Commodity Trade Mantra

Here’s What Gold Can Tell You About Crude Oil Prices

Here's What Gold Can Tell You About Crude Oil Prices

Here’s What Gold Can Tell You About Crude Oil Prices

It’s human nature to pay close attention to market indicators when they seem to be working and show neglect or indifference when they’re not. That is not, however, necessarily the way to buy low and sell high.

Take the WTI crude oil to gold ratio. This is one of the oldest indicators in the market, comparing the price of the world’s most traded commodity with the world’s oldest store of value. For that reason, there is a large data set from which to draw. In addition, gold has always played an important role in commercial transactions and in particular with crude oil in the Middle East. Aside from the gold culture prevalent in the region, transactions were frequently conducted in gold for crude before any kind of sophisticated financial infrastructure was in place. When a number of major countries brought a change to end the decades-old practice of buying and selling oil in US dollars in 2009, gold was included in the currency basket in addition to all the usual suspects. As recently as 2012, in a widely-reported event, Turkey exchanged nearly 60 tons of gold, worth about $3 billion, for several million tons of Iranian crude oil to circumvent Western sanctions against Iran’s energy sector. One suspects that wasn’t an isolated event.

Since World War 2, the annual average ratio has reflected the fact that one ounce of gold could buy precisely 14.83 barrels of oil. Therefore, whenever one ounce of gold can buy more than 14.83 barrels of oil, either oil is comparatively cheap or gold is comparatively expensive. Conversely, whenever an ounce of gold can buy fewer than 14.83 barrels, then oil is expensive or gold is cheap. Spread traders and hedgers pay attention to changes in this ratio to create arbitrage opportunities which are in a sense directionless because they are predicated on convergence or a form of mean reversion.

Currently, the ratio, which bottomed at about 21 at the end of 2016 (see chart), has risen to just over 26. Most importantly, as Dennis Gartman remarked recently (The Gartman Letter, 24 March 2017), the ratio has now clearly broken the trend line that had been established since it peaked in early 2016 at just above 45. So 45 barrels per ounce reflects very cheap oil or very expensive gold; 21 reflects very expensive oil or very cheap gold.

This kind of information can either constitute fodder for a game of Trivial Pursuit or a trading opportunity. Generally, the weaker the ratio, the higher the probability that gold will rise in value and oil will fall, which suggests a pair trade that is still viable. Trade execution implementation could be through short WTI futures and long Comex gold, or via the relevant ETFs, or using cash and/or futures options to create comparable synthetic exposure. Timing is everything, but it may also be possible to leg into the position on a pro rata basis. Follow the Commitments of Traders (COT) report each week from the U.S. CFTC of speculator/investor and commercial interest in the underlying futures markets as your preferred sentiment indicator. Blather from raving gold bulls or blither from OPEC’s propaganda machine is infinitely less reliable.

There are no guarantees in life, but no one ever went broke buying cheap and selling dear.

Since bottoming at the end of 2016 at roughly 21, the ratio has jumped to around 26, an increase of almost 24 percent.

– Brian Noble

These Fundamentals Point To Higher Oil Prices

These Fundamentals Point To Higher Oil Prices

These Fundamentals Point To Higher Oil Prices

Gasoline demand is rising again in the U.S., helping to drain the exceptionally high levels of refined product inventories. That provides a small bit of bullish evidence for a market running a little low on reasons to feel optimistic about oil prices.

All eyes tend to be on the crude oil inventory figures when the EIA releases its weekly data, and this past week was more of the same: no drawdown in crude stocks, which still remain at all-time highs.

That would normally induce another sell off in oil prices. However, investors overlooked that bearish news because of another more interesting development. Gasoline stocks have declined rather significantly in recent weeks, at a much faster rate than at this point in the 2016 season.

At 239 million barrels, gasoline stocks have dipped back into the five-year average range – still elevated, but no longer at record seasonal highs. A couple more weeks of drawdowns would mean gasoline inventories would no longer appear as bloated as they have been since the beginning of 2016.

That comes even as refinery runs have ticked up in recent weeks as well, which could have provided a fresh round of increases for gasoline inventories. However, the fact that inventories are falling suggests that demand is holding up in the U.S. Moreover, as refineries finish up with maintenance and the summer driving season draws near, higher demand from refiners will start to pull down on crude inventories.

I have written quite a bit about the bearish case for crude oil prices this year, but there are a few signs that, when put together, add up to a reasonable case for higher oil prices.

On top of stronger gasoline demand, the oil market saw a sudden supply outage in Libya this week. The loss of 250,000 bpd from disrupted oil fields due to ongoing security issues took a substantial source of output offline, if only temporarily. Only a few weeks ago Libyan officials said they were aiming to take output above 1 million barrels per day by the end of the summer, but for now, production is down to somewhere around 500,000 bpd, the lowest level in nearly seven months.

“The weekly U.S. oil statistics were bullish,” Tamas Varga, an analyst at PVM Oil Associates Ltd., told Bloomberg in an interview. If OPEC decides to extend its production cuts for another six months and U.S. gasoline inventories continue to fall, then a “bullish cocktail is in the making,” Varga said.

These bullish trends could be overwhelmed by other forces, such as weaker-than-expected Chinese demand, supply growth in the U.S., and above all the failure of OPEC to extend its deal beyond June. If that were to occur, and OPEC brought at least 1.2 million barrels per day back onto the market – or worse, production could go higher if they ramped up to fight for market share – then prices would certainly head down.

The longer-term is less clear, and that is where the case for bullishness is on sounder footing. The IEA has repeatedly warned that a dearth of investment today will lead to a supply shortage towards the end of the decade, as too few projects come online to meet rising demand.

The global oil industry slashed upstream investment by around 25 percent each year for the past two years. 2017 should see a rebound in spending, but only slightly, and a return to the heady spending levels of 2014 is not expected for the foreseeable future.

Even the oil majors are passing up on some otherwise viable long-term projects offshore and instead focusing a growing share of their spending on shale drilling.

Some of the world’s largest oil traders added their voices to the long-term bullish case this week. “We are sowing the seeds for potential instability in the future and more volatility,” Daniel Jaeggi said at the FT Commodities Global Summit in Switzerland on March 29, warning that the industry is too focused on shale projects, to the detriment of long-term supply. By the end of the decade “you won’t be able to satisfy demand with short-cycle barrels.” The IEA has also warned in the past that the best of U.S. shale will start to fizzle by the end of the decade, and the world will once again return to a dependence on the Middle East for new supply.

Other oil traders agree with this theory. “The low-hanging fruit on the short-cycle projects are being used now so I am more in this camp that says we are starting to see potential issues three or four years down the track,” Ben Luckock, co-head of group market risk and former head of crude trading at Trafigura Group Ltd. said at the FT summit.

That may be difficult to envision in 2017 when the market is still trying to find a home for a few hundred million barrels of oil sitting in storage. But the bullish case for crude oil prices is not dead yet. – Nick Cunningham

A Massive New Rally in Silver Prices could take the Gold

A Massive New Rally in Silver Prices could take the Gold

A Massive New Rally in Silver Prices could take the Gold

– Sean Brodrick: Silver has its racing shoes on, and it is pulling away from the pack.

Take a look at the year-to-date performance of silver prices, gold and the S&P 500.

The S&P 500 is up 5.77%, riding a wave of Trump-mentum. Gold is doing better, with an 8.47% gain. But silver is sprinting, with a 13.5% gain.

If silver prices keep up this pace, that would work out to a 65% gain for the year.

Now, there’s nothing to say silver prices must keep up that pace. It could slow down. Then again, it could speed up. We’re in a new precious metals bull market, after all.

Importantly, silver is at a critical point. Let me show you another chart of silver prices, as tracked by the iShares Silver Trust (SLV).

You can see that silver prices gapped higher on Monday, jumping right to its 200-day moving average. Now, it is testing its big downtrend from August.

Silver made that gap higher on strong volume. That’s bullish, too.

It’s likely that one of two things will happen here:

The less-likely thing is that silver will plow through that overhead resistance like a rampaging bull. I say less likely, but the metals have surprised us for months.

The OTHER thing that could happen is silver could pull back to test its uptrend, which I’ve marked as a blue dotted line. If silver does that, I’ll be happiest.

Why? Because more coiling up means the eventual explosion higher will only be bigger. A pullback will also be an opportunity to pile into miners with exposure to silver.

Fundamentally, what’s powering this move?

Silver is Rare. Pure-play silver mines are precious indeed. Most silver comes as a byproduct of other metals. That means silver production can’t be cranked up to meet rising demand.

Peak Silver. In fact, production from silver mines peaked in 2015, according to GFMS Thompson Reuters. And it should keep going down. We’ve hit “Peak Silver.”

Solar Surge. Silver is an industrial metal as well as a precious metal. Industrial fabrication makes up about 50% of silver demand each year, vs. less than 10% for gold demand.

Silver is used for all sorts of things, from wiring in cell phones to chemical reagents to the paste used in solar cells.

Many industry analysts thought solar demand for silver was peaking. That turns out not to be the case.

Prices of solar modules are falling as the industry becomes more efficient. That is stoking demand, especially outside the U.S. And that’s pointing the way to more silver consumption.

Weaker Dollar. Just like gold, silver straddles theSeesaw of Pain with the greenback. When one goes up, the other usually goes down. Now, the dollar appears to have peaked. And that opens the door to higher silver prices.

I hope we get that pullback in silver prices. It would be a buying opportunity. Silver is ready to run — the starter pistol is cocked. The race is beginning, and silver prices could take the gold.

Investors should get out of the way, or ride this rally for all it’s worth.

 

Secure Wealth with Gold as Brexit moves from a Concept to a Reality

Secure Wealth with Gold as Brexit moves from a Concept to a Reality

Secure Wealth with Gold as Brexit moves from a Concept to a Reality

– Martin TillierToday is an historic day for the nation of my birth. Nine months after the surprise referendum vote to leave the European Union (EU), the U.K. Prime Minister Theresa May signed Article 50 of the E.U Charter, formally beginning the withdrawal from Europe, or Brexit as it has become known. As significant as the day is in historical terms, though, investors should be careful not to read too much into the news from a market perspective. The process may now be irreversible, but the actual terms of the withdrawal and of any trade agreements that follow are not yet known and they will determine the impact on stocks, both in the U.K. and elsewhere. There is, however, one market that could benefit as negotiations get underway and that is gold.

