The precious metals sector is off to the races in the first six weeks of 2017, as returns in both gold and silver are beating the S&P 500. The silver market is the best performer – with nearly double the gains seen in gold. Here’s a quick look at the numbers:
Why are silver prices outperforming gold? Here are four reasons:
This creates a dual demand base for the metal from both investors and from the manufacturing and industrial community. A less expensive cousin than gold, silver offers investors many of the same properties as gold including portfolio diversification and a hedge against in inflation as gold and silver typically trend in the same direction.
Silver attracts nearly 50% of its demand from industrial buyers for use in electronics, autos, nanosilver applications, medical devices and solar panels. Both the electronics and solar panel industries that use silver are expected to grow strongly, triggering even stronger demand.
The world uses more silver than it produces. The silver supply deficit may be one of the most overlooked and most positive factors for silver prices ahead. Older silver mines have been producing less. And, there has been less interest in exploration for new silver mines amid the lower current price level for silver. It’s historically cheap: Spot silver prices at around $17.90 USD an ounce currently are well below the all-time high at $49.51 an ounce in 2011. That sets the market up for a potential supply squeeze amid forecasts for rising demand from both the investment and industrial side.
The 2016 Thomson Reuters GFMS Annual Survey shows a silver deficit for the past three years in which data is available. See Figure 1 below:
Copper prices, another widely used industrial metal are also up sharply since the start of 2017. Copper is a key building component across a broad array of uses from construction to wiring, plumbing, heating and cooling and automobiles.
This metal has earned the nickname – Dr. Copper – due it its ability to presage global economic activity. Typically, rising copper prices signal rising global economic activity ahead. That adds up to more inflation and is bullish for both gold and silver.
The current technical chart pattern for silver prices is stronger than gold. The silver market is trading above its 50-day and 100-day moving averages, which are bullish signals for trend following traders.
Buying tactics: Spot silver is currently trading around $17.90 an ounce. Short-term retreats to the 17.50 an ounce or $17.25 an ounce zone would offer good buying opportunities for long-term investors if silver sees a price pullback.
Looking ahead, silver prices are expected to rise toward $18.21 an ounce in 2017 and $20.21 an ounce in 2018, according to a BofA Merrill Lynch Global Research report.
It is only a matter of time before silver prices hit the $18.00 an ounce mark. – Blanchard and Company
– Gaurav Sharma: Silver futures contracts extended their winning streak into a ninth successive week on Monday (27 February), as traders continued to bet towards the upside, with commentators opining the move in tandem with rising gold prices could well be down to speculators bracing for a major ‘risk-off’ event, i.e. an equity market slump.
At 4:12pm BST, Comex silver was up 0.59% or 48¢ at $18.51 an ounce. Concurrently, the Comex gold futures contract for April delivery was up 0.41% or $5.10 at $1,264.40 an ounce, while spot gold was up 0.38% or $4.78 at $1,261.95 an ounce, as prices stayed above the psychological $1,260-level.
Over the past nine weeks, gold has risen on eight occasions, while silver has risen in each of the past nine weeks.
Fawad Razaqzada, market analyst at, said the dollar-denominated and perceived safe-haven precious metals have risen at a time when Wall Street has repeatedly hit new all-time highs and despite the dollar holding near its multi-year highs.
“The metals’ remarkable performance may suggest that investors are positioning themselves up for a major risk-off event – such as a collapse in the US stock markets. With the major US indices rising almost parabolically, it is just a matter of time before the inevitable happens. The trouble is, the parabolic rally could turn literally vertical before the markets start to head south.
“But one thing is for sure, we are getting very close to the upcoming stock market sell-off. This does not necessarily mean the markets will absolutely collapse. But we are anticipating there to be at least a sizeable correction,” Razaqzada concluded.
Away from precious metals, oil futures returned to positive turf without showing any appreciable movement beyond the recent mid-$50 per barrel levels demonstrating little appetite for a spike above $60.
At 5:23pm GMT, the Brent front month futures contract was up 0.36% or 20¢ at $56.19 per barrel, while the West Texas Intermediate (WTI) was 0.44% or 24¢ higher at $54.23 per barrel, as the sideways tug of the upside risk of Opec production cuts and downside risk of rising US production continues.
Bjarne Schieldrop, chief commodities analyst at Nordic SEB, said Opec has been successful in its effort to dry up the market and shift the crude oil forward curve into backwardation, ie a situation in which the spot or cash price of a commodity is higher than the forward price.
“This is pushing front month contract higher versus longer dated contracts. While Opec is tightening up the front of the forward curve, recovering US shale production is loosening up the longer dated part of the balance. That is why the longer dated contracts are slipping.
“Opec probably hoped for a situation where the longer dated contracts stood at $55-60 per barrel, with Brent one month contract trading at a backwardation premium of $5 above that. It will possibly get its $5 backwardation premium but longer dated contracts are likely to slip lower leaving Opec with limited gain at the front end of the curve.”
SEB analysts still think Brent will average $57.5 in the second quarter 2017 as the front end of the curve is flipping into backwardation with “erosion in longer dated contracts likely to continue.”
Americans now hold an incredible $4.1 trillion in consumer debt. This latest data shows that Americans are now back to having an insatiable appetite for spending beyond their means. Unlike mortgage debt, consumer debt is not building up any future equity here. The largest category of consumer debt is student loan debt. Even at the peak of the last debt bubble, consumer debt totaled roughly $2.5 trillion. While student debt makes up about $1.4 trillion of the consumer debt here, auto debt is above $1 trillion. We’ve also seen a large rise in subprime auto debt suggesting that people are borrowing beyond their means to consume. Delinquencies are also rising suggesting any tiny slip up in the overall economy and this credit bubble can burst too.
Consumer debt surging to record levels
Americans are now borrowing and spending at record levels. This would be fantastic if incomes were keeping up but many are trying to keep up with the Joneses by spending future income via consumer debt. This chart sums up the desire to spend:
Source: Federal Reserve
Showing signs of weakness we have over 10 percent of all student loan accounts being delinquent by 90 days or more. And this is the largest consumer debt segment. Auto debt delinquencies are also rising suggesting people are having a tough time paying their car loans.
Banks are more comfortable lending money now that we are 10 years passed the excess of 2007. The Great Recession officially ended in 2009 and while banks have had generous bailouts, it appears that American consumers are being bailed out via access to debt. If we take a tiny trip down memory lane, we will remember that solvency was the issue during the last credit bubble. People took on too much debt relative to their ability to pay. The amount of consumer debt being issued is troubling to say the least.
While auto debt and credit card debt can be discharged via bankruptcy, student debt cannot. That is very significant. Many younger Americans are being put into a new form of debt serfdom through going to college and taking out mini mortgages that they simply cannot pay back.
Here is one of many horror stories when it comes to student debt:
“My original debt from 1998 was $25,000. 8 years later I have a debt of $75,000. I am no banker or accountant, but I am assuming this will continue to triple every 8 years if I remain in poverty and thus in default. So am I correct that in 8 more years I may owe $225,000? That in 16 years I will owe $750,000; in 24 years, $2,250,000, and then at retirement time in 32 years I will owe $6,750,000? 6 Million plus? Haha. Now, of course, if this were any other form of debt that became this cancerous I could file for bankruptcy. Not for student loans though. At age 72 I may owe $20,250,000. Heaven forbid that I live to see my eighties. At age 88 I may owe $182,250,000.
I think we are just beginning to see how crazy this is going to get. If my math is correct, in ten years there are going to be a lot of impoverished people, people making less than $20,000 a year, who have these ludicrous million dollar debts.
My heart about exploded when I got the letter saying I owed $75,000. After I recovered, all I could do was laugh. It is so absurdly much that they might as well have told me that I owe a million bucks, and now, upon further reflection, it appears they will be telling me I owe them a million bucks in the not so distant future.
I wonder if people with unpayable student loan debt will due to accumulated stress, loss of work, and an inability to pay for medical needs in old age, have on average shorter lifespans than those who do not? This will make an interesting study in fifty years.”
So an original debt of $25,000 has ballooned to $75,000 in eight years. Why? Because the debt compounds with interest and charges are put upon charges. Of course if someone cannot pay, you see how comical the situation can get in a macabre sort of way. Does this even sound like a good situation to put young and older Americans into?
Consumer debt being over $4.1 trillion is troubling when student debt, auto loans, and credit cards are leading the way forward. Apparently we like repeating history and people may like to forget that at the root of the Great Recession was a giant credit bubble. – mybudget360
– Ralph Benko: Inside President Trump’s otherwise “standard Trump stump speech” at CPAC was nestled what might be a most intriguing observation:
Global cooperation, dealing with other countries, getting along with other countries is good, it’s very important. But there is no such thing as a global anthem, a global currency or a global flag. This is the United States of America that I’m representing.
There’s a keen insight in there that could, just maybe, transform our lives, America, and the world. No “global currency?” Was this, with the poetic observation that “there is no such thing as a global anthem…or a global flag,” just a trope? Or could it contain a political portent with potential high impact on world financial markets? Let’s drill down.
As it happens, there is a global currency.
It’s called the “US dollar.”
Most international trade is priced in dollars. The Bretton Woods international monetary system invested the dollar, which then was defined as and (internationally) was legally convertible to gold at $35/oz, with global currency status. France’s then-finance minister, later its president, Valéry Giscard d’Estaing, called the “reserve currency” status of the dollar — its status, along with gold, as global currency — an “exorbitant privilege.”
By this d’Estaing was alluding to the fact, as summarized at Wikipedia, that “As American economist Barry Eichengreen summarized: ‘It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one.'” That privilege, which made great sense during the period immediately after World War II, became a curse.
In 1971 President Nixon, under the influence of his Svengali-like Treasury Secretary John Connally, “suspend[ed] temporarily the convertibility of the dollar into gold.” That closure proved durable instead of temporary. The dollar became, and remains, the world’s global currency.
What had been an “exorbitant privilege” devolved into an exorbitant liability. As my former professional colleague John D. Mueller, of the Ethics and Public Policy Center, formerly Rep. Jack Kemp’s chief economist, writing in the Wall Street Journal in Trump’s Real Trade Problem Is Money recently and astutely observed:
a monetary system based on a reserve currency is unsustainable, since foreign official dollar reserves (for example) are acquired and must be repaid in goods. In other words, the increase in official dollar reserves equals the net exports of the rest of the world, which means it must also equal U.S. international payments deficits—an unsustainable situation.
In other words, if President Trump wishes to address America’s merchandise trade deficit (balanced to perfection, of course, by a capital accounts surplus) he will find that allowing the dollar to be used as the global currency is the real snake in the economic woodpile. The dollar’s burden as the international reserve currency, not currency manipulation by our trading partners or bad treaties, is the true villain in the ongoing melodrama of crummy job creation.
Mueller’s Wall Street Journal column enumerates the three options open to President Trump:
First, muddle along under the current “dollar standard,” a position supported by resigned foreigners and some nostalgic Americans—among them Bryan Riley and William Wilson at the Heritage Foundation, and James Pethokoukis at the American Enterprise Institute.
Second, turn the International Monetary Fund into a world central bank issuing paper (e.g., special drawing rights) reserves—as proposed in 1943 by Keynes, since the 1960s by Robert A. Mundell, and in 2009 by Zhou Xiaochuan, governor of the People’s Bank of China. Drawbacks: This kind of standard is highly political and the allocation of special drawing rights essentially arbitrary, since the IMF produces no goods.
Third, adopt a modernized international gold standard, as proposed in the 1960s by Rueff and in 1984 by his protégé Lewis E. Lehrman …and then-Rep. Jack Kemp.
To “muddle along” would, of course, be entirely antithetical to Trump’s promise to Make America Great Again. It would destroy his crucial commitment to get the economy growing at 3%+ — vastly faster than it has for the past 17 years — which also happens to be the recipe for robust job creation and upward income mobility for workers. It also is the essential ingredient for balancing the federal budget while rebuilding our infrastructure and military.
To turn the IMF into a world central bank would, of course, be anathema to Trump’s economic nationalism. To subordinate the dollar to the IMF’s SDR would be equivalent to lowering Old Glory and replacing the American flag with the flag of the United Nations on every flagpole in America. Unthinkable under a Trump administration.
