning physical silver is that you don’t have to report it to anyone.
Cook: With all their buying, why doesn’t the price go up?
Butler: They are world champion manipulators. They maintain a large paper short position on the futures market that enables them to keep the price where they want it. It allows them to buy physical silver cheap which they’ve done masterfully.
Cook: How big is their short position?
Butler: Around 90 million ounces. They’ve been reducing it lately.
Cook: That’s a good sign
Butler: Yes, but don’t get confused by this large short position. When you have 550 million ounces of physical silver, you’re still long 460 million ounces after you subtract the paper short.
Cook: You’re saying they use this short position to manipulate the market so they can buy silver cheaper? Isn’t that a possible violation of commodity law?
Butler: It absolutely is. As you know, I have bombarded the regulators with my newsletter and various correspondence pointing out this manipulation.
Cook: But they don’t move on it?
Butler: No. I’ve also sent hundreds of epistles to JPMorgan; their board, their lawyers and their chief executive accusing them in the strongest terms of wrongdoing. Every newsletter I write accuses them publicly.
Cook: What do they say to that?
Butler: I’ve never heard a word. Let’s face it, if you call a big financial entity crooked their lawyers are going to write you. If you keep it up, they will eventually sue you. I think the fact that they let my accusations ride proves I’m right.
Cook: When is silver going to overcome all this and the price break free?
Butler: When JPMorgan wants it to.
Cook: Are we close?
Butler: I think so. Here’s an analogy. Imagine silver as a poker game. The stakes are in the billions. JPMorgan is holding an ace, king high royal flush. It’s a lock so they can’t lose. Everybody else at the table has four of a kind or a full house. JPMorgan is in no hurry to win the pot. They are sitting back watching the raises and re-raises. They want to win as much as they can so they are patient.
Cook: How do we stay patient?
Butler: One of the biggest financial entities in the world is hoarding silver. They are your ally. If you own silver JPMorgan is your partner. You couldn’t have a better ally.
Cook: People don’t want to sit back and be patient anymore.
Butler: Why not? A price rise is inevitable. If you know you’re eventually going to make a lot of money you should be able to wait if necessary. With JPMorgan in the mix, you know you have a big win ahead. They go for the jugular so it’s going to be an enormous gain.
Cook: Could you give us an inkling as to when?
Butler: Soon I think. A number of things are happening in the futures market that are different. For example, the big hedge funds or managed-money traders have always gone short at these low price levels. For the first time they have not done so.
Cook: What’s it mean?
Butler: We could snap back much faster.
Cook: Anything else?
Butler: JPMorgan may not be the biggest short anymore.
Butler: I’m thinking JPMorgan may be setting the other shorts up for a double-cross. All that has to happen for a price explosion is for JPMorgan to do nothing. If they don’t go short again, we go up in a hurry. Remember, every time silver goes up $2.00 an ounce, they make a billion dollars.
Cook: If they don’t go short on the next rally, who will?
Butler: I can’t imagine substitute silver sellers stepping forward to replace them except at very high prices. As it stands now, eight commercial traders, many of them banks, hold a net short position of 85,000 contracts or 425 million ounces. There’s nobody to take their place at these low prices. JPMorgan figured all this out long ago and that’s one of the reasons they bought so much physical silver. There was no other way for them to cover without sending silver into orbit. You’re truly looking at the opportunity of a lifetime with silver. You just have to relax and let it play out.
Cook: Anything else you can tell us?
Butler: The big theme, as I see it, is JPMorgan becoming more aggressive in acquiring physical silver and gold while at the same time reducing its COMEX short position in each almost as aggressively. It’s hard to imagine a more bullish backdrop for futures prices.
Courtesy: Jim Cook