Gold is technically a commodity, but unlike most commodities it has very little practical use. It is therefore more accurate to think of the yellow metal, not as a commodity but as a currency, and it is in that role that gold stands to benefit from Brexit. The interbank currency markets, where I got my start in a dealing room and worked for nearly two decades, are huge. The average daily turnover is just north of $5 Trillion, making it easily the world’s largest market. In effect, foreign exchange is a massive pool of money looking for a home and if just a fraction of that cash finds its way into gold the precious metal is in for a strong bullish run.

There are a couple of reasons that that outcome looks likely, but they are more to do with the unattractive nature of the alternatives than any particular attraction of gold per se. The British pound (GBP) is one of the world’s major currencies, alongside the US Dollar, the Euro and the Japanese Yen. To some degree that status as a major comes from the fact that London has remained the financial centre of Europe, even though the E.U. economy now dwarfs that of the U.K. Post-Brexit, however, many of the big banks whose European operations are based in London are expected to move elsewhere so as to stay within the E.U.

If London does lose its status in the financial world, then that will put pressure on GBP, no matter what the exit package and trade agreements look like. The problem for the forex market, though, is where that money goes. The U.K. is not currently the largest European economy, that honor goes to Germany, but it is a significant part of it. Removing the British market from Europe can, therefore, hardly be expected to benefit the Euro. Right now, though, neither the Dollar nor the Yen look like places to be either.

The Yen has admittedly strengthened around 7% so far this year against the Dollar, but the Bank of Japan is still pursuing inflationary policies, including negative short term interest rates, so further strengthening from this point looks to be limited at best. So, if the Pound, the Euro and the Yen all have reasons to discourage holding them that leaves the Dollar. The market, however, has recently shown that there is little enthusiasm for that currency either.

After a strong post election run the Dollar changed direction at year’s end and is still in a downward channel. That can be expected to continue, as following the failure of the healthcare act last week the President and Congress are now focused on policies that will presumably be more popular, but run the risk of being inflationary. Introducing a package of tax cuts and stimulative infrastructure spending simultaneously, as the White House is now suggesting they will, could easily create a serious inflation problem, and inflation by definition debases a currency.

Given the lack of choices, therefore, it looks likely that traders will turn to gold in its traditional role as a store of value and an inflation hedge. In fact the chart above would suggest that that process has begun already, as gold has risen as the dollar has retraced since December. That upward trend is likely to be confirmed over the next few months as Brexit moves from a concept to a reality and money looks for a safe home in anticipation of disruption, so introducing gold to your portfolio or increasing current holdings looks like a smart move for investors.

Gold to remain supported even as focus turns to Frexit from Brexit

Fawad Razaqzada: Today’s triggering of Brexit Article 50 by the UK government was expected and as such it didn’t come as surprise to investors. Consequently, the markets hardly reacted to the news.

However, if negotiations start going bad then that may trigger a risk off response at some point. As well as a drop in the pound, safe haven gold could surge higher, possibly similar to how it responded in reaction to the Brexit vote back in June. But that is a worry for another day. The focus will now turn from Brexit to a potential Frexit with upcoming French elections in April. In the event support for Marine Le Pen – the leader of the far right-wing National Front party – increases, so too will anxiety among market participants.

Given this uncertainty, gold is likely to remain supported ahead of the elections due to its status as a safe haven commodity. But in the last few days, the yellow precious metal has struggled to further extend its recent advance. Part of the reason for this has been the US dollar, which has bounced back sharply as we had anticipated that it might at the start of the week. The greenback has been supported by further improvement in US economic data, with consumer confidence climbing in March to its highest level in over 16 years. The firmer greenback has undermined buck-denominated precious metals. But it remains to be seen whether this was just an oversold bounce for the dollar, or perhaps the resumption of its long-term uptrend.

Gold has also been capped by its technically-important 200-day moving average, which comes in at just shy of $1,259 per ounce. If this level were to break then we could see the start of a move towards the next potential resistance at $1,265, followed by the next bullish objective at $1,269/$1,270, which corresponds with the 61.8% Fibonacci retracement level against last year’s high. But if Brexit negotiations were to turn ugly and/or stock markets tumbled for whatever reason then gold could easily make its way towards last year’s high at $1,375. Meanwhile a potential break below short-term support at $1,240/41 would be seen as a bearish move. Were this to happen, a drop to the 50-day moving average at $1227 or the support trend of the bullish channel, currently at $1,211, would become likely.

 

Gold Bullion Investment will keep Rising on Political & Economic Factors

Gold Bullion Investment will keep Rising on Political & Economic Factors

Gold Bullion Investment will keep Rising on Political & Economic Factors

Gold bullion investment will rise for the fourth straight year in 2017 as global political and economic factors are forecast to maintain buying interest, CPM Group said on Tuesday.

“There has been a return of opportunistic generalist investors who had exited gold in late 2011 and early 2012,” New York-based CPM Group said in its Gold Yearbook 2017.

CPM forecast gold bullion investment at 17.6 million ounces in 2017, up from 17.4 million ounces in 2016 and the highest since 2012 when it was 29.2 million ounces. The independent commodities research company pegged global gold coin demand at 7.5 million ounces in 2017, up from 7 million ounces in 2016 and the highest since 2013.

“Most long-term gold bullion investors do not seem to expect the world’s financial and political systems to collapse. Rather, they see them as facing major structural problems that will not be easily resolved or repaired in any short period of time,” CPM said.

“In the near- to medium- term as it is becoming clearer to (shorter-term investors) that, while there may not be a collapse in the financial system, clearly the present interest rate environment, global economic growth profile, levels of unemployment and underemployment, and political turmoil globally are all factors that warrant owning at least some gold bullion as a portfolio diversifier.”

The lack of clarity regarding the outcomes of U.S. President Donald Trump’s campaign promises and interest rate increases by the Federal Reserve to raise interest rate hikes is expected to prevent precious metals prices from taking a clear direction in 2017, CPM said.

Fabrication demand fell in 2016 to an estimated 92.2 million ounces, down 4.1 percent from 2015 as gold prices rose in the first eight months of the year and jewelry demand fell in China and India, the two biggest consumers of gold fabricated products, CPM said.

Fabrication demand was forecast to rise slightly to 92.8 million tonnes in 2017.

Central banks added gold bullion to their holdings on a collective net basis for the ninth straight year in 2016 to an estimated 7.2 million ounces, up from 5.3 million ounces in 2015.

Mine supply rose to a record high in 2016 and was forecast to continue rising into 2017.

Total 2016 supply, however, which includes mine and secondary supplies, also rose in 2016 but was still lower than 2012 levels. CPM said it expects total supply to rise again in 2017 due to mine supply. – Marcy Nicholson

Trump & the Monumental Magnitude of the US Debt Trap

Trump & the Monumental Magnitude of the US Debt Trap

Trump & the Monumental Magnitude of the US Debt Trap

The mules of Wall Street were back at it again yesterday, buying the dips after the overnight whoosh in the futures market.

Apparently, it will take an actual 2×4 between the eyes to break a habit that has been working for 96 months now since the March 2009 post-crisis bottom.

I think it is plain as day, however, that we are in a new ball game that the “stimulus” blinded mules don’t see coming at all. They have been juiced for eight years running by the Keynesian apparatchiks at the Fed who have run the printing presses full-tilt or rescued the market with a new round of QE or an extension of ZIRP whenever the indices began to wobble.

But now even the money printers have made it clear that they are done for this cycle, anyway; and that they will be belatedly but consistently raising interest rates for what ought to be a truly scary reason.

That is, the denizens of the Eccles Building have finally realized that they have not outlawed the business cycle after all, and need to raise rates toward 2-3% so that they have headroom to “cut” next time the economy slides into the ditch.

In effect, the Fed is saying to Wall Street: “price-in” a recession because we are!

After all, our monetary central planners are not reluctantly allowing interest rates to lift off the zero bound because they have become converts to the cause of honest price discovery — nor are they fixing to liberate money rates, debt yields and the prices of stocks and other financial assets to clear on the free market.

Instead, they are merely storing up monetary ammo for the next downturn.

But the Wall Street mules keep buying the dips anyway because they are under the preposterous delusion that one source of “stimulus” is just as good as the next. And since the gamblers have now decreed that the “stimulus” baton be handed off to fiscal policy, it only remains for Congress and the White House to shape up and get the job done with all deliberate speed.

But they won’t. Not in a million years. The massive Trump tax cut and infrastructure stimulus is DOA because Uncle Sam is broke and the US economy has slithered into rickety old age.

In that context, it’s not remotely plausible that the Fed will flood the canyons of Wall Street with cash by buying another $80 billion of bonds with digital credits conjured from thin air.

Au contraire.

Fiscal policy is inherently an exercise in herding cats, and an especially impossible one when the cupboards are bare.

The Trump-GOP coalition currently in nominal control of the Imperial City will not be able to generate any fiscal stimulus at all. And ignore the “grow your way out” foolishness that a greying band of supply siders and a desperate throng of Wall Street punters would like to believe.

There is no realistic possibility of passing a tax bill or even an infrastructure spending boondoggle.

Hammering out a budget resolution, passing it in each house and reconciling the differences in conference would take months under the best of circumstances. But given the parlous state of Uncle Sam’s fiscal condition and the partisan acrimony that already suffuses Washington in the era of Trump, passage of a budget resolution by summer  would be a miracle in itself.

Indeed, even the thought of surmounting this next daunting legislative obstacle course puts to rest this week’s particular Wall Street fantasy.

Namely, that after being burned by the Freedom Caucus on Obamacare Lite, the Trump White House will now “pivot” to the middle and form a coalition with the Democrats to make a deal on corporate tax cuts and infrastructure spending.

Yes, and if dogs could whistle the world would be a chorus. That is to say, there is no conceivable fiscal policy menu that could be agreed upon by Speaker Ryan, Nancy Pelosi, Chuck Schumer and the Donald, and then be shoe-horned into a 10-year budget resolution.

Yet without a budget resolution and reconciliation instructions there is no fiscal stimulus and no grand bipartisan compromise on building airports and slashing corporate tax rates.

So what lies directly ahead, therefore, is another bumbling attempt by the White House and Congressional Republicans to hammer out an FY 2018 budget resolution and what amounts to a 10-year fiscal plan. And it is there where the whole fantasy of the Trump Stimulus comes a cropper.

The necessary budget resolution must start with the Congressional Budget Office’s (CBO) projection of current law, which generated $10 trillion in new deficits over the next decade and would take the public debt to $30 trillion in 2027 — before even a single dime of the $5 trillion Trump Stimulus ($4 trillion of tax cuts and $1 trillion of infrastructure) is laid on the budgetary table.