That leaves the third option, to “adopt a modernized international gold standard, as proposed in the 1960s by Rueff and in 1984 by his protégé Lewis E. Lehrman … and then-Rep. Jack Kemp” (whose eponymous foundation I advise). To this one should add, as Forbes.com contributor Nathan Lewis has shrewdly observed, the removal of tax and regulatory barriers to the use of gold as currency.
As I have repeatedly observed Donald Trump shows a strong affinity for gold. He has also shown a keen intuitive grasp of how the gold standard was crucial to having made America great:
Donald Trump: “We used to have a very, very solid country because it was based on a gold standard,” he told WMUR television in New Hampshire in March last year. But he said it would be tough to bring it back because “we don’t have the gold. Other places have the gold.”
Trump’s comment to GQ: “Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.”
Trump has been misled to believe that “we don’t have the gold. Other places have the gold.” In fact, the United States, Germany, and the IMF together have about as much gold as the rest of the world combined and America has well more than Germany and the IMF combined. [Note: This column has been updated to clarify that the United States has well more gold than Germany and the IMF combined but not, as originally stated, more than twice as much.]
We have the gold. Bringing back the gold standard would not be very hard to do.
Trump’s politically unique intuition that “We used to have a very, very solid country because it was based on a gold standard” is no trivial matter. It is true. And as I have written elsewhere:
Marc Levinson writing recently in The Wall Street Journal provides a very pessimistic view for the American Dream, “Why the Economy Doesn’t Roar Anymore: The long boom after World War II left Americans with unrealistic expectations, but there’s no going back to that unusual Golden Age” [He wrote:]
“People who had thought themselves condemned to be sharecroppers in the Alabama Cotton Belt or day laborers in the boot heel of Italy found opportunities they could never have imagined. The French called this period les trente glorieuses, the 30 glorious years. Germans spoke of the Wirtschaftswunder, the economic miracle, while the Japanese, more modestly, referred to “the era of high economic growth.” In the English-speaking countries, it has more commonly been called the Golden Age.
“The Golden Age was the first sustained period of economic growth in most countries since the 1920s. But it was built on far more than just pent-up demand and the stimulus of the postwar baby boom. Unprecedented productivity growth around the world made the Golden Age possible. In the 25 years that ended in 1973, the amount produced in an hour of work roughly doubled in the U.S. and Canada, tripled in Europe and quintupled in Japan.
“Ever since the Golden Age vanished amid the gasoline lines of 1973, political leaders in every wealthy country have insisted that the right policies will bring back those heady days. Voters who have been trained to expect that their leaders can deliver something more than ordinary are likely to find reality disappointing.”
Levinson, whose column uses “Golden Age” as its leitmotif, strangely fails to make the connection between, or even explore, the fact that the era he calls the Golden Age correlated precisely with America (and the world) being on a form of gold standard, particularly the modified gold standard known as the Bretton Woods System. (Bretton Woods had the inherent flaw of using the dollar as an international reserve asset but, until that flaw undermined it, it served equitable prosperity.)
What would be the outcome of Trump’s following his instincts and going for the gold?
Prosperity, that’s what.
Former Fed Chairman Alan Greenspan just provided a barely noticed Big Reveal. In an interview with the World Gold Council’s Gold Investor Chairman Greenspan, stating “I view gold as the primary global currency,” went on to explicitly reveal, for the first time to my knowledge, that “When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions. I told him that US monetary policy tried to follow signals that a gold standard would have created. [Emphasis supplied.]
The period of “following signals that a gold standard would have created,” called the Great Moderation under President Clinton, was one of the most equitably prosperous in modern American history. That era saw the creation of over 20 million jobs. Robust growth converted the federal deficit into a surplus. It was, if only virtually rather than institutionally, a golden age.
After the Fed abandoned its Great Moderation America experienced almost no net job creation under President George W. Bush and very mediocre job creation under President Obama. Sad!
I want the American Dream back. We all do, very much including President Trump.
How might President Trump go about turning this around? He has a unique opening to forcefully pivot America toward epic prosperity.
As Paul-Martin Foss of the Menger Center astutely points out the Federal Reserve Board currently has three vacancies. If Trump were to fill those vacancies with three sophisticated gold standard advocates from the short list of Lewis E. Lehrman (whose eponymous Institute I formerly served), Dr. Judy Shelton (who served as an advisor on his presidential economic transition team), former presidential candidate Steve Forbes, and John Allison, former CEO of BB&T (preferably as vice chairman for regulation) the president would create a super “beachhead team” at the Fed to seriously restore equitable prosperity.
These appointments would be the safe and sure first steps out of economic stagnation for America. Couple these with a White House “Team B” to plan the enactment of the Jack Kemp Gold Standard Act and removal of the regulatory and tax barriers to using gold as currency. Then watch an American economic miracle take place.
Mr. President: “No such thing as a global currency?” The dollar is the global currency. Want prosperity? Heed Chairman Greenspan and do not just view but restore “gold as the primary global currency.” President Trump: replace the dollar with gold as the global currency to make America great again. We have the gold.
Gold has powered higher in a strong new upleg since the Fed’s mid-December rate hike. But the core group of traders who usually fuel early-upleg gains has been missing in action in recent months. The gold futures speculators have not done any meaningful buying since gold bottomed. This anomaly is a very-bullish omen for gold. Since these traders’ buying has yet to start, they need to do lots of catch-up buying.
Since the day after the Fed’s second rate hike in 10.5 years in mid-December, gold has surged 10.0% higher at best as of the middle of this week. Naturally these strong gains were really amplified by the gold miners’ stocks. The leading GDX VanEck Vectors Gold Miners ETF blasted 34.6% higher over that same short span, trouncing the broad-market S&P 500’s mere 1.4% gain! The gold sector is really shining.
But nevertheless it’s been a strange gold upleg distorted by the markets’ extreme Trumphoria. Normally new gold uplegs see a distinct three-stage buying pattern that fuels their advances. Gold’s initial gains off lows are driven by futures speculators buying to cover their shorts. The resulting gold reversal and surge entices in still more futures speculators on the long side, which really accelerates gold’s upside.
This early gold futures buying is essential, single-handedly pushing gold high enough for long enough to reach critical mass psychologically. That finally attracts investors to return, convincing them gold’s new upleg is real and sustainable. They command vastly-larger pools of capital than speculators, and fuel most of gold uplegs’ gains. Futures speculators jump start the gold-driving engine of investment buying.
This gold-upleg buying sequence has proven the standard for so many years now that it’s really hard to imagine it playing out any other way. Speculators and investors have very-different mindsets and risk tolerances, making them uniquely suited to buy at particular times. When gold hits a deep low in extreme bearishness after a major correction, the only buyers are speculators covering shorts to realize profits.
Gold futures actually have a wildly-outsized impact on gold prices, punching way above their weight in capital terms. The main reason is the extreme leverage inherent in futures trading. While the decades-old legal limit for leverage in the stock markets is 2x, it can run as high as 25x in gold-futures trading! So relatively-large amounts of gold can be controlled with relatively-small amounts of capital through futures.
This week, each gold futures contract of 100 troy ounces only required a small cash margin of $5400 to trade. Yet at $1240 gold, that contract was worth $124,000. Thus fully-margined futures speculators can run leverage as high as 23.0x! Every dollar they bet on gold has up to 23x the impact of another dollar used by investors to buy gold outright. So futures trading can overpower investing to wag the gold-price dog.
On top of the disproportional influence of leveraged capital in gold futures trading, the gold price derived from it is the world’s reference price. So big gold moves driven by hyper-leveraged futures trading can greatly affect gold sentiment universally, leading other traders to follow the lead of futures speculators. Gold futures trading utterly dominates short-term gold psychology, which is very frustrating for investors.
So to see gold reverse sharply higher since mid-December without any significant gold futures buying at all is an incredible anomaly. A strong new upleg in gold igniting despite an effective boycott by the futures speculators ought to be impossible based on past precedent. Yet that’s exactly what we’ve seen over the past couple months! These extreme Trumphoria-distorted markets since the election continue to amaze.
Every week speculators’ total long and short gold futures positions are published in the CFTC’s famous Commitments of Traders reports. They are released late Friday afternoons, but current to the preceding Tuesday closes. The latest CoT data available prior to this essay’s publishing ran to February 14th. And it almost miraculously reveals gold has enjoyed no meaningful gold futures buying at all by speculators!
This chart is simple, with speculators’ total gold futures long contracts rendered in green and their total short contracts in red. That CoT data is only available at a weekly resolution. Gold is superimposed over the top in blue, along with its key moving averages. For many years, gold futures buying and selling by speculators has been the dominant driver of short-term gold price action. Until the past couple months’ anomaly.
Speculators have four different ways to trade gold futures. They can buy to open new long contracts, or buy to close existing short contracts. Either type of buying has an identical upside price impact on gold. They can sell to close existing long contracts, or sell to open new short contracts. All selling has the same downside gold-price impact. Buying is buying and selling is selling, regardless of current positioning.
So the overall gold-price impact from speculators’ gold-futures trading is a combination of what they are doing on both the long and short sides. When they are buying new long contracts as evidenced by a rising green line above, they are bidding gold higher. When they are buying longs to offset, cover, and close existing shorts, as shown by a falling red line, they are also bidding gold higher. Longs and shorts matter.
All the major gold rallies in the past couple years were driven by some mix of speculators adding gold-futures longs and covering shorts. Gold only surged in both bear-market rallies before late 2015 and bull-market uplegs since when spec longs were rising and/or spec shorts were falling. The opposite is also true. Every major gold selloff resulted from some blend of speculators selling longs and adding new shorts.
Throughout most of 2015, gold slumped and plunged to a brutal 6.1-year secular low by mid-December. That terminal 19.3% bear-market drop was partially driven by speculators dumping 90.9k gold futures long contracts while adding 107.0k short ones. That made for the equivalent of 615.5 metric tons of gold selling in just 10.6 months, an extreme 58.1t-per-month pace. Talk about a roaring deluge of gold selling!
The world’s definitive arbiter on global gold supply and demand is the World Gold Council. Once every quarter it publishes fantastic reports detailing gold’s fundamental trends. According to the newest data, total worldwide gold investment demand in 2015 ran 918.7t. That works out to 76.6t per month. So the gold futures speculators hemorrhaging the equivalent of over 3/4ths of that was far too much to absorb.
But gold futures speculators’ capital is finite, and they finally reached selling exhaustion the day after the Fed hiked rates for the first time in 9.5 years in mid-December 2015. A major new bull market was born, which would catapult gold 29.9% higher over the next half-year or so. That was partially driven by speculators adding 249.2k long contracts while buying to cover another 82.8k short ones over just 6.7 months.
That was the equivalent of a staggering 1032.4t of gold buying from this one group of traders alone! At a monthly pace, we are talking about a jaw-dropping 154.7t of ongoing buying! The World Gold Council recently reported global gold investment demand only averaged 130.1t per month in all of 2016. So the extreme gold futures buying played a big role in gold’s powerful new bull market over the first half of last year.
When gold futures speculators are aggressively dumping contracts, the resulting heavy downside price pressure forces gold dramatically lower as we saw in 2015. But when they later flood back in to buy and reestablish their positions, gold powers far higher as witnessed in the first half of 2016. These traders’ outsized dominance over gold’s short-term price action extends back many years, it’s certainly nothing new.
After digesting a chart like this, it’s easy to assume gold futures trading is all that matters for gold’s price levels. But that’s not the case, as gold actually has two primary drivers. While the futures speculators command the short term, American stock investors exert massive longer-term influence. Their capital flows into and out of gold via the conduit of that leading GLD gold ETF are gold’s other primary driver.
Any gold-futures analysis without considering GLD capital flows is myopic and potentially misleading. If you need to get up to speed on the GLD juggernaut’s overpowering influence on gold prices, I recently wrote an essay on it. Gold’s price action and prevailing levels result from the interplay between gold-futures speculation and stock-market gold investment via GLD shares. Gold futures don’t operate in a vacuum.
Usually speculators’ gold futures trading and investors’ GLD-share trading run in tandem, as the same gold sentiment motivates both groups of traders. They are more likely to get greedy and want to buy gold after it has already rallied, as everyone loves chasing a winner. They are more prone to get scared and want to dump gold after it has fallen, succumbing to prevailing fear. Gold futures and GLD rarely oppose for long.
Zooming in this same gold futures chart to the past year or so, we can get a higher-resolution read on what’s been going on in gold since last summer. This perspective is essential to understanding the big gold-futures anomaly today and why it is so darned bullish for gold in the coming months. When this knowledge becomes more widely known, speculators and investors alike will rush to buy gold again.
Gold topped in early July because speculators were so heavily long gold futures that buying exhaustion was hit. They were fully deployed in gold, with no more capital to throw at it. That left a record selling overhang for gold when these guys inevitably started unwinding their excessive longs. Their selling and the resulting downside pressure on gold was mercifully modest until catalyzed by a couple major events.
Gold futures trading is exceedingly risky and unforgiving due to its extreme inherent leverage. At 20x, a mere 5% adverse move in gold against traders’ positions results in 100% losses of their capital risked! So running automatic stop-loss orders is all but mandatory for survival. Last summer traders had a big mass of gold-futures sell stops set near the psychologically-important $1300 level, which held for months.
But as October dawned, gold started drifting near this support and triggering these stops. The resulting mechanical selling quickly cascaded, tripping more stops. This unleashed heavy selling in gold futures longs bludgeoning gold sharply lower, just like it had in May after FOMC minutes proved more hawkish than expected. That was the first gold-futures mass stopping in the fourth quarter, really damaging gold sentiment.
The second came in the days after Trump’s surprise election win. For months, gold had traded higher when Trump rose in the polls and lower when he fell. On Election Day’s evening itself, gold futures rocketed 4.8% higher from that afternoon alone when Trump’s lead mounted in the biggest battleground state of Florida. All indications were that a Trump win would be bullish for gold and bearish for the stock markets.
So when that universal expectation proved wrong in the subsequent days, speculators and investors alike started fleeing gold. That resulted in more cascading gold futures selling as stop-loss levels were sequentially hit. Selling begets selling. The faster traders dumped gold futures, the faster gold’s price fell spawning even more selling. Gold plunged in the resulting vicious circle of another mass stopping.
Gold kept falling into a third mass stopping last quarter right after the Fed’s meeting in mid-December. While its rate hike was universally expected, the FOMC projected three more rate hikes in 2017 instead of the expected two. Gold futures speculators irrationally fear Fed rate hikes even despite the fact gold has thrivedduring Fed-rate-hike cycles historically! That’s when the gold-futures selling finally started to moderate.
By gold’s bottom the day after the Fed, speculators had jettisoned 174.0k long contracts and added 32.2k short ones since early July. That was enormous selling equivalent to 641.3t of gold, or a 116.1t monthly pace that was far too extreme for the markets to absorb. But after such a huge gold-futures liquidation, the speculators’selling was exhausting. So it was only a matter of time until gold-futures buying returned.
That would trigger gold’s next major upleg after its brutal 12.7% Q4 plunge, one of its worst quarters ever witnessed. But as these charts reveal, gold-futures speculators weren’t ready to buy. With the prospect of the Fed hiking rates three times in 2017, and the US dollar trading near extreme 14.0-year highs on rate-hike hopes, and the stock markets hitting record after record on all the Trumphoria, they didn’t want gold.
These traders’ serious bearishness on gold in late December was understandable given where gold had come from and the fierce headwinds arrayed against it. So speculators weren’t interested in covering their gold futures shorts, which triggers the initial rally in new gold uplegs. And unlike short covering which is contractually-obligated, long buying is totally voluntary. Speculators didn’t want to bet on gold rising.
Yet gold started rallying anyway, rather sharply! While I was expecting a new gold upleg late last quarter after all the gold carnage, I would’ve never believed it could happen with virtually no participation by the futures speculators. I can’t remember a major gold advance, both bear-market rallies and bull-market uplegs, that erupted and grew without speculators buying gold futures. They are the kings of short-term action.
But incredibly, gold bounced and rallied anyway despite speculators boycotting gold-futures buying! This new gold buying didn’t come from American stock investors either, since GLD suffered serious draws in December and January showing ongoing capital outflows. But there was a critical clue as to where gold’s mysterious buying was coming from. It came in the form of the timing of intraday gold rallies.
While American gold futures trade 23 hours a day, the vast majority of their trading activity comes during the normal US stock-market hours. The same is true of GLD buying. Between late December and late January, gold would often sell off during the US trading day. Most of the gains came overnight when the American traders were sleeping! The gold buying driving this strong new upleg was coming from Asia.
American investors didn’t start returning to gold with heavy differential GLD-share buying until the dawn of February. And as of the latest CoT current to mid-February, futures speculators still haven’t done any significant buying. That is stunningly bullish, since all their buying fuel remains intact. They have yet to expend any of their capital firepower buying gold, which means they have big catch-up buying to do.
As of that newest CoT when this essay was published, speculators’ total gold-futures longs were way down at 252.0k contracts. That is actually considerably lower than where they were when gold bottomed in mid-December! And speculators’ total gold-futures shorts are running 124.2k contracts, not far under mid-December levels. This leaves vast room to buy when gold’s rally inevitably turns speculators bullish again!
Back when gold peaked in early July, speculators held an all-time-record-high 440.4k long contracts to bet on gold’s expected upside. To mean revert back to those levels, speculators have a colossal 188.4k contracts of long buying to do! That’s the equivalent of 585.9t of gold, or 3/8ths of full-year-2016’s global gold investment demand. They also have 24.1k contracts of short covering to do, for another 74.8t of buying.
And because of the extreme leverage and risks inherent in futures trading, speculators are rapid buyers once they wax bullish on gold again. So we are looking at the equivalent of a potential 660.7 metric tons of gold buying from this group of traders alone unfolding over a few months, six on the outside. That is going to supercharge gold’s upleg when it inevitably arrives, greatly accelerating gains and bullishness.
If a full mean reversion back to speculators’ early-July gold futures levels seems too fanciful, you can be very conservative and model a mere half mean reversion. That still equates to 330.3t of gold buying via gold futures over the coming months. Remember global gold investment demand averaged 130.1t per month in all of 2016, so even 50t or 100t per month of gold futures buying is a massive increase in gold demand!
The fact a strong new gold upleg is underway without speculators buying gold futures is incredible, an extreme anomaly. The Trumphoria stock-market rally, and sky-high US dollar, have greatly distorted market psychology. But once these lofty overvalued stock markets and euphoric topping US dollar inevitably roll over, gold futures speculators will be shocked from their slumber. Then they will rush to do catch-up buying.
That will really accelerate gold’s strong new upleg. While investors can certainly play gold’s big coming gains in that leading GLD gold ETF, individual gold stocks will really amplify gold’s gains. While gold powered 30% higher in the first half of 2016, the leading gold-stock index nearly tripled with a monster 182% gain! Gold stocks have similar massive upside potential this year, but only smart contrarians will reap it.
The bottom line is speculators’ gold futures buying hasn’t even started yet despite gold’s strong new upleg. While these elite traders sat on their hands after gold’s mid-December bottoming, Asian buyers usurped their usual early-upleg command. That’s left futures speculators greatly under-positioned in gold. So they have massive catch-up buying to do to leverage gold’s coming upleg gains, which is very bullish.
Distracted by the extreme Trumphoria market distortions, futures speculators have totally missed this gold boat. They won’t stay on the sidelines for long though as gold keeps powering higher. They will rush to get properly positioned for more gold upside, aggressively adding longs and covering shorts. All that coming buying will feed on itself and really accelerate gold’s new upleg, catapulting this metal much higher. – Adam Hamilton
Stanley Druckenmiller is considered one of the greatest traders ever. From 1986 to 2010, his hedge fund earned average annual returns of 30%. Even more incredible, he didn’t have a single down year during that stretch.
In 2010, Druckenmiller stopped managing outside money. But he didn’t retire. He now runs a family fund with about $1 billion in assets.
In other words, Druckenmiller’s still active in the market. And still worth watching…
• In 2015, Druckenmiller made a huge bet that captivated the financial world…
He bought $300 million worth of gold.
At the time, that was about 20% of his fund’s money. It was his biggest position by far.
Most investors wouldn’t put that much money in gold. But Druckenmiller isn’t like most investors. He thinks of himself as a “pig”:
The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered.
I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere.
In short, Druckenmiller doesn’t bet small when he finds something he likes. He bets the ranch.
• Now, we don’t know exactly why Druckenmiller loaded up on gold two years ago…
But we do know that he worries about the same things we do. In April 2015, Druckenmiller said the following at an investing conference in Florida:
If you look to me at the real root cause of the financial crisis, we’re doubling down. Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there and enabled those bad actors to do what they do.
Now, Druckenmiller said this almost two years ago. But not much has really changed since then.
The European Central Bank (ECB) and Bank of Japan (BOJ) are still doing everything they can to “stimulate” the economy, like printing money and using negative interest rates. Meanwhile, the Federal Reserve is still holding its key rate near zero.
In other words, central banks are still destroying paper currencies…meaning the case for gold is as strong as ever.
• Yet, Druckenmiller sold all his gold four months ago…
He actually cashed out on election night.
You see, Druckenmiller thought Hillary would win the presidency. When Trump pulled off the unthinkable, Druckenmiller sold all his gold because he likes what Trump brings to the table.
He thinks his pro-business policies will help the economy. He told CNBC two days after the election:
This economy is so over regulated and people are just drowning in red tape, that the removal of that, and I’m expecting serious tax reform, cuts to the corporate tax rate… So I’m quite, quite optimistic on the economy.
• Now, you have to remember something about Druckenmiller…
He’s a trader. He gets in and out of positions all the time.
Druckenmiller didn’t sell his gold in November because he gave up on the yellow metal. He sold it because he’s bullish on the economy, and gold’s a “safe haven” asset.
But he didn’t stay out of the gold market for long. In December, Druckenmiller started buying gold again.
This time, we don’t know how much gold Druckenmiller bought. But we wouldn’t be surprised if it’s a lot. He is a “pig,” after all.
We don’t know how much gold Druckenmiller bought this time. But we do know why he bought more gold:
I wanted to own some currency and no country wants its currency to strengthen… Gold was down a lot, so I bought it.
• Pay attention to Druckenmiller’s choice of words…
He didn’t say he bought gold because the stock market or economy is about to crash.
He bought it because 1) it’s cheap and 2) central bankers are weakening paper currencies.
And he’s absolutely correct.
Today, gold is trading 10% below last year’s high. It’s 35% below the all-time high it set in 2011.
Accounting for inflation, it’s even cheaper. Just look at the chart below.
To reach its previous inflation-adjusted high, gold would have to rise another 44%. That would push gold well above $2,000 an ounce. But we think it could head even higher than that in the coming years.
That’s because inflation is making a comeback…
• Inflation measures how fast everyday prices rise…
At least, that’s the mainstream definition.
But Casey readers know that most investors have it all wrong when it comes to inflation.
You see, inflation isn’t a side effect of money printing. Inflation is money printing.
When central bankers create money out of thin air, they don’t add anything “real” to the economy. All they create is more currency units.
Eventually, the economy accounts for this. Everyday people end up paying a lot more for groceries, gasoline, and rent.
This is important because central bankers have printed more than $12 trillion since 2008.
In other words, it was never a question of if we’d get inflation. It was a question of when.
Now that inflation has finally arrived, it’s time to take action.
• Physical gold is the best way to protect yourself from inflation…
You see, gold isn’t just money. It’s a hard asset. It has tangible value.
Because of this, the price of gold should rise as inflation picks up. And if central bankers don’t stop printing money, its value could skyrocket.
This is why we encourage everyone to own at least some gold.
Just be sure you understand something…
Just don’t trade gold like Druckenmiller. Leave that to the pros.
Instead, treat it like a core holding. Own it for the long haul. You’ll be very happy you did five years from now.
Investors are worried about inflation.
Today’s chart compares the iShares TIPS Bond ETF (TIP) with the iShares 20+ Year Treasury Bond ETF (TLT).
TLT holds long-term Treasury bonds while TIP holds TIPS, or treasury inflation-protected securities. These are bonds designed to protect investors from inflation. Because of this, investors buy TIPS when inflation is high or likely to rise.