So there flat-out must be big-time deficit offsets or there will not be close to 218 votes for what would otherwise be upwards of $15 trillion in added public debt over the coming decade.

Nor can the above baseline picture be significantly ameliorated by assuming a robust Reaganesque economic forecast in lieu of CBO’s. The latter long ago embraced Rosy Scenario and therefore has already built-in an implausibly strong economy for the next ten years.

This includes the credulous assumption that there will not be an economic recession for 206 months — or double the longest expansion in history — and that the nominal GDP will grow by nearly 4% over the next decade or nearly one-third faster than the 2.9% rate of the last decade.

But 5% nominal GDP growth — or 67% faster than that last decade — is not remotely plausible. Even then, the current law deficit would exceed $8 trillion over FY 2018-2027.

And there are not 218 GOP votes for what would be a $12-13 trillion add to the national debt with the Trump Stimulus program over the next decade.

To be sure, this is why the GOP Congressional leadership stoutly insists on a deficit-neutral tax cut. They are keenly aware of the debt monster they have been kicking down the road — even if the headline reading robo-traders of Wall Street are not.

The baseline Federal spending level for 2018 is $4.09 trillion, according to CBO’s January update. But about $300 billion of that is net interest, and even the Donald will end up urging that be paid; and another $2.6 trillion consists of entitlements and mandatory spending — almost the entirety of which the Donald has take off the table.

So that puts nearly 70% of the budget out of reach. But what’s actually worse is that the remaining $1.2 trillion of so-called discretionary or appropriated spending mostly amounts to Trump priorities!

That’s right, the current CBO baseline includes $600 billion is for defense and another $250 billion for Trump’s nondefense priorities including veterans, infrastructure, law enforcement, border control and homeland security.

Moreover, the Donald’s partial and preliminary fiscal plan, or the so-called “skinny budget” actually increased this $850 baseline by about $60 billion per year. Therefore, they would need to cut the tiny $350 billion corner of the budget that is left by 17% just to break-even.

That is, before generating even a single dime to pay for the $5 trillion Trump Stimulus.

In short, the whole enterprise amounts to budgetary madness and demonstrates the monumental magnitude of the Debt Trap that has enveloped the Imperial City.

And the “buy the dip” crowd will soon be getting that 2×4 between the eyes. – David Stockman

The Fake Paper Markets & the Real Gold and Silver

The Fake Paper Markets & the Real Gold and Silver

The Fake Paper Markets & the Real Gold and Silver

In the four trading days following the election, approximately 6200 tonnes of gold (2,000,000 contracts) traded on Comex. That is equivalent to two years of global gold mining production…That hair-trigger trading reaction led to a price smash of 4.5% and turned the trading sentiment for gold from positive to negative almost overnight. The question is where did sellers come up with 6200 tonnes – a preposterously enormous and unprecedented quantity of gold – on a moment’s notice, in the wee hours following the surprising election outcome? – John Hathaway on King World News

Perhaps what’s most interesting about Hathaway’s comment above is that sometime in the last few years Hathaway’s viewpoint has shifted from denial that the gold market is manipulated to seemingly full acceptance of that obvious fact.

The official entities in the western hemisphere who operate to keep the price of gold artificially restrained, using paper gold based on the fact that most western buyers never care to take actual delivery, no longer make an effort to cover-up their manipulative activities.  Anyone involved in trading and investing in the gold and silver market who denies that the markets are rigged is likely in some way connected to or benefiting from the manipulation.

The same holds true for the stock market.  Everyone has seen the statistics by now but just to mention the facts:  until last Tuesday’s market drop, the S&P 500 had gone 109 days without a 1% correction.   All of the previous periods that were longer than 109 days occurred before 1964 – when the U.S. was in its economic renaissance period – except one period in 1993.

The majority of the headline news reports this past week have focused on the lavish political stage show performances on Capitol Hill. It’s been a convenient distraction to divert attention away from the largely dismal economic reports. What’s more stunning than the childish verbal exchanges from alleged adults masquerading as responsible lawmakers is watching the stock market gyrate from hedge fund algorithm-driven volatility as the trading bots react to any headline connected to the ebb and flow of the healthcare bill drama. For some reason the hedge fund computers believe that the Trump healthcare legislation creates better earnings prospects than Obamacare for corporate America. After reading David Stockman’s assessment of the proposed Obamacare replacement bill, it’s not clear to me that the new legislation won’t be worse.

Just like the artificial paper markets in New York and London that are used to keep the price of gold and silver from rising, the western stock markets are prevented from falling by a web synthetic derivative securities and fraudulent financial reporting applications. Never before in history have stock market valuations been more disconnected from the underlying fundamental economic reality.

The U.S. Government will never stop issuing debt and it will never pay back the debt that it has issued.    In this regard, the U.S. financial and economic system has become an “act as if” system:   Act as if it’s real even though we know it’s not.   In today’s episode of the Shadow of Truth, we discuss the difference between fake markets and real gold and silver.

Investment Research Dynamics

What Role May Trumps’ Policies Play in Creating Inflation

What Role May Trumps' Policies Play in Creating Inflation

What Role May Trumps’ Policies Play in Creating Inflation

– Invesco: Financial markets have reacted strongly to the election of US President Donald Trump. While equities in the US and elsewhere have risen strongly (reflecting expectations of stronger growth and therefore improved corporate earnings), bond prices have fallen (reflecting higher yields, in turn a result of higher inflation expectations).

As debate continues around President Trump’s fiscal stimulus program, a key question has emerged: What role might his policies play in creating inflation?

A large fiscal deficit does not necessarily lead to inflation

Among the main drivers of higher inflation expectations, one is the idea that a larger fiscal deficit will inevitably lead to higher inflation. The Trump program calls for higher defense expenditures and increased infrastructure spending. The perception in the financial markets is that fiscal spending and tax cuts add up to higher deficits, which would almost certainly imply higher inflation.

The last time such a major fiscal spending program with substantial increases in defense spending and enlarged deficits occurred was under President Ronald Reagan. However, although the budget deficit surged from 1.3% of GDP in 1980 to 5.9% by 1986, inflation actually fell steeply during this period, as the tightened monetary policy of the time aimed to lower the persistent double-digit inflation of the late 1970s and early 1980s. In other words, fiscal policy is not inflationary unless it is also accompanied by a surge in monetary growth. The clear implication is that unless monetary growth surges from its current (and very modest) growth rate, the risk of inflation is being grossly exaggerated by market participants.

The Phillips curve relationship is not a reliable predictor of inflation

A second theory of inflation that is popular among academics, central bankers and financial market participants is that there is a strong relationship between the level of available capacity in the economy and the rate of inflation. Sometimes the amount of spare capacity is represented by the output gap, the level of capacity utilization or the unemployment rate. These variants of inflation theory are collectively known as “Phillips curve” explanations of inflation.

The statistical problem is that these relationships have an extremely varied track record. The Phillips curve relationship is more an empirical observation than a theory of inflation. In reality, its components — measures of labor market tightness and inflation or wage increases — are both affected by money and credit growth, although other factors may also play a role. Typically, as the business cycle expands, employment rises (or unemployment falls), and inflation will rise in the late stages of such an expansion. Monetary expansion is the underlying driver of these increased expenditures that in turn tighten the labor market and push up inflation. However, idiosyncratic factors may occasionally affect unemployment and inflation, causing the Phillips curve relationship to go awry.

So why are widening fiscal deficits and the Phillips curve not reliable predictors of inflation? The reason is that inflation and deflation are fundamentally monetary phenomena resulting from excess or inadequate growth of the quantity of money for a sustained period of time. While rising fiscal deficits or falling unemployment may accompany faster money growth, on their own they are neither a necessary nor a sufficient condition for a sustained increase in inflation.

When will the inflation rate rise?

So is monetary growth really a superior predictor of inflation in the broadest sense? Of course there is also controversy among economists about the relationship between money and inflation, but when properly understood and applied, it is a far more dependable relationship over most business cycles than either the fiscal deficit or Phillips curve theories of inflation.

Meanwhile, the rates of growth of money and credit — and wider measures such as shadow banking credit — remain at subdued levels and are not enough to permit a sustained rise in the US inflation rate. This implies that the current business cycle expansion has several more years to run before the Federal Reserve needs to start tightening rather than normalizing rates.

 

How Do a Nation’s Gold Reserves Affect its Economy?

How Do a Nation’s Gold Reserves Affect its Economy?

How Do a Nation’s Gold Reserves Affect its Economy?

Last month I watched one of James Bond’s movies called ‘Golden Finger’, which was produced in 1964. The story was about a villain who wanted to contaminate the US gold reserves in Fort Knox, his notion was to save gold bullions that will eventually multiply its price. As I was watching this movie, I wondered about the reason of any government to own gold, and how important is that process? What will be the consequences if the movie’s events occurred in reality?

At first glance you may think that all governments are rushing to own gold by all means; however, the fact is not exactly the same. Gold used to be the historical unique reserve asset by any government and civilians for decades due to its unique chemical specifications which made it unable to react with any element including acids, which made it a store of the value.

Nevertheless, that form was changed in the 20th century. All governments represented in their central banks or the treasury secretaries own a significant amount of reserve in the form of diversified portfolio of foreign currencies, foreign governmental bonds, and precious metals.

Most published researches and articles focus blindly on the gold amount owned by the governments regardless of how much gold represents of the total reserves. This research focus on the gold percentage compared to the total countries reserve, which will reflect the political and economical perspective of the policy makers of any country. The research classifies countries relation to gold reserves in two groups. First group is expanding gold policy countries; second, shrinkage gold policy countries.

The Gold Standard Era

Without delving too deep in history, in 1694 the Bank of England established the gold standard system to the world by replacing gold direct dealing with written banknotes to a promise of exchanging notes into gold when asked for that. This system was accepted worldwide, and stayed for more than two centuries to create an efficient economic system.

Under the gold system, the value of each currency was fixed in terms of gold, implied that the exchange rate between two currencies are fixed. The gold standard system put a lot of heavy weight on the big and smaller countries jointly. From the bigger countries side, the absolute ascending inflation for more than two centuries made the people doubt the capability of central banks in covering the banknotes into gold; as a result, speculators started selling off currencies to exchange it by gold. Such speculative actions depleted the central banks gold including BOE in the forefront. On the other side, smaller countries were enforced to raise their interest rates when rates were raised abroad; otherwise, it will find itself exposed to severe losses. Mass selloff of the local currency triggered the obligation of gold reserves or trade the local currency to other foreign currencies with higher interest rates.

During WWI the gold standard system was suspended by all countries, yet, the US remained on gold standard during the war. The war burdens left its shadows on countries, which were loaded by the war debts and hyperinflation. However, the most effected was the banking sector as many banks faced insolvency. By the end of WWI central banks made extensive efforts to reconstitute the gold standard system. Notwithstanding of printing large amounts of money bills during the war without its covering gold reserve, countries could reestablish the gold standard system. Despite these facts, the post WWI period lacked monetary stability, and countries including the UK itself seemed to give up the adoption of this system.

With the lack of political and ideological support of the gold standard system, central banks started to reevaluate its policies, especially after the world great depression era in the 30s. A significant amendments was made on the system by president Roosevelt.

Top Countries with Expanding Gold Reserve System

  • Untied states of America

As the markets crashed in 1929, UK left the gold standard system after the frequent attacks made by the speculators effected the pound price to float and to determined by the market forces. Countries started to disbelieve in the gold standard system, and one after another gave up the system.

By the collapse of the pound against the gold, speculators started to focus on US Federal gold reserve, which refused to give up the gold standard system. The US took new actions to recover the world crisis. One of the actions was to raise interest rates that was below 20% in order to break down speculations against the dollar. As the government pressured the Fed, the Federal Open Markets operations Committee (FOMC) was established to increase supply by decreasing interest rates on governmental and corporate bonds. Eventually the Fed and the government realized that they were not on the right track and they have had to change something. They realized that the gold was the pivot point of the fiscal policy and nothing can be changed without system revision.

By the beginning of President Roosevelt period, reconsideration of the gold standard system was a priority. It didn’t take too long to recognize that lifting the gold standard up was a key element to recover the great depression. Straightaway, Roosevelt took a decision to let the dollar price float against gold by resetting its value at significant low level.

WWII  burdens were insufferable, by that time every country took the decision to give up the gold standard system as it became very exhausting. In 1944, before the end of the war, the big governments signed the Breton Woods agreement, which stated currencies prices to be fixed to the US dollar instead of gold.

Nevertheless, the US Dollar should be converted in gold whenever there was a demand and gold to be priced at $38 per ounce. The final destination for gold role in the fiscal policy came in 1971 when President Richard Nixon decided to terminate the gold standard system and to replace it by the petrodollar system. Starting from that date, interest rates replaced gold and became the pivotal point of fiscal policy.

By that time, gold was out of the Federal Reserve fiscal policy; although the importance as a reserve asset did not diminish for the Treasury secretary. According to the world gold council, USA lead the countries gold reserves list. It stated that the USA holds 8133.5 (USD12 000 000 000) which consists 74% of the total reserves held by the treasury. The treasury is responsible to reserve the gold in deep storage since January 31 1934 in three places: Denver, CO, Fort Knox, KY, and West point, NY. US is the forth gold producer with 209 tons a year.

Moreover, If we’re consider the classification of gold percentage out of total reserves as no other country is keeping that high percentage of gold reserves but Tajikistan, the US is placed as the second on that list. A question should arise here, what does that means? a) USA, as the producer of the most dominating currency doesn’t need a large amount of foreign currencies. b) Gold has an inverse movement with the dollar, meaning that as the demand for gold rises by the treasury, gold price will go up and US Dollar will devalue. In other words, weakest dollar can boost economy, and higher reserved gold value.

  • European Countries Using the Euro

Similarly to the US policy, the Euro considered to be one of the world economy columns. Despite the fact that ECB holds 26% of its gold reserves by 504 Tons, every country in the EU represents its treasury by holding a separate amount of gold reserves. The form of ‘sell Euros buy gold’ as a reserve is a common policy within Eurozone countries. Germany comes second on the list by holding 3377 tons representing 68.8%, followed by Italy with 2451 tons representing 67.8% of the reserves. However, Cyprus holds only 33tons, represents 64.1% of its reserves. France 2435T 63.8%, Netherlands 612T 63.9%, Portugal 382T 59.1% and Austria 280T 45%.

The European countries maintain structured formula to hold high gold reserves of their total reserves(commodities, currencies, etc.). As the Gold standard system rules global economy, a country must sustain gold reserves in order to control its currency and economy.

  • Venezuela Learnt the Lesson

Venezuela, one of the top oil producer, was determined to hold anti-west policy, adopted the anti-dollar system by putting 64.8% of its reserves in gold instead of foreign currencies which represents only 187.5 Tons, the lowest in three decades.

That wasn’t the plan of Venezuela; in December 2009, Venezuela’s central bank released the “gold reorganizing”. They had a 10 year plan to increase gold reserves  – they didn’t declare the amount they plan to increase due to the financial crisis and the decreasing confidence in USD, and they called this year “the year of gold”. Actually the plan worked for while, where the reserved amount rose from 355T to 365T by 2011; Nevertheless, it didn’t work for a long time. The country faced a severe crisis in 2016 caused a sell-off of two thirds of its gold reserves in a lower price than 2010.

As a result, the increased amount bought after the 2009 “Reorganization” was sold by loss, and Venezuela is classified as shrinking economy. Important lesson we should learn from the Venezuela model as we go through this research.

Venezuela gold reserve since 1990-2017

Venezuela gold reserve since 1990-2017
  • Tajikistan

You may get astonished if you knew that Tajikistan, one of the poorest countries with 30% poverty, holds 81% of its reserves in gold, that puts it on the top of the list above USA. The 81% represents only 14.4Tones.

Tajikistan’s GDP was 7.8 billion in 2016, most depending on agriculture products and metals export. In fact, Tajikistan does not rely on gold for a reason, but because their main income rely on emigrated work force in Russia and exporting its product to neighbors countries like Russia, Turkey, Kazakhstan and Afghanistan.

Tajikistan gold reserve 1998-2017

Tajikistan gold reserve 1998-2017

Shrinking Gold Reserves Countries

  • United Kingdom

On the other side of the coin it seems that some emerged economies have different point of view. Unlike the rest of Europe, UK has a different gold policy. The UK decided on the 7th of May 1999 to sell a big portion of its gold reserve in a short period to replace it by a basket of currencies including the new currency (Euro). UK gold reserves dropped from 590 Tons on 1999 to 310 tons today which represents only 8.6% of the UK reserve.

UK gold reserve from 1999-2017

UK gold reserve from 1999-2017

The decision was taken after new amendments made by the BOE. The policy targeted the high unemployment rates and price instability occurred in the mid 90s that formed a huge drop in UK exports. Graham Yong, a senior manager of foreign exchange division in the BOE, said about the change of UK gold reserves policy: “holding in the reserve is amid at achieving a return on them by lending a portion to the market”. However the UK decided to decrease 2/3 of its gold reserves, yet, the kingdom still ranked 17 on the list by amount not percentage.

  • Commonwealth Realm

On the footsteps of UK, Canada and New Zealand followed, but more aggressively. Gold standard was adopted by Canada in June 14, 1853, and by 1999 the Bank of Canada decided to sell its gold reserves. The economic reasons that made Canada and New Zealand get rid of all of their gold reserves to be 0% remain unclear.

Australia is a country with a strong economy heavily focused on mining holds only 79.9 tons of gold reserve representing 6% of its allover reserves. Australia gold reserves raised slightly its gold reserves from 79.7 in 1999 to 79.85 in 2017. The Common wealth countries are some of the richest countries in gold mining field and hold the biggest portion of gold production combined. Australia is the second producer in the world with 270 Tons, Canada comes Fifth with 170 Tons, and south Africa comes seventh with 140 tons a year.

  • Chinese and Russian axis

China was the last country to join the gold standard system in the early years of the twentieth century instead of the silver cover. China ranked Fifth by the amount of gold with 1842 tons of reserved gold representing only 2.6% of its reserves which connect China to the gold shrinking policies countries.

On the footsteps of China, Russia followed to be one of the shrinking gold policy countries by holding only 1645 Tones representing 16% of its total reserves; however, doubts relate to Russian numbers since the central bank of Russia shows different numbers than those claimed by the gold council.

Gold as jewelry retail sales, both in China and Russia is extremely popular and those considered to be the cheapest places to buy gold. China ranked first gold seller with 455 tons, Russia comes third 250 tons yearly.

Final Words

The gold reserve is a wide topic and there are many subjects to be discussed. For instance, there must be connection among gold trade, gold reserves and gold prices. What are the effects of gold prices on governments reserved gold? and the most important question, what will be the impact after the end of raw gold? In general, I would like to sum up the main ideas of that topic:

  • However gold never loses its value as a store mean, its role in current economy differs from age to age. It started as a coin in itself, and then turned to standard cover of banknotes, later it took different path by being used as governmental reserves and classical uses (jewelry and store of value) including the medical and automobile industry. Moreover, the relation between banks and gold also changed from phase to phase.
  • We can classify countries regarding their gold reserve system into three types; a) USA and Eurozone that own the most desired currencies, have no way but to hold their reserves in gold and give a little space to less desired currencies. Bear in mind that USA is the fourth gold producer. b) Emerged economies such as the Commonwealth countries have different perspective by liquidating the reserved money to be used for development and other emerged countries had followed their footsteps – Japan and Switzerland. c) Emerging economies such as Russia, China and India adopt the same idea of the second group as an inevitable result to develop the currently stagnating economy.
  • Venezuela is a vivid exam of failed policy, by which a country insisted to ignore the facts by challenging the international monetary systems and stagnating all of its oil income into gold only. That was one of the reasons that caused the country a severe crisis in 2015, resulted that the reserved gold was sold in lower price in 2016.

Impossible to Fully Comprehend the Looming Upside Shock in Silver Prices

Impossible to Fully Comprehend the Looming Upside Shock in Silver Prices

Impossible to Fully Comprehend the Looming Upside Shock in Silver Prices

The narrative thus far – after decades of allowing themselves to be led in and out of COMEX silver futures contracts by their commercial counterparties, several managed money traders appear to have woken up to the fact they’ve been duped all along. A key component of the silver manipulation for the past 30 years has been the knee-jerk and mechanical reaction of the managed money traders to collectively sell whenever the commercials rigged prices lower beyond certain moving averages. Ditto for buying on rising prices.

The dependability of the managed money technical funds to obey commercially rigged price signals made the funds the true enablers of the manipulation. The commercials, mostly domestic and foreign banks, made their profits by getting the technical funds to buy high and sell low. Without the technical funds to maneuver at will, the commercials would have little reason to prolong the silver manipulation.