The chart below shows TIP as a ratio to TLT. When this ratio is falling, it means TLT is doing better than TIP. When it’s rising, it means TIP is outperforming TLT.
You can see that this ratio has surged higher over the last few months. This happened because investors got out of normal Treasurys and into TIPS.
More importantly, this key ratio looks like it just broke out of a downtrend that it’s been in since 2011. This signals inflation is here to stay.
The price of gold is moving in contradiction to its economic purpose, which is to serve as an investor safe haven against inflation. Shortly after the election, the dollar index spiked as gold prices began a quick decline; however, recently the trend has reversed. Gold prices are now up around 7% since the Fed’s December rate hike, according to Bloomberg.
Last week we saw the Consumer Price Index report showing inflation above 2% and Janet Yellen’s congressional testimony sending firms like Goldman Sachs increasing the odds of a March hike to 30%. With stronger assurance and signals of higher interest rates and rising inflation, why are gold prices rising and the dollar falling? Here are 3 critical factors:
Uncertainties surrounding the stability of his administration, the priority of his policies, and responses by other world leaders are keeping investors skeptical of what Trump-o-nomics will look like. The rallies in the dollar and the stock market began quickly after the election results. Investors were looking to campaign promises of fiscal spending and deregulation that would free up more capital investment into construction projects like the border wall. Since then Trump’s focus has been diverted to national security matters, and investors haven’t yet seen the earnestness, political will or Republican support to push through spending increases.
Peter Schiff explained in a recent podcast why the likelihood of rising interest rate hikes isn’t driving interest in the dollar: investors are beginning to understand the insignificance of the Fed’s moves. Raising the Federal Funds target rate to .05% – .75% won’t curb inflation, which is already moved past the Fed’s own target of 2% and accelerating. Anyone going to the grocery store lately doesn’t need a CPI report to know prices are skyrocketing. It’s too little too late.
The Fed can’t risk raising rates too quickly because it will tank the economy, and they’ll be forced to officially declare that we’re still in a recession (another fact most people outside of Washington already know). Janet Yellen and her monetary cabal will raise them just enough to say they’ve done something, but not enough to effectively fight inflation.
As obvious as the basic economic law seems, many are finally beginning to realize inflation weakens the purchasing power of their cash. It’s not really a lack of understanding economic fundamentals that’s the problem here; it’s the belief in the Fed’s argument that inflation is good for the economy. The Keynesian theorists running the Fed continue to think the US can spend its way to economic health and prosperity. From that perspective, inflation is good. But for everyday citizens trying to make ends meet, having a devalued fiat currency doesn’t add to an increase in their standard of living. As Ludwig Von Mises said, “Capital goods come into existence by saving.”
These three factors for upward movement in gold prices suggest more people are beginning to feel less optimistic about the future, given the current political climate and rightful mistrust of institutions like the Federal Reserve.
Peter believes we’ve been living in a phony recovery, that inflation will increase along with unemployment at a substantial rate. Layoffs are coming and interest rates will rise. As a result, political battles will increase. US citizens will have a White House looking to place blame for the new recession on the Fed, and a Fed pointing to the chaotic policies of the Trump administration.
Today’s political uncertainties make it a great time to consider diversifying your portfolio with precious metals. Buying gold and silver can help guard against destructive inflation and protect your hard-earned wealth. – Peter Schiff
According to the fundamentals, gold and silver are severely compressed coiled springs looking for an opportunity to release their tremendous power. Yes, it is true, the precious metals still hold a great deal of power. Which is why their prices are constantly controlled by market intervention.
Of course, the market intervention of gold and silver didn’t start recently. Oh no, this has been going on for quite some time. Even though the Central Banks and Gadflies on the financial networks have been able to BAMBOOZLE the public into believing gold is a “Barbarous relic”, fundamentals and the laws of nature can’t be broken forever… as serious consequences normally follow.
When I read comments from supposedly intelligent people who believe gold is nothing more than a “13th century Middle Ages relic”, and “that digital currency is the new future”, what in the hell happened to IQ levels recently???
There seems to be this notion put forth by many in the Mainstream and Alternative media that “TECHNOLOGY” is going to save us all and be the new religion of the future. While I have nothing against technology per say, it will not be the solution to our extremely serious energy predicament we are about to face head on.
For example, there are several voices out in the Alternative media suggesting that “Alien technology” will be finally released into the world, thus allowing our ADVANCED EMPIRE to continue indefinitely. This of course would be a great benefit for Americans as it would allow them to continue filling their homes and rental storage units with all sorts crappy consumer products.
According to the supposed history of Alien encounters on the earth, they have been toying with humans for quite some time. So, the idea that they will allow us to use some of their technology to save a species that shows such a high degree of IGNORANCE, STUPIDITY, CRUELTY & GREED, doesn’t pass the smell test to me.
Hold on.. I can take that a step further, How many EMPIRES have come and gone in the past?? Okay, we had the Egyptian, Persian, Roman and Mayan Empires to name a few. You would think if Aliens were going to start saving humans from being the POOR UNWORTHY SLOBS they have been for thousands of years, they would have done so already. Wouldn’t they??
But, maybe we finally passed the test for our species, and now the Aliens think we deserve a break…. just like a freshly opened bottle of Coke. Yes, that’s it. We have passed the test of being WISE, PRUDENT, CARING and GENEROUS with one another, the plant and animals… and let’s not forget the environment.
On the other hand, logic suggests we are about to hit another SENECA CLIFF just like all the other prior empires that dried up and blew away…. and quite quickly, I may add. So, even though there may be more intelligent life forms roaming the galaxy, it doesn’t seem quite likely they are going to waste much time on a species that has totally run AMUCK.
Which means, we little people here on earth are going to have to take it upon ourselves to continue on-wards when the GREATEST FINANCIAL PONZI SCHEME finally pops. And pop it will.
Over the years, monetary power shifted away from gold and silver and over to the FIAT MONETARY REGIME (a debt-based worthless paper currency system). This stared long ago, but if we have to put a date on it, it would be 1969. I will get into the particulars in an upcoming article. However, the notion (again) that gold is a “13th century Barbarous relic” fails to consider that the world ran on a Gold-Backed U.S. Dollar system up until 1971. This wasn’t that long ago.
Moreover, we still used silver in our coinage up until 1965. While some silver coins, such as the Kennedy Half Dollar, were still minted for the general public up until 1969, silver was removed from U.S. coinage in 1965.
The real reason that silver was finally removed from U.S. coinage in 1965, was that it was too valuable to be used as money…. LOL. I know that sounds silly, but that is the truth. Now, when I say “money”, I mean what it has degraded to over the past 50 years.
There just wasn’t enough silver to go around to meet the insatiable demand coming from the expanding industrial and jewelry sectors. To use silver in coinage as well as supply future industrial and jewelry demand… there just wasn’t enough of the shiny metal.
This is exactly what President Lyndon Johnson stated during his comments after signing the 1965 Coinage Act:
Now, all of you know these changes are necessary for a very simple reason–silver is a scarce material. Our uses of silver are growing as our population and our economy grows. The hard fact is that silver consumption is now more than double new silver production each year. So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins.
Well, there you have it. While the grand conspiracy that silver was removed from currency to give more power to the elite may hold some truth, the REAL REASON was much more simple. There just wasn’t enough silver to go around.
Furthermore, I really don’t believe the elite are really as smart and clever as some make them out to be. Again, if we go back in history and look at all the EMPIRES that have come and gone, you would think that the elite would have had a better plan than allow everything to go to hell in a hand-basket… time after time.
We must remember, back in day when the world was using silver as money, life was a lot simpler. There were no cell phones, or I-pads. There were no electronics or solar panels that required silver. Rather, we basically spent most of our time walking around dressed in glorified burlap sack clothing, growing food or producing simple consumer goods, while enjoying a bath once a week. Gosh, how times have changed.
Regardless, the days of the Fiat Monetary Regime are numbered. There’s just too much debt and derivatives over-hanging the system to allow us to continue for much longer. Thus, in order to keep the Fiat Monetary Regime alive, the value of REAL MONEY, such as gold or silver, has to be kept in the DARK.
If we look at the following two charts, we can plainly see that gold and silver are both standing at the doorway of a major inflection point:
Normally, I don’t pay much attention to “Technical Analysis”, but in this case, we are on the verge of a very critical technical breakout. Of course, this is more important for Hedge Funds, Institutions and large traders to follow, but in both charts, the gold and silver price remained above the 50 MA (50 month Moving Average) for a decade.
However, when QE3 was announced at the end of 2012, Central Bank liquidity made its way into stocks, bonds and real estate. The precious metals were left out to dry.
If we recall from the quote above when Lyndon Johnson stated that silver was a scarce material over 50 years ago, it’s even more scarce today. The same with gold. When the gold and silver prices were knocking on the DOOR to reach new highs in 2012, this just could not stand.
Which is precisely why both gold and silver’s 50 MA level (RED LINE) and have fallen below and stayed there for the past four years. However, gold and silver are once again tapping up against that 50 MA. They first tapped up against the 50 MA in 2016… for good reason.
When the Dow Jones Index was scaring the living hell out of the markets by rapidly falling in the beginning of 2016, investors were getting a HINT of PRECIOUS METALS RELIGION. Thus, investors flocked into gold and silver (gold and blue colored lines) in a big way, pushing their prices up as the Dow Jones Index fell nearly 1,000 points during five trading days in the beginning of February 2016:
This isn’t rocket science. FEAR provides an excellent motivation for bringing people back to their senses. However, this was just for a short while as the Fed and Central Banks ramped up their stock and bond purchases. God only knows just how insane this amount must be.
Thus, calm was brought back into the markets allowing investors to go back to being TOTALLY INSANE once again. Unfortunately, duct tape, baling wire and hot air cannot keep a market from succumbing to the fundamental laws of real economics.
The Dow Jones Index is so inflated, it’s overvalued by at least 60%…. for starters:
According to the economic contraction cycle that occurs about every six years, the Dow Jones Index is severely overdue for a good ‘ole fashion beating. If we assume that a normal correction for the Dow Jones would be for it to fall to about 8,000 points, the index is overvalued by at least 60%. And that is just for starters.
As I have mentioned in previous articles, where we are heading is nothing like anything we have experienced before. Well sure, we could go back and look at the remains of the Egyptian, Persian, Roman and Mayan Empires for clues, but this would not be a good topic to bring up at the next family gathering or office party.
We must remember, most Americans are way too busy spending money they don’t have on crap that they really don’t need, to be bothered with the TRUTH that we are going to go head over the SENECA CLIFF, and there isn’t anything to stop it.
For all those who are new to the alternative media, the SENECA CLIFF came from the work of an ancient Roman philosopher, named Lucius Seneca. According to Lucius Seneca (published on Ugo Bardi’s blog):
increases are of sluggish growth, but the way to ruin is rapid.” Lucius Anneaus Seneca, Letters to Lucilius, n. 91
Like it or not, we will most certainly experience the ramifications of the SENECA CLIFF in the future. Unfortunately, technology will not save us from this fate. Rather, the more technology we use to try to solve our dire energy predicament, the worse the cliff dive will be.
While I am being a broken record on this subject matter, I continue to receive new subscribers every day on the site. Furthermore, the more individuals look at this data and information, the more LIGHT BULBS go off. It takes time for this stuff to sink in. Heck, it has taken me years to come to this realization.
Lastly, the value of gold and silver are going to skyrocket in the future. However, I have no idea how bad things are going to be when the PHAT DEBT LADY finally sings. But, at least physical gold and silver will offer much better options in the future rather than 99% of the STOCK, BOND and REAL ESTATE liabilities out there which are masquerading as assets.
The Dow Jones Industrial Average marched to its 10th straight record close yesterday.
That’s the longest streak of record closes since 1987, MarketWatch notes. And if we aren’t counting all-time highs, the last time we saw 10 straight sessions finish in the green was early 2013.
It’s safe to say investors are feeling giddy as the stock market blasts into uncharted territory. Heck, even the president is retweeting bullish market stories these days:
“In case there was any doubt, the Trump administration sees the stock market as a good barometer of how the economy is doing,” Yahoo Finance notes.
In fact, Treasury Secretary Steven Mnuchin told CNBC yesterday that the administration would look to the stock market as a “report card” for how the economy is performing. Judging by the huge post-election rally we’ve witnessed, it’s no surprise the administration is patting itself on the back.
But if early morning market action is any indication, the streak ends today.
Unlike the Dow, the Nasdaq logged its second day of losses on Thursday. Momentum is beginning to wane. Falling stocks outnumbered the ones finishing higher yesterday. Many popular growth names are starting to get hit with profit taking…
That’s a recipe for a pullback. Markets can’t shoot straight up forever. Now it looks like stocks are going to deliver this friendly reminder to investors via some downside action. Unless Trump signs an executive order banning downticks, some healthy mean reversion is on the way.
I doubt a pullback will change the president’s self-graded “A+” rating on the economy under his watch– no matter how sharp it is. But while every investor in the country remains focused on the record-setting major averages, we’re turning our attention to gold.
As the stock rally loses steam to finish the trading week, gold looks stronger than ever. The Midas metal nearly flunked out to finish off 2016. But the new year helped turn things around in the precious metals world. Thanks to its improved performance to begin the year, gold is well on its way to making the dean’s list in 2017.
Earlier this month, we alerted you to a curious development in gold so far this year: Gold’s advance for the first six weeks of 2017 perfectly mirrored the action we witnessed during the first six weeks of 2016.
Gold had posted gains of 6% through the first week of February for the second year in a row. In both cases, gold bounced off a late December bottom. And in both cases, the gold rally dipped in late January—only to rocket to new highs at the start of February.
Now we’re watching gold extend this rally as we approach the end of the trading month. The metal is streaking higher this morning, rising to new year-to-date highs and prices not seen since early November as world stock markets continue to retreat.
As of Thursday’s close, gold has easily outperformed even the celebrated Dow Industrials so far in 2017. Take a look for yourself:
As you watch the market sink into the red this morning, don’t forget to check out gold’s renewed momentum. If history is any indication, this rally has plenty of room to run.
Courtesy: Greg Guenthner
The US Government has essentially declared war on the OTC markets. This is the banking industry life blood. Banks are not going to go down easily. We have said so here in the past. Since the US government has essentially declared it wants exchanges to be the depositories for risk instead of Banks, the Banks are going to start buying exchanges. What ICE, (originally formed by Goldman and other banks) did for oil, EOS intends to do for Gold. That is ensure that if banks are disintermediated, at least they will own their replacement. ICE is the second largest oil exchange behind the CME now. And ICE is no longer bank owned. Hence the banks are creating a new vehicle to capture lost business, this one is in Gold. And its goal is to get in the middle of every Gold deal being bought in the East. And they are smart to do it. From a previous post, the problem for banks can be easily seen. Banks know this and are not going down without a fight.
TBTF = Too Big to Exist
The Federal Government’s policies post the 2007 crash have done nothing to reduce the concentration of systemic risk in our markets. They have in fact concentrated power in a smaller number of counterparties’ hands. Price discovery is less reliable. Transparency of price is better, but less reliable. We like this statement made today on transparency, diversity in market participants and our growing systemic risk.
Exchanges Are the Answer
One positive we see is the vested interest the Federal Government has take in the US Exchanges. By encouraging trades on the exchanges, the gov’t at least has a fair shot of seeing systemic risk now. The opacity of banking’s OTC markets are a big problem. Maybe it is bad to have all your eggs in one basket. But if you really watch that basket closely, then at least you can see trouble coming rather than waiting for a bank to blow up and start a cascade of OTC defaults. And as long as all the data “eggs” are transparent, then another 2007 event can be avoided. Manipulation in Metals
They will preserve their FX franchises as long as they can. But they see the writing on the wall with the Gold OTC market. Therefore they will join what they cannot beat. Here are the talking points on the deal the Banks cut with the LME in summary:
At the moment, London’s gold trade is dominated by over-the-counter (OTC) business conducted bilaterally among networks of brokers, producers and consumers. Gold futures trading takes place chiefly on the CME’s New York market and the Tokyo Commodity Exchange. However, the LME and its rivals see an opportunity as regulation of the market tightens, hoping this will force the trade onto transparent, centrally-cleared exchanges. Bigger banks, which rely on their wide range of business relationships, stand to lose market share from such a shift because exchange trading would make it easier for smaller players to compete.
Gold dealers keep their volumes secret and no precise figures are available, but analysts and traders estimate the EOS shareholders may control up to 50 percent of OTC bullion trading in London.
The secular trend is Gold demand moves eastward. And it is a fact that exchanges do best in regions of demand, not regions of supply. Hence Comex vaults are emptied while SGE are getting filled.
The LME is paying banks with revenues and guaranteed order flow in return for “liquidity provision”. Does this seem like captive flow in which a bank’s prop desk in the US can somehow front run?
Here are the revenue streams a designated marketmaker/ specialist type market structure affords:
Here is how the marketmaker/specialist manages risk
Small Players Will Be Shut Out
The Specialist/DMM/PMM type liquidity provider with no real risk has a license to print money. And he can walk away is he doesnt like the deal. His risk is limited to the extent he participates. The LME has all the risk here. Do they even know how to police their liquidity providers beyond the “moral” obligation? It is not easy to quantify when a sub-contractor is shirking his responsibility in this business.
From Reuters: The London Metal Exchange has reached a 50:50 revenue-sharing deal with a company founded by a group of banks to promote trade in its new gold futures contracts, sources said, aiming to overcome market skepticism surrounding their launch in June. Usually, exchanges merely consult potential users about their needs when planning new financial and commodity contracts. But in this case, the LME has opted for a radical departure from normal practice as it tries to grab a piece of London’s $5 trillion-a-year gold market. Sources close to the matter told Reuters that the five banks and a proprietary trader which are shareholders in the new company have undertaken to bring guaranteed minimum levels of trade in the gold futures. Should they meet these levels, the project partners will receive a half share of the revenue under an incentive scheme designed to ensure the contracts have turnover, viability and credibility from the outset.
“We’re all committed to market-making and will at least bring our own trading book,” said a source at one of the banks involved in the project. “It’ll come with some built-in volume.” The sources gave few details of the arrangement. However, one at a different bank backing the contracts said: “Do we have incentives for it to work? Yes.” The LME, which is owned by Hong Kong Exchanges and Clearing Ltd, hopes the arrangement will give its contracts enough business to take off from June 5 despite doubts among many brokers and gold producers.
Essentially, the contracted specialist has a free “put” to not do what he is morally obligated to do. This is not a new model. But it is now full circle where banks as liquidity providers ( the guys who rigged and or passively played a role in rigging the Gold and Silver Fix) are now at the hub of the Gold flow. Yet in much bigger markets like FX, the banks wont participate in this way. This is because the FX market is still largely OTC and a good profit center franchise still. That is not to say the Specialist/ DMM type market-structure cannot work. It is necessary in many cases where the marketmaker is the gold dust that gets the virtuously reinforced cycle of liquidty going. That is a paraphrase from the Goldman sponsored book “B2B exchanges”
More: It also wants to shoulder aside U.S. exchanges CME Group and ICE which launched London gold contracts last month, although they have yet to attract any business.The LME’s partners from the banking sector are Goldman Sachs, ICBC Standard Bank, Morgan Stanley, Natixis and Societe Generale. They have founded a company called EOS Precious Metals along with commodity trader OSTC and The World Gold Council, an industry market development body.
And demand is moving East. Incumbent exchanges in precious metals should consider getting the gang back together to augment their currently homogeneous and hedged (conflicted?) liquidity pool and make a stronger play in China. Traders who invest their competitive ego and heart as well as financially vested interest into making London contracts work are out there.
“If the LME can provide liquidity, then that’s where people will go and so will we,” said a source at one gold producer. The LME plans to offer a much wider range of contracts than its competitors do at the moment in London.The CME is offering gold and silver contracts to connect London with its established New York market. ICE runs the London gold auction, which sets a global benchmark price for bullion, and has a daily gold contract that will enable participants, which include most of London’s largest bullion banks, to clear their trades.Neither set of contracts has traded since launching in January. The CME said it was working with major banks to synchronize their systems to start trading.
While the regulators are patting themselves on the back for catching the Gold and Silver scandals after 20 years, the players have moved on to greener pastures.
– by Soren K. – Zerohedge
Ongoing uncertainty on multiple fronts is triggering a rise in demand for safe-haven investments such as gold and silver – Ole Hansen
The dollar has hit a six-week high against the euro. The wider forex market, however, tells us that this latest move is mostly euro weakness over French election concerns rather than dollar strength. As a result we are seeing both gold and silver showing resilience with XAUEUR reaching the highest level since November 10.
Source: Bloomberg; Saxo Bank
The increased risks and worries related to a potential surprise outcome of the French presidential elections can be seen in the way investors currently behave in the forex and bond market. Opinion polls are giving Marine Le Pen close to no chance of becoming the next president. The market, however, has become very skeptical of polls following recent experiences with the UK’s referendum and the election of Donald Trump in the US.
With polls narrowing in favour of Le Pen, the euro has come under pressure and Bloomberg reports that the cost of puts relative to calls are now the most expensive in two years. In the bond market the yield spread between 10-year French and German government bonds has risen to 0.81 percent, the widest since 2012.
Into this uncertainty we are continuing to see a pick-up in demand for alternative investments such as gold and silver. In January, it was increased uncertainty about the impact of the new administration in Washington that gave precious metals a boost. Since then, worries about Europe have added another layer of support and this has so far resulted in year-to-date gains for gold of 8% and 12.5% for silver.
Source: Bloomberg; Saxo Bank
Investment demand from hedge funds in the futures market and investors using exchange-traded products have so far been relatively muted with the Federal Open Market Committee in tightening mode and universal expectations of a stronger dollar providing a headwind. The resilience seen especially in the last week, where the dollar strengthened, should provide some additional support but first a key technical level at $1,245/oz needs to be taken out.
Gold has settled into a range determined by the 38.2% and 50% retracement of the July to December sell-off. We maintain a bullish bias, with the market likely to target $1,278/oz on a break. Support remains firm at $1,220/oz, which also co-insides with trendline support from the December low.
Silver has been the best performer on a relative basis with the XAUXAG ratio at 68.6, down from 72.4 at the beginning of the year. Hedge funds have been continuous buyers of silver for the past seven weeks and in the week ending February 14 it led to funds holding a bigger position in silver (70,746 lots) than gold (67,982 lots). On that basis we see a potential bigger upside to gold in the short term from a positioning perspective.
Source: Bloomberg; Saxo Bank
Here are two different looks at Fed rate hikes since Volcker. The charts are the same, but one presentation is a lot funnier than the other.
the above image from the New York Times article A History of Fed Leaders and Interest Rates.
Here’s an alternative view courtesy of @HedgeEye.
Let’s take the fist chart and see what correlations exist between rate hikes and the US dollar index.
Rate Hike Cycle vs. the US Dollar
Conventional wisdom suggests rate hikes will support the US dollar.
US Dollar Conventional Wisdom vs. Rate Hike Reality
British Pound 8-Year Cycle
The above chart from You’ve heard of Kondratiev waves – now meet the Frisby flux, the pound’s eight-year cycle by Dominic Frisby.
Rate Hikes Bad for Gold?
Conventional wisdom also says rates hikes are bad for gold. Let’s take a look.
How’s that conventional wisdom doing?
Why is it that nearly all of mainstream media preaches that rates hikes will strengthen the dollar and rate hikes will be bad for gold?
Gold Does Well in These Environments
4. Decreasing faith that central banks have everything under control.
5. Rising credit stress and fear of defaults
Gold Does Poorly in These Environments
1. Disinflation (1980 to 2000 is a perfect example. There was inflation every step of the way but gold got clobbered).
2. Increasing faith in central banks’ ability to keep things under control (Mario Draghi’s “Whatever it takes” speech triggered a prime example)
Gold does worst in periods of prolonged disinflation and in periods of rising faith in central banks.
Moments in Gold History
Conventional Wisdom Roundup
Gold does not necessarily rise and fall with interest rates, jewelry demand in India, or any other widely believed nonsense. Rather, gold has moved in conjunction with perceptions as to whether or not the Fed and central banks have everything under control.