So obvious had become the continued whipsawing of the managed money traders by the commercials that a near-universal question emerged – “why are these technical funds engaging it such a bizarre and harmful (to their investors) game?” I’ve heard from more than one reader that there must be some kind of collusion between the technical funds and the commercials, featuring under the table payments to the technical funds by the commercials to continue deliberately losing. While I understand and empathize with the logic of such an explanation, given the nearly inexplicable behavior of the technical funds, I don’t see such collusion, as I’ve tried to explain over the years. I certainly see collusion, just not on the part of managed money traders to deliberately lose.

Nowhere is the price influence of the continuing contest between the managed money traders and the commercials more pronounced than it is in COMEX silver. That’s what led me to conclude the price of silver was manipulated more than 30 years ago. And while it is now true that this same price influence has come to infect just about all our markets, silver still maintains a unique role as being the most manipulated market of all. Not just because it was the first such market to be manipulated by futures positioning, but that has something to do with it. Being first means that silver has been manipulated in this manner for far longer than any other market and, as such, its price is necessarily more artificial. More to the point is that the objective relative measures involving actual production and consumption and real world supplies always feature silver at a much different level than any other commodity.

So extreme has become the size of the derivatives trade in silver compared to actual metal in the world and the fact that it has lasted so long (decades) that perhaps it’s no great surprise that, if the managed money traders were ever going to wake up to the realization they were being gamed; then they would likely first see it in silver. Should the managed money traders come to such a realization and radically alter their behavior, then there should be strong signs indicating such a change. Those strong signs abound and have been discussed on these pages.

First came the start of a buildup in core non-technical fund managed money long positions in COMEX silver, starting around three years ago. I define these positions as not being governed by price change, meaning such longs are not sold on price selloffs and, therefore, are not technical in nature. In simple terms, the core long position is the amount of long positions remaining after significant price declines. From the time the COT data started tracking managed money traders around 2009 until the fall of 2013, the long position of managed money traders in COMEX silver rarely fell below the 20,000 contract level at the depths of price declines. Again, what’s remaining long in the managed money category at the end of significant silver price declines is the core non-technical fund long position.

But starting in 2014, the core non-technical fund managed money long position began a years-long climb, first to 30,000 contracts, then 40,000 and finally this past December to nearly 60,000 contracts (56,000 contracts on Dec 6). This meant many more managed money longs remained long after selloffs. Then, on the $3 rally early this year, some 40,000 new managed money longs were added, as technical funds joined with their non-technical fund fellow managed money traders on the long side of COMEX silver futures, creating a combined managed money long position of 96,000 contracts on Feb 28. Part of me wants to apologize for throwing so many numbers at you, but I’m talking about the only numbers that matter. Every 10,000 contracts of COMEX silver is equal to 50 million oz of metal, so I am talking about the many hundreds of millions of oz that is setting the price of silver, so please bear with me (but certainly feel free to question me about any of this).

On the sharp $1.50 selloff thru the last COT report, some 16,000 managed money long positions were sold (presumably by technical funds), leaving over 80,000 contracts long in the managed money category. Prices moved higher since then, so there is little reason to suspect that the long position is lower as of yesterday’s cutoff date. If silver prices don’t get pushed below the recent lows ($16.75), then by my definition, the core non-technical fund long position in COMEX silver appears to be 80,000 contracts or 400 million oz, until proven otherwise. That is four times the 20,000 contract (100 million oz) core long position that existed prior to late 2013.

Not only is this a shocking and monumental increase in core long positions, I must remind you that it is unique to COMEX silver and this pattern of an exploding core non-technical managed money long position exists in no other market, gold included. Moreover, the stunning size of the core managed money long position in silver is also accompanied by at least another 30,000 contract core non-technical fund long position held by traders not in the managed money category. The bottom line, as I’ve indicated recently, is that there exists at least 110,000 contracts (550 million oz) of a core paper long position in COMEX silver futures not likely to be sold should silver prices get rigged lower.

Also as I’ve indicated previously, if this core long position is not about to be sold to the downside (as I believe), then it will only be sold to the upside. So here we have 550 million oz of paper silver held by a fairly diverse number of traders seemingly intent on holding until they can sell at what they conclude is a sufficiently high enough price. Because this huge core long silver position is held in paper contract or derivative form, there must be an equally huge corresponding short position. Thanks to exquisitely detailed government data (in the form of COT and Bank Participation Reports), we can pinpoint the huge short position in COMEX silver with even greater precision than the long side. That’s because, as large as the short position is in COMEX silver, it is held by far fewer traders than exist on the long side. Because the traders which hold the huge short position in COMEX silver are so very few in number, serious issues related to market concentration, position limits and collusion are raised, none of which I’ll go into today.

This issue today is that the core long position in COMEX silver is held by a diverse number of traders (into the hundreds), while nearly all of the short position is held by just 8 big commercial shorts. In last week’s COT report, these eight large traders held, essentially, the entire 98,000 contract (490 million oz) total commercial net short position. One of those 8 traders, JPMorgan, held around 27,000 contracts short, leaving the remaining 7 traders net short more than 70,000 contracts (350 million oz).

For the sake of brevity, let me quickly conclude that because the crooks and scoundrels at JPMorgan saw the need and wisdom to accumulate the many hundreds of millions of ounces of physical silver that they did acquire over the past six years, JPMorgan must be removed from any calculation of loss due to higher silver prices. The problem is that none of the crooks and scoundrels at the seven remaining big commercial shorts can be removed from such calculations because none bought actual silver. As such, I can’t help but think of these 7 big COMEX shorts as dead men walking – their financial fates sealed and with only the timing to be determined.

There are several forces that seal the fate of the seven big COMEX silver shorts. One, the unquestioned and documented buildup of core long positions, not about to be resolved by lower prices. Two, JPMorgan exiting the dead man fold, by virtue of snatching up every available ounce of actual silver for six years. Three, the growing awareness of the big seven’s predicament, including lawsuits hitting closer to home. Incredibly, these are self-reinforcing factors. For example, sensing the fate of the doomed 7 could and should have encouraged ever larger managed money core long positions.

Further, we know that the 7 big COMEX silver shorts are mostly foreign banks, speculating their butts off on the short side of silver and are not, repeat not, legitimately hedging in any way, just taking the other side of a speculative derivatives bet. Because there is no legitimate basis for why a Bank of Nova Scotia, for instance, would maintain a massive short position in COMEX silver, then, by definition, the basis for being short must be illegitimate. There is no way anyone could construct a legitimate economic motive behind the 7 big shorts’ massive and concentrated short position in COMEX silver; otherwise I would have heard it long ago. And not for a moment am I exempting JPMorgan in the legitimacy department, just in the 7 dead men’s fate.

What makes the 7 big traders dead men walking is that they can no longer resolve their fate profitably. It took years to create this very unique situation, but basically, they are trapped. There are only two ways for any short to get covered – by actual delivery or by buying back the short position. How the heck are the 7 big COMEX silver shorts going to secure 350 million ounces of physical silver in a hurry , with which to deliver against and close out their huge short position, when JPM has put a strangle hold on physical silver? Look at the current March silver delivery process – JPM has taken nearly all of the 15 million oz delivered this month. Any attempt by the big 7 to buy physical silver in any reasonable quantity would send the price soaring and financially cripple these traders.

Likewise, any attempt to buy back big quantities of COMEX paper futures contracts would also send prices soaring for the simple reason the big 7 (along with JPM) have been the sole sellers up until now. How can the former big short sellers simply turn around and begin to buy in earnest without causing prices to explode? In simple terms, they can’t. Sure, they can buy on lower prices as long as the core longs are willing to sell, but that’s the whole point – the evidence strongly suggests the core longs won’t sell on lower prices. This is what’s known as being between a rock and a hard place.

Of course, I can’t give you the exact timeline and sequence of events and if I tried to, you should reject that. No one can see the future with such clarity. I can’t tell you if the crooks at JPMorgan might not still continue to aid the 7 soon to be dead men by adding shorts for a while longer, but I don’t see JPMorgan bailing them out completely by donating the bank’s acquired physical silver of six years at low prices. My firm sense about JPMorgan and how they behave typically is that they would sooner rip your lungs out than look at you if there was a decent buck in it for them. Even if JPMorgan temporarily prolongs the silver manipulation, as they are certainly capable of doing that will only offer a brief stay of execution for the 7 walking dead.

What I can tell you is that when the time is up for the walking dead, it will be a time like no other in the history of silver. Prices can and will continue to muddle along as long as the 7 big shorts and JPMorgan continue to cap price rallies, but the moment the capping ends – either at the hands of JPM or the walking dead – the silver price landscape will be changed forever. None of us – myself included – will be able to fully comprehend the upcoming shock to the upside. This has little to do with price per se, just the mechanics of the market; but it will be seen most vividly in price. When the big shorts start to buy back their shorts to the upside, the world of silver will have changed. – Ted Butler

 

Precious Metals Demand Plummets In West, Surges In East

Precious Metals Demand Plummets In West, Surges In East

Precious Metals Demand Plummets In West, Surges In East

With the Trump euphoria pushing the broader markets to new all-time highs, it has impacted precious metals demand considerably… especially in February.  Precious metals investors believing the White House “Grandiose plans”, of making American great again, have cut back seriously on their precious metals buying.

There seems to be a percentage of the alternative community that are convinced that Trump will actually put the U.S. back to the way it was in the 1960’s.  And that is, back to a manufacturing powerhouse with high-paying jobs.  While this would be a wonderful thing to do, the continued disintegration of the global oil industry, just won’t allow it to happen.

IT WAS A ONE-TIME DEAL, and that period has come and gone…. FOREVER

Regardless, Western demand for precious metals declined considerably in February versus the same month last year.  A few years ago I spent more time publishing articles on gold and silver demand, but have refocused my analysis on how energy will impact the precious metals, mining and the overall economy.

However, Louis at Smaulgld.com does an excellent job publishing articles on precious metals demand.  So, I have used some of his data and one of his charts.

As I stated above, the Trump market euphoria has taken the wind out of precious metals investors recently.  According to the data from Smaulgld.com and the U.S. Mint, sales of gold and silver have plummeted in the West (especially USA), but surged in the East:

As we can see, Shanghai Gold Exchange withdrawals surged 67% in February versus the same month last year, while Perth Mint silver sales declined 17%, Perth Mint Gold sales dropped 32%, U.S. Gold Eagles fell 67% and Silver Eagle sales plummeted 75%.