If you think everything is under control, and do not want insurance against a currency crisis or another debt crisis, then dump your gold.
If you believe as I do, that everything is not under control, or if you want some insurance, then take a position in gold.
Either way, stop listening to conventional wisdom regarding gold. The charts show how laughable that wisdom is. – Mike “Mish” Shedlock
The broad consensus is to own stocks and to sell gold.
But, as I have discussed since 2003 in my annual Surprise Lists, the broad consensus of investors is often wrong. Indeed, it is often the case that the very coalescing of popular opinion behind an investment tends to eliminate its profit potential.
As Howard Marks writes:
“First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in: ‘The outlook for the company is favorable, meaning the stock will go up.’
Second-level thinking is deep, complex and convoluted. The second-level thinker takes many things into account:
While the animal spirits may have taken over the equity markets and have ignored the gold market, we should recall that there is a reason why Keynes called them animal and not human spirits. That’s because animals are a lot dumber than humans!
As excited as investors are about stocks, they are now uninterested in gold.
I remain a minority and outside of consensus regarding gold. However, given the developing and concerning conditions — and lack of credible policy responses — that I now see falling into place, the uncertainty premium should be rising and gold may be a beneficiary this year.
What is most surprising to me is that the price of gold has not responded to these uncertainties, providing a potentially favorable upside/downside ratio for the yellow metal.
I wanted to start today’s opening missive with the way in which I concluded my 15 Surprises for 2017 — the major theme being that “Donald Trump will make volatility and uncertainty great again.”
I especially would pay attention to the three questions at the end of my column as they relate to the prospects for a higher gold price. Answer them yourself — I have my own responses — and act accordingly:
Kew-Forest School in Queens (Where’s Donald “The Dude” Trump?)
Some final words.
My outlook for 2017 is more gloomy than in years.
To me, the biggest surprises are (1) the abundance of complacent sheep that populate our financial markets today, (2) the rapidity in which the bloom comes off the Trump flower next year, and (3) that the market actually may do what is unexpected in 2017.
The Republican Party becomes divided and Trump’s policy support loosens. Even the newly elected president’s “A Team of Rivals” cabinet with vastly different philosophies and backgrounds becomes splintered, full of tension and conflicted, much like an episode of “The Apprentice.” Unlike President Lincoln (who neither lacked for self-confidence nor needed to be the only voice in the room) and his ornery set of advisers, Trump’s management style of an “Apprentice-like” administration does not produce constructive and cohesive policy.
With little strategic vision and a limited ability to effectively govern, the Trump administration’s popularity quickly wanes as the trade-off from a slower growth world to a late-cycle policy experiment to stimulate growth fails.
Off of Twitter, absent regular press conferences and the delay/failure of policy, Donald Trump by year-end 2017 will be less ubiquitous and harder to find than he has been for the last 18 months and more like Where’s Waldo? (see picture above — can you find the young Trump?)
All of which gets me back to the three questions that I have asked myself every morning over the last two to three years. These questions seem more appropriate to ask today than ever:
- In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
- In a flat, networked and interconnected world, is it even possible for America to be an “oasis of prosperity” and a driver or engine of global economic growth?
- With the G-8’s geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?
— Doug’s Daily Diary, I’m Bearish in Word and Deed (March 24, 2016)
Think about these questions as you approach investing in 2017 and consider embracing the contrary and even some of my “probable improbables” for a portion of your invested assets.
Risk happens fast in 2017.
As a possible manifestation of some of the concerns expressed above, the price of Bitcoin recently has ripped higher ($1,130), and Bitcoin, for the second year in a row, is the best performing “currency.”
Finally, I would note that we have ransomed our economy because our policies have favored debt over equity and speculation over productive investment, placing gold in a more envious position:
Though it is always hard for me to value gold as I cannot produce an intrinsic value calculation, I believe the odds that gold will shine brightly this year are growing, and that the commodity may go from goat in 2016 to hero in 2017.
I have moved to a large holding in gold. – Doug Kass
The commodity landscape is always a fascinating one, and one that I think is worth your attention if you trade for periods longer than a week. Many traders are familiar with commodity currencies like the Australian Dollar, which has been the strongest currency in G8 for most of 2017, the New Zealand Dollar, and the Canadian Dollar.
Some savvy traders may even be familiar with the role that commodities play in emerging market currencies like the Mexican Peso and South African Rand among others whose economies are rich in resources as well dependent on trade. Trade and commodity demand tend to go together like spring and rain.
Lastly, the large confusion post-financial crisis has been the disappearance of inflation. Many Central Bankers promised it would come back, but it’s been hiding away in the one place that money or money-printing cannot seem to buy. The lack of inflation has been seen clearly from sovereign bond yields, which are related inversely to the price that has been on a long move lower (price higher) as demand was ever present for consistent coupons in the disinflationary environment.
Many Central Bank QE plans were activated to restore the price stability of inflation. This background in important because commodities are a key part of any market cycle that goes from rising to peak to correction to trough and repeats. The three markets that play along with the market cycle is the bond market first, which tends to rise (bond yields fall), followed by stocks (which admittedly do not look to have topped yet), and is last followed by commodities.
Commodities tend to market the final stage of a market cycle. In 2008, stocks topped out in November of 2007, and commodities, as witnessed most clearly by Oil, topped the following summer. As trend followers, this is important because despite what is happening with stocks and whether or not it is about to top or will continue to rise, we could still have a large trend ahead of us in commodities.
Naturally, as traders, there are important ramifications if this is to be the case. First, commodities themselves via CFDs could continue the trend that we’ve seen in much of 2017. As mentioned earlier, a derivative of commodities are the commodity bloc currencies that have trended strongly against the USD for most of 2017. Lastly, there is the inverse trade to commodities themselves, which is the US Dollar.
Historically, we tend to see strong moves in commodities with converse movements in the US Dollar. Therefore, if you have a good scent on where Commodities are headed, and that is confirmed with US Dollar moving in opposite directions, you likely have found a good theme that could trade and ride for a while.
Let’s take a look at some key commodity components to see what’s going on right now and how it might be helpful for understanding what may be coming down the road along with the possible trades this may make available.
While industrial metals may not be as fun to discuss at a dinner party as Gold or Oil, the implications of Industrial metal demand and therefore price is, of course, crucial. Gold tends to play the commodity role similar to the US 30yr bond, which is more of an inflation gauge than growth measure. However, the rise in the price of industrial metals like we’ve recently seen with Iron Ore Futures and Copper, that recently surpassed its November peak help to show rising demand, at a time when China appears to be reducing its supply.
A key story that popped up last week was that Anglo American, the mining giant has decided to halt some of their asset sales that are designed to clear up the balance sheet and help pay off debt or make money available for dividends. The important part of the story is why they decided to halt the sale of the assets that were their mines. They said that the mines had recently turned into a cash cow.
While the supply of metals got crushed alongside a lot of other commodity producers in the downturn of H2 2014 and 2015, the few that remained to appear to be sitting pretty one-quarter into 2017. Demand appears to be picking up, and there are fewer mines that we’ve seen in a long time that is there to meet that demand, which could make for profitable mining companies and a Bullish trend in the industrial metals if the trend continues.
Multi-Month Breakout In Copper
Chart Created by Tyler Yell, CMT
What Is Happening In The Energy Sector
The energy sector seems to have a lot of traders confused, and for a good reason. The market has been flat since the start of the year despite all the news of Trump Policies, OPEC cuts, and record positioning from hedgers and speculators.
Crude Oil Price Stability Above LT Polarity Zone
Chart Created by Tyler Yell, CMT
I would point out a few takeaways in the energy market. The news has not been encouraging given the rise in US Supply, but the price has been stable. This could be a component of rising inflation expectations, which was validated with last week’s CPI print in the US or a factor or rising demand.
Demand does appear to be rising, and given the recent reports of ~92% OPEC compliance, it appears the US Supply is not enough to prevent Oil from eventually moving higher. Obviously, as technicians, we need to have a point where the price looks to negate the theme and story we’re viewing. A breakdown below the $50 range alongside a strengthening dollar with DXY over 102 would put a large dent in the Oil Bullish story.
Price stability, for now, appears to be Bullish given that it is developing above prior long-term resistance. Should Oil eventually align with the Industrial Metals picture, we could be working on a move toward $60/bbl.
What is happening with the Denominator in the Equation? The US Dollar
Chart Created by Tyler Yell, CMT
The US dollar is akin to the axis on which global markets turn. It does not matter if you’re looking at Government Bonds, Equities, Global Alternative Assets or you-name-it, the US Dollar is in the mix. There are many reasons, but a large part in addition to being the global reserve currency is that the US Treasury Market is the defacto risk-free rate that nearly every asset pricing and portfolio risk measure utilize.
Therefore, the direction and the broader trend of the US Dollar matters, a lot. We can see that the USD got a large boost post the November election and this aligned nicely with a move higher in UST 2Yr Yields, which do a fine job of pricing in and acting as a Proxy of the Federal Reserve monetary policy in the coming 24 months. The current 2-yr Yield as of Mid-November sits around 2.2%.
This appears surprising given the recent Humphry-Hawkins testimony from Janet Yellen who noted that we could see 2-3 hikes per year coming up. This could indicate that the bond market (the supposed “smartest people in the room”) believes Yellen & Co. are getting ahead of themselves. Either way, the relationship we’ve seen is that it is difficult for the USD to breakout without 2 Yr US Yields moving higher, and that would appear to need an exogenous shock. For now, we’ll keep an eye on the uptrend, and a break of support to possibly validate the larger potential Bull Trend in commodities that I am proposing you should be on the watch out for in 2017.
What To Watch For Commodity Bloc FX
Chart Created by Tyler Yell, CMT
Lastly, it’s helpful to tie this all back to the FX market. The Australian Dollar has traded places with the New Zealand Dollar, and Canadian Dollar for the top spot on a relative strength basis for most of 2017 among G8 currencies. A key component of Momentum is that it is a force that is difficult to predict (will it turn/reverse), but rather easy to follow.
The commodity currencies that have headlined as strongest currencies in 2017 should continue to be on your radar and a break above AUD/USD resistance, the strong/ weak pairing of Thursday, February 16, 2017, at 0.7800 could be a further indication that a strong move higher is upon us as we may be making a move on USD weakness or commodity strength toward 0.8000.
Strong/ Weak Analysis For Thursday, February 16, 2017
Created by Tyler Yell, CMT
Such a move would likely be aligned with broader commodity strength that we encourage you to be looking for validation signs as well. – Tyler Yell
– John Grandits: In December, we argued gold’s post-election decline didn’t reflect its fundamentals and that now could be a good time to add some to your portfolio. It just so happened that shortly after, the price began rising. The yellow metal is up almost 8% since the beginning of the year—and the outlook for 2017 is bright. Net bets on higher future prices have almost doubled since January. Assets held by gold ETFs are up 34% from their December lows.
Given its recent surge, is gold still a “buy?”
With gold having its best January since 2012, many are expecting a pullback. While a retrenchment is possible, given the shifting political landscape, we think it has further to go.
Historically, the yellow metal has done well in times of uncertainty. While uncertainty rose following the election, gold fell. This was due to optimism surrounding Trump’s pro-growth policy announcements. However, since the inauguration, some optimism has evaporated, and investors are recalibrating their expectations and timelines for actual policy implementation.
As uncertainty surrounding immigration policies, the future of Obamacare and Dodd-Frank, and tax cuts continues, gold will be a likely beneficiary.
Are Investors Too Complacent?
The change in the drivers of economic growth is also good for gold. Since the election, it has been politics—not central banks—steering markets higher. This represents a major sea change. While the Fed’s actions post-financial crisis have been predictable, Trump is anything but. Therefore, we can expect twitchier markets ahead. Mohamed El-Erian has coined this period “Phase III” of the Trump Rally.
Given this is the second longest period in stock market history without a 10% correction, investors should proceed with caution. Higher volatility may very well be the story of 2017.
Increasing ambiguity has led to another positive development for gold—the drop in the dollar. The dollar index hit a 14-year high back in December. It then went on to have its worst January since 1987.