According to Louis’s article, Shanghai Gold Exchange February Withdrawals Highest On Record, he published the following chart:

Chinese Shanghai Gold Exchange withdrawals were 179 metric tons (mt) in February compared 107 the same month last year.  Gold withdrawals from the Shanghai Gold Exchange are a pretty good proxy for the physical metal demand taking place in China.  We must remember, global monthly gold mine supply is approximately 265 mt.  Which means, the Shanghai Gold Exchange withdrawals of 179 mt accounted for two-thirds of global gold monthly mine supply.  That’s a heck of a lot of demand… from just one country.

The decline in U.S. Gold Eagle and Perth Mint gold coin sales in February versus last year equaled 67,806 oz.  However, Shanghai Gold Exchange withdrawals increased 2,315,000 oz in February compared to the same month last year.  So, we can clearly see that the increase in just Chinese demand, via the Shanghai Gold Exchange withdrawals, more than made up for the decline in Western retail official gold coin purchases.

Unfortunately, the Royal Canadian Mint does not publish their Gold or Silver Maple Leaf sales until after the end of each quarter.  That being said, Canadian Gold and Silver Maple Leaf sales normally parallel what is taking place in U.S. Eagle sales.  Thus, Gold and Silver Maple Leaf sales are probably down signifcantly as well.

I would imagine most precious metals investors came across this article published on Zerohedge a few days ago, Demand For Physical Gold Is Collapsing.  It seems as if the intent of this article was to generate a lot of READS.  Because, if we look at what is taking place in China, there is no collapse in physical gold buying.  Matter-a-fact, there was a record amount of gold withdrawn off the Shanghai Gold Exchange last month.

The author of that article, needed to include a footnote stating the following:

Western physical precious metals demand (especially in the USA) decreased significantly due to the Trump Market Euphoria, while Shanghai Gold Exchange withdrawals hit a new record in February as the Chinese realize the U.S. economy and Dollar is still toast.

I am completely dumbfounded by recent decline in precious metals demand and sentiment in the West.  While I can understand the reason precious metals investors believe Trump will make America great again, the awful ENERGY DYNAMICS in the future will not allow us to return to the good ‘ole days of a manufacturing super-power.  Rather, the upcoming collapse will change our lives forever.

When the Dow Jones Index and broader markets finally crack, there won’t be many SAFE HAVENS to invest in.  Along with a collapse of the Dow Jones Index, Real Estate prices in all sectors will also head down the toilet.  Investors scrambling for something to protect wealth will finally move into precious metals.  Unfortunately, there won’t be the available supply… only at MUCH HIGHER PRICES.

So, this current downturn in Western physical gold and silver purchases do not faze me one bit.  It only indicates that most Americans are completely insane when it comes to sound fundamental investing.

Courtesy: SRSroccoreport

Don’t Worry about Oil Prices, Here’s How You Can Profit

Don’t Worry about Oil Prices, Here’s How You Can Profit

Don’t Worry about Oil Prices, Here’s How You Can Profit

This month, Saudi Arabia sent oil prices lower by announcing an increase in production.

Oil prices dropped below $50 per barrel on the news. Since the initial pullback following Saudi Arabia’s announcement, WTI crude oil has been trading in a range of about $48 to $50.

Here’s why this is so important…

Source: TradeStation

As you probably know, Saudi Arabia has been trying to manipulate the oil market since mid-2014.

Originally, Saudi Arabia purposefully sent oil prices into a death spiral in an attempt to put U.S. shale oil companies out of business. The idea was to push oil so low that U.S. companies couldn’t compete. And this would allow the Saudis and OPEC to corner the oil market.

It didn’t exactly work out that way.

What happened instead is that U.S. shale drillers got innovative. And that innovation allowed them to drill wells more cheaply.

Over the past year, the cost of shale fracking has steadily declined. Today, U.S. companies enjoy a very low “breakeven cost” when drilling for oil in the largest shale formations in the U.S..

Check out the chart below to see how these costs have declined over the past three years.

Source: WSJ’s Daily Shot

So instead of putting the U.S. oil industry out of business, Saudi Arabia essentially gave U.S. oil companies the incentive to become more innovative, more efficient, and to produce oil at cheaper prices.

That’s great news for the U.S. shale oil industry!

Saudi Arabia Captures Headlines With Another Weak Move

Last month, Saudi Arabia increased oil production by 2.7% to 10.011 million barrels per day.

By increasing production in February, Saudi Arabia was boosting the supply of oil on the global market. We know from Economics 101 that the more supply of a commodity, the lower the price.

The financial media loves to tout how Saudi Arabia is the second largest global oil producer. Only Russia produces more oil than Saudi Arabia. So when Saudi Arabia increases production, the talking heads on CNBC and Bloomberg Television make a big deal about it.

But the bottom line is that Saudi Arabia has already tried this move.

In 2014, oil was trading near $120 per barrel. Ramping up production had a big effect on global oil prices. But today, Oil is trading at less than half of that level. So I don’t expect oil to move much lower than its current range.

More importantly, U.S. oil companies are not nearly as vulnerable as they were two years ago. The chart above shows you how cheaply these companies can produce oil and still turn a profit. Plus, the weakest oil companies have already been shut down or acquired during the 2014 / 2015 bear market for oil.

The U.S. oil companies that are left represent the strongest and most resilient operations. Which means Saudi Arabia is very unlikely to capture much market share by boosting production.

After all, Saudi Arabia can’t live forever with low oil prices…

The country has bills to pay. It’s burning through cash at an alarming rate. And if oil prices remain below $50 for an extended period of time, Saudi Arabia won’t be able to survive.

That’s why I don’t think Saudi Arabia’s will continue to increase production. And I don’t think this move will have a long-term effect on oil prices.

So if I’m right and the price of oil doesn’t have too far to fall, what’s the best way to take advantage of today’s lower oil market?

Don’t Worry about the Price of Oil, Here’s How You Can Profit…

Investors are going to find some of the safest and most lucrative oil investments not in the stock market, but instead by purchasing corporate bonds.

How do I know?

Because I’ve already shown investors how to lock in tremendous profits from energy-related corporate bonds.

Investing in oil-related bonds is very different from investing in oil-related stocks.

Yes, they’re both affected by the price of a barrel of oil.

But stock investors live and die based on the profits that each oil company generates. More accurately, stocks move higher and lower based on what investors expect profits to be. And you and I both know that traditional investors can be fickle animals.

Oil stocks in general are more speculative and can have more risk.

Corporate bonds, on the other hand, come with a company guarantee. by law, oil companies are required to pay semi-annual coupons to their investors. And when the bonds mature, the company must pay you $1,000 for every bond you own.

That legal requirement is why bonds can be much safer — and much more lucrative investments for energy investors. Especially if you pick your bonds up during a down market.

Case in point:

In April of 2016, when oil was trading near $45 per barrel, I recommended buying the bonds of EP Energy – a U.S. oil producer. Since investors were worried that lower oil prices would hurt energy companies, we were able to buy these bonds at 51-cents on the dollar.

That means every $1,000 bond only cost us about $510.

Fast forward to today, and those bonds are trading closer to 90-cents on the dollar. Meanwhile, each bond has paid us $93.75 of income as well.

EP Energy bonds aren’t the only bonds we’ve been able to do this with. We’ve made similar plays with Clayton Williams, Resolute Energy, Bill Barrett and other oil producers as well.

The key to making money from energy corporate bonds is to buy these income investments in a down market for oil. This way, you’re more likely to pick up the bonds at a discount.

Then, you can sit back and collect your income payments, knowing that both your income and the investment value of your bond is protected by a legal guarantee. As long as the energy company stays in business, they’re legally required to pay you!

Researching New Opportunities in a Down Oil Market

I’m keeping a close eye on the oil market, and on the moves that Saudi Arabia is making to manipulate oil prices. My guess is that over time, Saudi Arabia will be unable to affect oil prices as much as they have been able to in the past. That’s because U.S. oil production is picking up, and capturing a bigger chunk of the global oil market.

Once it’s clear that oil prices are firming, we’ll be hoisting the buy flag on other resource based opportunities.

Here’s to growing and protecting your wealth! – Zach Scheidt

Contrarian fund managers expect oil prices to double to $100 by 2018

Fears of a global oil glut have returned to sink oil prices in March, but two fund managers argue that supplies are much tighter than traders realize. They expect oil prices to roughly double, to $100 a barrel, within a year.

Prices for oil trade around $50 a barrel and recently set lows for the year, but that doesn’t worry Leigh Goehring and Adam Rozencwajg, managing partners at Goehring & Rozencwajg Associates.

“We’re actually more bullish than we were before,” said Goehring, in an interview with MarketWatch.

“The underlying fundamentals of what we‘ve outlined for everyone…are happening right in front of us and yet people are becoming more and more bearish, so you’re setting yourself up for a very, very big, positive surprise,” he said.

Goehring & Rozencwajg Associates
Leigh Goehring, left, and Adam Rozencwajg

Goehring and Rozencwajg, who launched a natural resources fund in January GRHIX, -0.21% GRHAX, -0.32% made their call for $100 oil in 2018 late last year when the Organization of the Petroleum Exporting Countries reached an agreement with other major producers, including Russia, to cut production.

The November announcement of the OPEC-led deal, which officially kicked in at the start of 2017, helped fuel strong gains in the last two months of 2016. West Texas Intermediate crude CLK7, -0.48%  gained 45% last year, while Brent crude LCOK7, -0.02%  jumped by more than 50%.

The OPEC pact draws parallels to a production cut announced in 2006, Goehring and Rozencwajg said. “They didn’t need to cut back then” and they don’t need to cut this year, said Goehring.

WTI crude spiked to more than $145 a barrel in July 2008.

In 2006 to 2008, the OPEC cut “tightened the market that had already tightened on its own. It was too much tightening,” Goehring said.

The “same thing’s happened again—the market tightened on its own in 2016,” he said. OPEC has cut production, “now we’re going to see too much tightening in 2017.”

‘Missing barrels’

The biggest reason Goehring and Rozencwajg expect to see $100 WTI and Brent crude oil prices in the first quarter of 2018 lies in their analysis of data from the International Energy Agency.

The IEA reported an oversupply of crude oil for 2016, but G&R research shows a discrepancy between the global inventory picture and the global supply and demand data the Paris-based agency provides, Goehring and Rozencwajg said. That’s what Goehring referred to as “missing barrels.”

IEA December 2016 oil report

The IEA’s December oil report estimated that 2016 global oil supply was at 97 million barrels a day and global demand was at 96.3 million.

That suggests that the market was oversupplied by a “very large” 700,000 barrels a day for full year 2016, Rozencwajg told MarketWatch. “If you think that’s true, then you should think that inventories over the course [of the year] would’ve…built” by 700,000 barrels times 365 days in the year, or more than 250 million barrels.