The dollar’s decline helps gold in two ways. First and foremost, gold and the dollar have a strong inverse relationship. When gold rises, the dollar falls—and vice-versa. Secondly, as gold is priced in US dollars, when the greenback falls, gold becomes cheaper for foreign buyers.
The situation in Europe also looks promising for precious metals. Following the “Brexit” vote last June, gold rose 7% in less than two weeks. If you thought Brexit cast doubt over the future of the EU, wait until you see 2017’s political calendar.
National elections are taking place in France, Germany, and The Netherlands. In all three countries, outsiders are gaining ground on traditional “centrist” parties. Greece is also back in the news with its perennial fiscal problems. That’s not to mention Italy, where a banking crisis is emerging.
Besides political happenings, the developing economic picture looks positive for gold.
On the back of improving economic data, the Fed raised interest rates last December for only the second time since 2006. They also laid out a plan to hike rates three times this year. As a result, equities moved higher while bonds sold off.
As expected, gold fell on this announcement. Higher rates are negative for gold as it increases the opportunity cost of holding the metal. While the rate hike knocked gold, the chances of more coming in the near-term fell after the disappointing January jobs report.
Adding to the optimism is the return of inflation. In December, the consumer price index (CPI) recorded 2.1% year-over-year growth. Expected inflation, measured by the 10-year breakeven rate, has consolidated above 2%. Both numbers are at their highest levels since 2014.
As the biggest driver of the gold price is real rates, this is a huge plus for the metal. At the moment, the negative correlation between gold and real rates is the strongest since records began in 1997.
Given the current setup, the January CPI number could have enormous implications. If it comes in over 2%, it may force the Fed to reluctantly raise rates in March. Higher rates will further tighten financial conditions. Given the elevated public and private debt levels, it would likely weigh on economic activity.
Following these developments, gold moved above its 100-day moving average (MA) last week. This is very bullish as the 100-day MA acted as both a floor and a ceiling during 2016’s rally and correction.
It’s worth noting the last two times it did this, gold advanced 18% and 13%, respectively.
With the Fed in a tricky situation regarding interest rates—and ambiguity likely to continue to surround the political arena—we may be in for a wild ride in 2017. Given the uncertain outlook and improving fundamentals for gold, now is a great time to add the yellow metal to your portfolio.
Notwithstanding the strong demand for gold and silver globally, buying activity in the U.S. retail market for physical bullion has fallen noticeably in the wake of Donald Trump’s election victory. And retail selling in the U.S. has increased. The bullion markets have entered a new phase.
The two terms of President Obama included the aftermath of the 2008 financial crisis, zero interest rate policy from the Federal Reserve, and multiple rounds of Quantitative Easing. Reasons to buy gold and silver were plentiful. Today, the reasons to diversify into gold and silver are as strong as ever, but they’re perhaps less obvious to the average retail buyer in the U.S.
Many of the people who felt deeply concerned about the direction of the nation under Barack Obama are more optimistic now. U.S. stock markets are moving relentlessly upward. Artificially low interest rates are sending home prices higher. Even the US dollar looks decent when compared to other world currencies.
The rationale for owning physical gold and silver isn’t making page one headlines. That does not mean the gold story is over. Rather the markets seem to be at a crossroads with investors waiting to see which direction events will take them.
One path is not bullish for precious metals prices. That route includes a stronger US dollar coupled with real economic growth and risk assets continuing to outperform.
The other two paths move through very different landscapes, but both lead to sharply higher gold and silver prices. The first path involves price inflation amid rapidly growing government debt. The need to hedge against the dollar’s declining purchasing power re-emerges in investor psychology. The second path leads toward geopolitical uncertainty and the return of safe-haven buying.
There are good reasons to expect metals markets will take one of the more bullish paths. Here are the potential catalysts as we see them today…
The Bureau of Labor Statistics just reported the biggest jump in the Consumer Price Index in four years. Bureaucrats have a sordid history of under-reporting the true price inflation rate.
But a massive devaluation of the dollar remains the only politically viable means of addressing our national debt and avoiding an overt default on entitlement obligations.
No election can change that imperative. It remains a matter of when, not if, Americans can expect big league price inflation.
President Trump and his advisors would very much like to see a weaker dollar, and they are saying that explicitly. The jawboning has even yielded some results. For the moment, however, they aren’t getting much help from Janet Yellen. The Fed is still signaling tighter monetary policy, which could make the dollar look stronger relative to other major currencies.
The administration has put some proposals on the table which would promote a decidedly weaker dollar. Trump’s bid to launch a massive infrastructure spending program is one of these. The anticipation of a trillion dollars worth of construction projects is already fueling inflation expectations.
The proposal for significant tax reductions is getting plenty of attention, but, as yet, not many see it as a significant driver of price inflation. It would be. Tax cuts work as a direct stimulus because people have more spendable cash left in their pockets. Any cuts could also undermine the dollar by driving up federal deficits and borrowing, assuming a booming economy doesn’t increase overall tax revenues.
Finally, should Trump convince congress to levy import or border taxes with a major trading partner such as Mexico or China, it will mean higher prices inside the U.S. That is the inevitable cost for such a policy.
Even the most optimistic Trump supporters should be planning for a bumpy ride on the way to reform. For starters, it is increasingly clear the president is at war with the Deep State – the unelected, often anonymous bureaucrats and elites who have been running our government from behind the scenes for decades.
This battle breeds uncertainty and the potential for real turmoil. It is impossible to confidently predict what the political landscape will look like just a few months from now, let alone a few years down the road.
The potential for widespread social unrest should not be discounted. Anti-Trump forces are already mobilized and cultivating enough hysteria to foment violence in places like Berkeley.
His supporters, by and large, seek to avoid physical confrontation. But that could change quickly if Trump’s war with the Deep State takes a turn for the worse.
The president has many enemies in Congress, including some powerful Republicans. What happens if the president is impeached? What if there is an assassination attempt?
Turn away from America’s extraordinarily volatile political scene, and you’ll find other reasons to retain some caution. This year promises to be pivotal in Europe. Anti-EU candidates just may win in upcoming European elections. Should that happen in either France or Germany, it is likely to shake markets to the core.
Europe isn’t the only continent with trouble brewing. Jim Rickards is among a number of experts who think the next economic crisis might kick off in Asia. Appearing on the Money Metals podcast last week, Rickards makes the case for China “going broke” as officials attempt to maintain a currency peg and grapple with the massive numbers of bad loans piled up in Chinese banks.
Current valuations in the U.S. equity markets should also be giving investors reasons for concern. Having risen dramatically as shown in the chart below, price-to-earnings ratios are signaling a significant correction may be just ahead.
The bull run in the S&P 500 has lasted almost 8 years. Do Trump’s plans for economic revitalization mean the run can persist for years longer?
It’s possible. There are two ways for valuations to fall back into line, and one of them is for corporate earnings to rise significantly.
The other is for share prices to fall… hard. For anyone who isn’t supremely confident in Trump’s ability to shepherd the tax cuts and a big infrastructure program through congress, this is the better bet.
Submitted by: Money Metals
In the next issue of The Austrian, David Gordon reviews Sebatian Mallaby’s new book, The Man Who Knew, about the career of Alan Greenspan. Mallaby points out that prior to his career at the Fed, Greenspan exhibited a keen understanding of the gold standard and how free markets work. In spite of this contradiction, Mallaby takes a rather benign view toward Greenspan.
However, in his review, Gordon asks the obvious question: If Greenspan knew all this so well, isn’t it all the more worthy of condemnation that Greenspan then abandoned these ideas so readily to advance his career?
Perhaps not surprisingly, now that his career at the Fed has ended, Old Greenspan — the one who defends free markets — has now returned.
This reversion to his former self has been going on for several years, and Greenspan reiterates this fact yet again in a recent interview with Gold Investor magazine. Greenspan is now a fount of sound historical information about the historical gold standard:
I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.
The gold standard was operating at its peak in the late 19th and early 20th centuries, a period of extraordinary global prosperity, characterised by firming productivity growth and very little inflation.
But today, there is a widespread view that the 19th century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable! It wasn’t the gold standard that failed; it was politics. World War I disabled the fixed exchange rate parities and no country wanted to be exposed to the humiliation of having a lesser exchange rate against the US dollar than itenjoyed in 1913.
Britain, for example, chose to return to the gold standard in 1925 at the same exchange rate it had in 1913 relative to the US dollar (US$4.86 per pound sterling). That was a monumental error by Winston Churchill, then Chancellor of the Exchequer. It induced a severe deflation for Britain in the late 1920s, and the Bank of England had to default in 1931. It wasn’t the gold standard that wasn’t functioning; it was these pre-war parities that didn’t work. All wanted to return to pre-war exchange rate parities, which, given the different degree of war and economic destruction from country to country, rendered this desire, in general, wholly unrealistic.
Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today we would not have reached the situation in which we now find ourselves.
Greenspan then says nice things about Paul Volcker’s high-interest-rate policy:
Paul Volcker was brought in as chairman of the Federal Reserve, and he raised the Federal Fund rate to 20% to stem the erosion [of the dollar’s value during the inflationary 1970s]. It was a very destabilising period and by far the most effective monetary policy in the history of the Federal Reserve. I hope that we don’t have to repeat that exercise to stabilise the system. But it remains an open question.
Ultimately, though, Greenspan claims that central-bank policy can be employed to largely imitate a gold standard:
When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions. I told him that US monetary policy tried to follow signals that a gold standard would have created. That is sound monetary policy even with a fiat currency. In that regard, I told him that even if we had gone back to the gold standard, policy would not have changed all that much.
This is a rather strange claim, however. It is impossible to know what signals a gold standard “would have” created in the absence of the current system of fiat currencies. It is, of course, impossible to recreate the global economy under a gold standard in an economy and guess how the system might be imitated in real life. This final explanation appears to be more the sort of thing that Greenspan tells himself so he can reconcile his behavior at the fed with what he knows about gold and markets.
Nor does this really address Ron Paul’s Concerns expressed for years toward Greenspan and his successors. Even if monetary policymakers were attempting to somehow replicate a gold standard environment, Paul’s criticism was always that the outcome of the current monetary regime can be shown to be dangerous for a variety of reasons. Among these problems are enormous debt loads and stagnating real incomes due to inflation. Moreover, thanks to Cantillon effects, monetarily-induced inflation has the worst impact on lower-income households.
Even Greenspan admits this is the case with debt: “We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.”
Certainly, debt loads have taken off since Nixon closed the gold window in 1971, breaking the last link with gold:
|R1||17.24 Dec highs|
|R2||17.35 H&S neckline (broken at)|
|R3||17.63 20 DMA|
|R4||17.73 38.2% Fibo (Jul-Dec sell-off)|
|R5||19.00 Nov highs|
|R6||20.13 Sep 6 peak|
|R7||21.13 High so far|
|R8||21.60 Jul 2014 peak|
|S1||17.63 20 DMA|
|S4||15.82 May low|
|S5||15.63 Low so far|
|S6||15.44 Long-term UTL|
|S7||13.64 Dec low|
|Legend:DMA – daily moving averageFibo – Fibonacci retracement line
H&S – head-and-shoulder pattern
RL – resistance line
UTL – uptrend line
The fact silver prices have managed to accelerate higher while the dollar has been strengthening is noteworthy. With base metals generally rallying too, it looks as though silver is attracting industrial buying.
Last week’s CFTC data, up to the close on February 14, showed the net long fund position (NLFP) climbed 6,535 contracts to 84,812 contracts. This was the seventh consecutive week where the funds have been net buyers. Shorts have been cutting exposure for six weeks and the longs have been adding positions for eight weeks. At 104,765 contracts, the gross long position is still some way below last year’s peak of 123,737 contracts and the short position at 19,953 contracts is in low ground, the lowest since 2014 has been 12,375, while the highest has been 63,993 contracts.
The fact gold prices are holding up well, almost regardless of the dollar, and that dips have been short-lived and shallow also portrays a robust market. Overall, we still feel that bullion will remain sought-after as a safe haven in the days and weeks ahead. This is especially the case while geopolitical uncertainties are growing with the UK getting closer to Brexit, Greece facing debt repayment issues, Europe facing elections and US President Trump settling into his new role.
That said, prices rarely travel in straight lines so we should expect pullbacks along the way.