But industry and government-controlled oil inventories from the Organization for Economic Cooperation and Development were actually down in 2016, he said—falling by roughly 7.6 million barrels over the course of last year, based on figures from the IEA.

The latest March oil report raised the 2016 global demand estimate to 96.6 million barrels, with the IEA effectively lowering its oversupply estimate to about 400,000 barrels a day.

OPEC felt that 2016 was oversupplied and would get worse in 2017, said Rozencwajg. But he believes the oil market likely shifted into a deficit in 2016, as measured by the OECD inventories falling year-over-year.

The market will “become massively undersupplied in 2017 and price should rise,” he said.

IEA revisions

The IEA accounts for supply and demand discrepancies by using “miscellaneous to balance” figures.

Matt Parry, a senior oil market analyst at the IEA, explained to MarketWatch that the miscellaneous to balance figure “”represents a combination of the non-OECD stock changes and missing barrels in the demand and supply numbers.”

In the past year, he believes the non-OECD stock changes played a more significant role, noting that China has seen big changes in its stockholdings recently as it builds strategic reserves and has tried to take advantage of what it perceives as historically low prices.

“The IEA is striving to get a better handle on non-OECD stocks and if we did, we could [likely] greatly bring down the ‘miscellaneous to balance’,” he said.

These countries, however, don’t have an obligation to report to us, said Parry. “Indeed, business incentives in storage often favor secrecy.”

Parry said he wouldn’t be surprised if the supply and demand forecasts are revised 12 times a year. “The revisions are generally small each month, although they can add up if they are consistently in the same direction.”

This chart, compiled by The Wall Street Journal with data from the IEA, show what the Paris-based agency’s forecasts were in January of each year since 2010, and what the latest estimates for those years were in the March IEA oil report. For 2016, there was a revision of nearly 902,000 barrels.

The IEA’s estimates of global crude demand have been upwardly revised by an average of 880,000 barrels a day for the past seven years, according to a Wall Street Journal analysis.

For this year, the IEA forecasts demand of 96.6 million barrels a day, but Goehring and Rozencwajg expect to see further revisions to the number.

“We go to great lengths to try and figure out what are those missing barrels, do they really exist and are they truly missing or do they exist at all,” Goehring said. “We believe, based upon our research and our demand models…that those IEA demand numbers are understated, and if you were to bring those numbers up to what we believe are the correct demand numbers, that those missing barrels would go away.”

“It paints a completely different world of what oil looked like in 2016 versus what [the IEA] said,” according to Goehring.

Here is what the IEA revisions over the years look like to Goehring and Rozencwajg:

“The IEA in their last several announcements have gone through severe revisions of their 2016 data,” said Goehring. “ And they’ve basically made a huge amount of those missing barrels go away.”

“What have they done? They’ve revised significantly upward their 2016 oil demand” forecast, he said. – Myra Saefong

Are Gold ETFs Gearing Up for a Rally on the New-found Optimism?

Are Gold ETFs Gearing Up for a Rally on the New-found Optimism?

Are Gold ETFs Gearing Up for a Rally on the New-found Optimism?

Gold prices are back on a rallying mode following the Fed’s dovish guidance over the course of policy tightening. The Fed raised the benchmark interest rates by a modest 25 bps to 0.75-1% in the March meeting and forecast three rate hikes for 2017 like it did last December.

Fed’s Dovish Outlook

Given the prospect of a faster economic recovery and Trump’s promise of fiscal reflation, this guidance came as accommodative to the investing world. As a result, gold which nosedived before the rate hike and the Fed statements, again raised its head. The precious metal touched a two-week high on March 20 as the greenback dropped to a six-week low on the Fed’s dovish outlook.

Negative Interest Rates

With three rate hikes this year and in the next, the real interest rates in the U.S. are likely to be in the deep negative territory, as per some analysts. If this is not enough, most central banks across the world including Bank of Japan, the Swiss central bank or the ECB are pursuing negative interest rates to promote growth. This in turn would be favorable for non-interest bearing assets like gold.

Inflation: A Friend

The inflationary outlook is finally looking up in the developed economies, albeit slowly. Prolonged easy money policies from global central banks, the OPEC move to stabilize oil prices and the Trump effect made it happen. Gold is often viewed as a hedge against inflation. Having said that, as of now, the global inflation level is not that steep to give a material boost to gold prices .

Geopolitical Risks

Investors should also note that though the price of the yellow metal has steadied with the possibility of a gradual rate hike trajectory, political risks in Europe including Brexit worries, French elections and talks of Scotland’s independence vote have brightened the prospects of the metal. These issues would help the safe-haven asset gold.

If the Trump Rally Hits the Brakes

So far, the U.S. market rally has been propelled by Trump’s pledges for fiscal reflation. However, it is to be seen how many of the vows will translate into reality. The market did not jump in joy following the budget blueprint. If economic measures taken by Trump take time to materialize, there could be a correction in stocks. Volatility levels might flare up, opening up scope for a gold rush.

Analysts’ Bullish View

Some analysts believe that gold will rise to US$1300/oz by midyear from the current level of $1227/oz, though the metal is expected to fall back at the end of the year. However, while Morgan Stanley is bullish on precious metals, Societe Generale SA expects less hiccups on the political front and thus sees no rally for gold. It believes that further policy tightening would hurt the rally.

Bottom Line

As of now, the metal seems due for a rally, though the run may not be long enough. So, investors intending to profit out of the new-found optimism in the gold space may consider gold ETFs like SPDR Gold Shares GLD , iShares Gold Trust IAU and ETFS Physical Swiss Gold SGOL .

For fatter returns, investors can also play leveraged products like VelocityShares 3x Long Gold ETN UGLD , DB Gold Double Long ETN DGP and ProShares Ultra Gold UGL . However, leveraged ETF plays involve greater risks.

 

– Sanghamitra Saha

Falling Mine Supply will Trigger Panicked Gold Buying & Higher Gold Prices

Falling Mine Supply will Trigger Panicked Gold Buying & Higher Gold Prices

Falling Mine Supply will Trigger Panicked Gold Buying & Higher Gold Prices

I consider gold a form of money. That means I investigate movements in gold prices the same way I investigate moves in any other global currency — and find the best way for you to play it.

To understand the gold market, you understand physical gold flows.

Visiting with some of the most knowledgeable experts and insiders in the physical gold industry has allowed me to gather extensive information on the major buyers and sellers of gold bullion in the world and the exact flows of physical gold.

This information about gold flows is critical to understanding what will happen next to the price of gold. The reason is that the price of gold is largely determined in “paper gold” markets, such as Comex gold futures and gold ETFs. These paper gold contracts represent 100 times (or more) the amount of physical gold available to settle those contracts.

As long as paper gold contracts are rolled over or settled for paper money, then the system works fine. But, as soon as paper gold contract holders demand physical gold in settlement, they will be shocked to discover there’s not nearly enough physical gold to go around.

At that point, there will be panicked buying of gold.

The price of gold will skyrocket by thousands of dollars per ounce. Gold mining stocks will increase in value by ten times or more. Paper gold sellers will move to shut down the futures exchange and terminate paper gold contacts because they cannot possibly honor their promises to deliver gold.

The key to seeing this gold buying panic in advance is to follow the flows of physical gold. Once the price of physical gold starts to move up on basic supply and demand fundamentals, the stage is set for corresponding increases in paper gold prices.

As more and more paper gold holders turn from the paper market to obtain physical gold, which is already in short supply in the physical market, we’ll see the beginning of a price super-spike.

As long as supply and demand for physical gold are in rough equilibrium, there is no catalyst for a sudden spike in gold prices, apart from the usual geopolitical flight to quality demand. But, as soon as demand begins to overwhelm supply, then it’s “game on” for significantly higher physical gold prices followed by the toppling of the inverted pyramid of paper gold contracts.

What information do we have about the flows of physical gold that will help us to understand the supply/demand situation? That’s a mixed bag. Some physical gold players are completely opaque and do not report their purchases or holdings transparently. The Chinese and Saudis are the least transparent when it comes to reporting their gold market activities.

On the other hand, the Swiss are highly transparent. The Swiss report gold imports and exports by source and destination on a regular basis.

The Swiss information gives us a window on the world. That’s because Swiss imports and exports are mostly about the Swiss refining business, which is the largest in the world.

There are no major gold mines in Switzerland and Swiss citizens are not known as major buyers of gold (unlike, say, Chinese or Indian citizens). The Swiss watch industry does use a lot of gold, but imports are balanced out by exports; Switzerland itself is not a major destination for Swiss watches.

In effect, Switzerland is a conduit for much of the gold in the world. Gold arrives in Switzerland as 400-ounce good delivery bars , doré bars (those are 80% pure ingots from gold miners), and “scrap” (that’s the term for jewelry and other recycled gold objects).

This gold is then melted down and refined mostly into 99.99% pure 1-kilo gold bars. These 1-kilo “four nines” quality bars are the new global standard and are the ones most favored by the Chinese.

By examining Swiss imports and exports, we can see where the supply and demand for physical gold is coming from and how close to balance (or imbalance) that supply and demand is. This information can help us to forecast the coming super-spike in gold prices. Switzerland does not produce its own gold.

The “big five” destinations are China, Hong Kong, India, the U.K. and the United States. Those five destinations account for 91% of total Swiss gold exports.

Hong Kong demand is mostly for re-export to China. This is revealed through separate Hong Kong import/export figures, which are also considered reliable by international standards. Using Hong Kong as a conduit for Chinese gold is just one more way China tries to hide its true activities in the physical gold market.

Bear in mind that China is the largest gold producer in the world. There is an additional 450 tons per year of indigenous mining output available to satisfy China’s voracious demand for official gold, held by its central bank and sovereign wealth funds.

And China has been a major destination for Swiss gold.

In December 2016 Switzerland exported an astonishing 158 tonnes of gold bullion directly to China. That’s a 168 % increase over the previous December.

In total, Switzerland exported 442 tonnes to China last year, up 53 % from 2015.

Heavy Chinese buying means there’s less physical gold to meet investor demand going forward. That means the price of gold is likely to go up because that’s the market’s solution to excess demand.

Supplies of gold in Switzerland are already tight (I heard this first-hand from refinery and vault contacts there). If shortages worsen, as I expect, there’s only one way to adjust the Swiss gold trade imbalance — higher prices.

Once higher gold prices kick in, demand will send it into overdrive. From there, it’s just a matter of time before the whole paper gold pyramid comes crashing down.