The sell-off in the second half of last year was significant but the downtrend looks to be over. The rebound now looks more than merely another counter-trend move and is more likely to be the start of a bull market, although to-date silver prices have rallied 16% rather than the 20% required to call it a bull market officially. That said, in the short term the latest up-leg is looking tired, the stochastics have swung lower and another show of dollar strength may act as a headwind, so we would not be surprised to see prices consolidate at lower numbers; but we expect dips will be well supported. – William Adams
– John Ross Crooks III: Investors are putting their faith in gold because they fear what’s coming for stocks.
Now, we can verify that their faith in gold has helped prices rise more than 7% this year.
Even while the S&P 500 has risen roughly 5%.
But despite the ongoing strength in stocks — the resilience of investors’ appetite for risk — gold investors fear that the happy times are about to change.
Think about everything that everyone is thinking about the state of economics and markets in the U.S. …
Consumer Price Inflation (CPI) is on the rise
The 5-year/5-year Breakeven (the Fed’s favored inflation gauge) is north of 2%
Fiscal infrastructure spending
Personal and corporate tax cuts are “coming”
GDP growth seems lacking and forecasts are being revised lower
Industrial production is iffy
Retailers are contending with border-tax proposals
Margin debt at the NYSE continues rising
Some indicators and analysts see weakness in corporate profits and margins, which have been a huge driver of returns in the last five years
The Federal Reserve is still jawboning about the need for more interest-rate hikes
Surely, these are only some of the things investors are thinking about.
But clearly the more-favorable items are taking precedence over the growing risks.
The S&P 500 is on the up-and-up.
And if Wave V (at the top of the chart) looks anything like Wave I …
The S&P 500 has another 7% or so to rise, from current levels, until this bull market tops out.
But if gold investors have a beat on what’s going on behind the scenes of this stock market rally … then a stock market correction is in order soon.
For triggers, watch how the dialogue plays out on tax reform. Some say that any real reform that cuts the corporate tax rate must coincide with a border-adjustment tax (BAT). And this potential BAT threatens to hit U.S. retailers hard.
Also, watch the developments in Federal Reserve rate-hike expectations. The major factors will probably be the resilience of GDP growth forecasts and the outlook for inflation, which could change if the price of oil cannot resurrect the bulls.
Finally, fiscal spending tends not to be the buoy to economic activity and corporate earnings … despite what many think. See the chart below from a blog called Variant Perception. In it, expenditures are inverted. So, the correlation suggests that the CAPE falls when fiscal spending goes up.
Remember, CAPE is the cyclically adjusted price-to-earnings ratio. Consider it a P/E that spans 10 years and offers a glimpse into longer-term equity valuations.
And let’s not forget what the debt burden might mean for the efficacy of such an infrastructure-spending plan. (It means the impact on economic activity will be muted even if the expenditures get approved.)
With that, I leave you with comments from a very concerning Bloomberg article by Danielle DiMartino Booth:
“… Combine the dynamic of tightening financial conditions with the Congressional Budget Office’s year-old calculations that the deficit … would more than double to 4.9 percent by 2026. The CBO projects debt held by the public will swell to 86 percent, twice the historic average and the highest since 1947.
“In terms of borrowing costs, the CBO assumes that the rate on three-month Treasury bills rises … while that of 10-year Treasuries increases … Just think of what that would do to Uncle Sam’s interest expense … with the national debt at the cusp of crossing the $20 trillion line. That’s on top of the $18.2 trillion in household debt.
“So, add rising deficits and higher rates together with a shrinking balance sheet that will slash Fed remittances back to the Treasury. Then factor in Trump’s proposed tax cuts, and just for proper measure, the looming reality that an aging population presents to entitlement spending. What do you get? Even worse debt-to-GDP levels than what the CBO assumes.”
I am not indicting President Trump when I ask: Should markets really be putting their faith in Trumponomics?
I fear the markets are nearing an end to the glory days.
Here’s the fact: if silver prices continue to move higher, as they have since the beginning of the year, silver stocks could surge in 2017. This is going to sound very bold, but it wouldn’t be shocking to see them double, triple, or more.
Why could silver prices surge?
You see, there are several reasons why silver prices could rise in 2017. You can read about the silver prices forecast here: “Silver Price Forecast for 2017.” But this is just one reason why the gray precious metal could soar, and buying silver stock could be the best way to make money.
Understand that in the silver market, there’s a disparity between demand and supply—the most basic economic factors. We currently see the demand for silver soaring, while the supply side is struggling.
To examine the demand side, look at the sales of silver at mints around the world. They are nothing short of impressive.
In the first month of 2017, the U.S. Mint sold over five million ounces of silver in American Eagle coins alone. (Source: “Bullion Sales,” U.S. Mint, last accessed February 16, 2017.) If we assume five million is the average for the next 11 months as well, the mint could be selling 60 million ounces of silver in the entire year of 2017.
But, don’t just stop here. Look at the Perth Mint, the biggest mint in Australia, as well. In January, it sold 1.23 million ounces of silver. This was over 180% higher than what the mint sold in December of 2016! It sold just 430,009 ounces of silver in December. (Source: “Perth Mint Gold and Silver Bullion Sales Jump in January,” CoinNews, February 10, 2017.)
This isn’t all for the demand side. Keep in mind, silver has huge industrial use as well.
It’s used in gadgets like cell phones and other electronics.
Currently, the demand for cell phones is huge and it wouldn’t be shocking if it gets bigger. I wrote about this not too long ago, on how many sell phones are expected to be sold between 2017 and 2019, and how much silver could be needed to make these phones.
Silver is also used in solar cells, and the demand for them is solid. This is despite the new U.S. administration being friendly towards coal and other fossil fuels. Investors have to look beyond the U.S. Elsewhere in the global economy, solar energy is becoming mainstream, and it’s going to require silver. Obviously with time, we will know more.
Adding to all this, it shouldn’t be forgotten that silver is used as a store of value, just like gold. Investors rush towards the precious metal in times of uncertainty and currency devaluation.
With this said, we are seeing news stories pop out of Europe that suggest the European financial crisis could be reviving again. If this continues, and we hear news of a bank default, this will cause investors to panic and boost the demand for silver.
As per the supply side, it looks like there are troubles brewing—there isn’t enough silver being produced.
Over the past few years, the decline in silver prices has been pretty much a blessing in disguise for those who are bullish on silver.
Lower silver value has caused companies to cut production. If you look at the statistics from major silver-producing regions, it becomes very apparent that the struggle is real.
Consider Canada as one example. In the first 11 months of 2016, primary silver production in Canada amounted to 331,645 kilograms. In the same period a year ago, this figure was 338,466 kilograms. If you do simple math, this represents a decline of over two percent year-over-year. (Source: “PRODUCTION OF CANADA’S LEADING MINERALS,” Natural Resources Canada, November, 2016.) Canada is one of the top 15 silver-producing countries in the world.
Look at Mexico as well, the biggest silver-producing country in the world. In the first 11-month of 2016, the monthly average silver production was 391,718 kilograms. In the same period of 2015, this was 414,425 kilograms. (Source: “Value and volume production of Silver,” Servicio Geológico Mexicano, November 30, 2016.) Again, simple math here; this represents a decline of about 5.4%.
Adding more to the misery, as silver prices were down, mining companies cut back on exploration. Keep in mind, when a company cuts back on exploration, it’s essentially investing less in its future production. Think of it this way; if a mining company doesn’t look for the metal (exploration), it will eventually run out of resources in the ground.
Keeping the demand and supply situation in mind, it’s not irrational to think there could be a shortage of some sort in the silver market. We have soaring demand and anemic supply. Economics 101 suggests this is a perfect recipe for higher silver prices.
One of the ways to value silver prices is to look at the gold-to-silver ratio. At the very core, this ratio says how many ounces of silver it takes to buy one ounce of gold.
With this in mind, please look at the long-term chart of gold-to-silver ratio below.
Chart courtesy of StockCharts.com
Notice how since 1992, the gold-to-silver ratio has been in a range from 80 to 40? If we assume the ratio hits the 40 level again, and assume gold prices remain at $1,250, silver prices would have to rise to at least $31.25—that’s over 73% from where they currently stand!
As silver prices surge, investing in silver stocks could provide the biggest bang for the buck.
Consider this: If an investor buys silver bullion for $18.00 an ounce and we assume the precious metal price goes to $31.25, their return would be just that, 73%.
Now look at silver stocks.
Assuming a silver stock produces an ounce of silver for $5.00 an ounce, with the current price of silver, it rakes in about $13.00 per ounce in profit margin—about 260%. If silver prices go to $31.25, its profit margin will increase to 525%. As this happens, its stock price will reflect this and soar much higher.
In other words; by investing in silver stocks, investor could get leveraged returns.
Still not convinced? Then look at this. In the past 12 months, silver prices have increased just over 12%. If you look at a well-run silver-mining stock like Hecla Mining Company (NYSE:HL), it has increased over 184.93%. In other words, for every one percent increase in silver prices, this mining stock provides a 15% return. Impressive.
Mind you; Hecla Mining Company is not a recommendation to buy, but rather an example of how silver stocks could perform when silver prices soar.
You see, when it comes to picking silver stocks in 2017, investors have to keep three things in mind.
First, if a silver company is producing the precious metal, it’s important to look at the price of production. If the company’s production price is lower than the spot price, then it’s worth a look. If a company is producing at a much higher price than the spot price, it’s losing money on every ounce it extracts from the ground.
Second, the quality of the grades in the ground is very critical as well. Silver mining companies usually report this information in their shareholders’ presentation or in their technical reports. The higher the grades, the better the company. Why? To extract the metal from the ground, with higher grades, it might take less effort, and it could help the company produce more silver and essentially increase shareholders’ value.
Third, the location of the property. A silver property in a mining-friendly and safe geopolitical area is far better than a property located in a country that has issues with mining and is prone to wars and corruption. If a silver company has a mine in a stable country, its actions are predictable and investors don’t get too many surprises.
With all this said, silver stocks are a place investors aren’t paying much attention to. With fundamentals in the silver market getting better, silver prices could soar. This is going to give a boost to silver stocks.
I will be bold here and say this; silver stocks are selling for literally pennies on the dollar. In the next bull run on silver stocks—that could very well be on its way—a lot of money is to be made. Investors could make massive returns. Their money could be doubling faster than any other asset class. – Moe Zulfiqar
Gold prices have been performing well since the beginning of 2017. The yellow precious metal is up roughly 7.30% year-to-date. Will gold prices go higher from here, or they are bound to go lower? If you look at gold prices from a technical analysis perspective, it’s projecting a bullish outlook.
Look at the chart below. Since 2011, the yellow precious metal prices have been in a downward channel (the blue lines in the chart). The mid-point of this channel is the most interest to note.
In late 2016, something interesting happened. Instead of dropping to the bottom of the channel, a level below $1,050.00, gold prices bounced higher midway.
Why is this significant? There are two things to keep in mind here.
First, and the most obvious, it says that gold prices are gaining strength and there are buyers.
Second, it’s looking as if there’s an emergence of a new trend in gold prices that’s pointing upward. Since the lows of late 2015, we have seen one higher high and one higher low. To get confirmation of an uptrend, at least one further higher high and one higher low is needed.
Chart courtesy of StockCharts.com
It would be interesting to see what happens once the gold price hits the top of the channel. If it breaks, then we could see resistance at around $1,367.00. If gold prices are able to move beyond this level, then we could see $1,550.00 without much resistance.
If the price of gold doesn’t break above the channel, and just touches the top of the channel, we could be seeing a move downward. Support could fall on the mid-point of the channel. If that level breaks, we could be looking at a much lower gold price. A price as low as $1,000.00 wouldn’t be out of the question.
From a fundamental perspective; there are bullish developments that shouldn’t go unnoticed. There three things that investors need to keep in mind:
Dear reader, as it stands, odds are in favor of higher gold prices ahead. Just like in 2016, it wouldn’t be shocking to see 2017 be another year when the price of precious metals rise.
As it has been repeatedly mentioned in Lombardi Letter, pay attention to gold mining companies. They are selling their stocks for pennies on the dollar, given the current value of gold. As the precious metal soars in price, gold stocks could skyrocket and provide leveraged returns. – Moe Zulfiqar