And global mining supplies are not expected to increase much over the next few years.

Fewer gold discoveries, lower grades and high extraction costs are constraints on supply growth. This year we could see decrease in global production for the first time in over a decade.

So while demand remains strong, supplies are tight. It’s a recipe for much higher gold prices.

Gold prices are set to skyrocket based on a combination of supply and demand fundamentals and imbalances in the paper gold market. If gold goes up, the prices of gold mining stocks go up even faster.

In effect, buying gold mining stocks is a leveraged bet on the price of gold itself.

I expect the days ahead will present amazing opportunities in select gold miners.

 

 

Courtesy: Jim Rickards

As Inflation Expectations rise, Gold looks more Attractive to Investors

As Inflation Expectations rise, Gold looks more Attractive to Investors

As Inflation Expectations rise, Gold looks more Attractive to Investors

Surprise, surprise! Despite last week’s move by the U.S. Federal Reserve, America’s central bank, to tighten monetary policy a notch, gold prices surprised many observers of and participants in the gold scene, even those who had expected the quarter-point increase in short-term interest rates would be sufficient to knock the metal into a still-lower trading range under $1,200 an ounce.

After all, higher interest rates are widely perceived as a negative or bearish influence on the gold price. But, as noted below, it is really the notional real “inflation-adjusted” rate of interest, not the “nominal” rate as might be quoted by a bank or other lender.

Not only did the Fed dial up short-term rates by a quarter percentage point, it suggested further tightening later this year and next, depending on economic performance and inflationary tendencies later this year. Yet, contrary to popular expectations, gold prices still moved higher despite the Fed tightening.

It just might be that inflation expectations are suddenly on the rise, as financial markets get a grip on the Trump administration’s economic and trade policies.

Having fallen briefly a tad under $1,200 an ounce in the days leading up to the Fed’s policy announcement last Wednesday, the yellow metal ended last week at $1,230 an ounce – a gain of some 2.5 percent over the prior week and 15 percent from year-end 2016.

As trading resumed this week in world gold markets, it now looks like gold prices are set to move still higher. In the short run – measured in hours, days, and weeks – hedge funds, commodity funds, and other institutional speculators are both reacting to and contributing to the market’s upward momentum.

Traders don’t want to miss out on a good party, let alone a major move up into a higher bracket. As they wade deeper into the market, stepping over and breaking through important trading levels, the market’s upward momentum is attracting still more buying, advancing the rally still further. Before long, a growing number of traders will see more than just another rally but a firm resumption of the long-term bull market.

Indeed, the market is now at an important juncture with key fundamentals and technical trading setting up the possibility of a self-fulfilling prophecy where buying begets more buying – all of which is fueled by increasingly bullish fundamentals.

First and foremost, despite the rise in nominal interest rates, as “real” or “inflation-adjusted” interest rates continue moving lower, gold looks increasingly more attractive to investors, large and small, around the world.

In other words, as inflation expectations rise, the real rate of interest moves lower and lower – making gold look increasingly more attractive. And this, along with technical factors and market psychology, is pushing gold prices higher.

 

 

Submitted by: Jeffrey Nichols

Stronger Demand & Weaker US Dollar To Push Gold Prices Higher

Stronger Demand & Weaker US Dollar To Push Gold Prices Higher

Stronger Demand & Weaker US Dollar To Push Gold Prices Higher

In this publication by Georgette Boele: A modest rise in mine supply is expected in 2017 but demand is likely to rise more sharply, reducing the excess supply in 2017 and eliminating it in 2018. Overall, we expect a modest rise in gold prices in 2017 and 2018.

Improvement in the balance

Recently gold prices have bounced off the USD 1,200 per ounce level to just above USD 1,230 per ounce. We usually focus on investor behaviour to explain gold prices because of our conviction that this factor is driving gold prices.  In this report we decided to take a helicopter approach including the supply dynamics (mine supply, scrap supply, all-in-costs) and total demand as well (per category).

Mine supply to rise at a modest pace in 2017…

Mine supply has been on an upward trajectory since 2008. For 2016 and 2017 we expect mine supply to be around 3,200 metric tonnes per year (slightly above of the 2016 level) partly because of lower all-in-costs to mine gold. Mine supply depends on several dynamics. First, the availability of gold ore in the ground and the ore grade. Second, the margin that can be made on mining an ounce of gold. The mining companies’ margins are calculated by taking the difference between the total cash costs or all-including cash costs on the one hand and the gold prices on the other.

For 2016 total cash costs[1] will probably be around USD 725 per ounce[2] and all-in cash costs[3] around USD 1,160 per ounce[4]. The largest part of direct mining costs is wages (around 50%), energy (around 10%), parts & supply (12%) and utilities (10%) and interest (source CPM Group). Wages are often paid in local currency so if currencies of gold producing countries rise, direct mining costs and all-in cash costs will also rise. Energy is another important input cost for gold mining. For 2017 we expect currencies of gold producing countries to come under some pressure. In addition, we expect lower oil prices in the coming six months. These forces should result in some downward pressure on all-in cash costs for 2017 before rising again in 2018 as we expect currencies of gold producing countries and oil prices to rise again.

…but demand will rise more strongly…

In the coming quarters, it is likely that investors will hesitate to aggressively buy gold given the prospect of the Fed further normalising official rates. However, as long as US real yields don’t rise sharply as we expect, gold prices will probably be very resilient. Meanwhile, we expect global jewellery demand to pick up in line with the overall improvement in the global economy and in gold demand centres in particular. We expect demand from China and India to increase; the latter only at a modest pace. We also expect jewellery demand to pick up in the US in line with the increase net-worth and disposable income. So the pick-up in jewellery demand will protect the downside in gold prices in the coming quarters. Later in the year, we expect US real yields to peak and to start to edge lower. This will also weigh on the US dollar, which we expect to weaken later in the year. The peaking of US real yields (based on 5 and 10y US Treasury yields) and the downward pressure building on the US dollar are positives for gold prices.

…leading to a modest rise in gold prices

In the coming quarters we expect gold prices to stabilise in the USD 1,200 to 1,250 per ounce range. This is because we expect the improvement in jewellery demand and investor demand to balance out the rise in supply. Later in the year, we expect the balance to improve because of higher jewellery and investor demand resulting in gold prices rallying towards USD 1,300 per ounce. Next year, it is likely that demand will outpace supply mainly because of higher investor and jewellery demand. We expect gold prices to rally to USD 1,400 per ounce.  It would be the first time in five years that demand will be higher than supply. However, this “supply-shortage” will unlikely persist for a long time as scrap supply will probably increase as well (reaction to higher gold prices). If gold prices rise sharply, a part of the jewellery stock will come to the market as scrap supply. Jewellery stocks account for the largest share of above-ground stocks (see graphs below). Based on data from Bloomberg, Thomson Reuters GFMS and own calculations these above-ground stocks are between 187,000-189,000 tonnes of gold at the end of 2016 which is roughly 59 years of annual gold mine production.

[1] Cash costs plus off-site costs, head office costs  and sometimes interest
[2] Based on weighted average of roughly 47% of annual gold production (company reports Bloomberg, Thomson Reuters GFMS, own calculations)
[3] Cash costs plus exploration expense, head office costs and sustaining capital
[4] Based on weighted average of roughly 47% of annual gold production (Thomson Reuters GFMS mine economics, own calculations)

Read America’s Credit Card Statement (No Password Required)

Read America's Credit Card Statement (No Password Required)

Read America’s Credit Card Statement (No Password Required)

What will replace the current system after it self-destructs? That’s the question.

You know those disclosures on your credit card statements? That it will take 27 years to pay off your balance if you only make the minimum payment each month, and so on?

You might not be aware of it, but America’s credit card — our national debt–comes with its own disclosure statement:

Here’s a chart of America’s credit card – clearly, any credit line expanding this fast will bankrupt the borrower, regardless of their income.

I often refer to debt serfdom, the servitude debt enforces on borrowers. The mechanism of this servitude is interest, and today I turn to two knowledgeable correspondents for explanations of the consequences of interest.

Correspondent D.L.J. explains how debt/interest is the underlying engine of rising income/wealth disparity:

Here is a table of the growth rate of the GDP.

If we use $18 trillion as the approximate GDP and a growth rate of, say, 3.5%, the total of goods and services would increase one year to the next by about $600 billion.

Meanwhile, referencing the Grandfather national debt chart with the USDebtClock data, the annual interest bill is $3 trillion.

In other words, those receiving interest are getting 5 times more than the increase in gross economic activity.

Using your oft-referenced Pareto Principle, about 80% of the population are net payers of interest while the other 20% are net receivers of interest.

Also, keep in mind that one does not have to have an outstanding loan to be a net payer of interest. Whenever one buys a product that any part of its production was involving the cost of interest, the final product price included that interest cost. The purchase of that product had the interest cost paid by the purchaser.

Again using the Pareto concept, of the 20% who receive net interest, it can be further divided 80/20 to imply that 4% receive most (64%?) of the interest. This very fact can explain why/how the system (as it stands) produces a widening between the haves and the so-called ‘have nots’.

Longtime correspondent Harun I. explains that the serfdom imposed by debt and interest is not merely financial servitude–it is political serfdom as well:

As both of us have stated, you can create all of the money you want, however, production of real things cannot be accomplished with a keystroke.

Then there is the issue of liberty. Each Federal Reserve Note is a liability of the Fed and gives the bearer the right but not the obligation to purchase — whatever the Fed deems appropriate. How much one can purchase keeps changing base on a theory-driven experiment that has never worked. Since the Fed is nothing more than an agent of the Central State, the ability to control what the wages of its workers will purchase, is a dangerous power for any government.

If a Federal Reserve Note is a liability of the central bank, then what is the asset? The only possible answer is the nations productivity. So, in essence, an agent of the government, the central bank, most of which are privately owned (ownership is cloaked in secrecy) owns the entire productive output of free and democratic nation-states.

People who speak of liberty and democracy in such a system only delude themselves.

Then there is the solution, default. That only resolves the books, the liability of human needs remain. Bankruptcy does not resolve the residue of social misery and suffering left behind for the masses who became dependent on lofty promises (debt). These promises (debts) were based on theories that have reappeared throughout human history under different guises but have never worked.

More debt will not resolve debt. The individual’s liberty is nonexistent if he does not own his labor. A people should consider carefully the viability (arithmetical consequences) of borrowing, at interest, to consume their own production. The asset of our labor cannot simultaneously be a liability we owe to ourselves at interest.

Thank you, D.L.J. and Harun. What is the alternative to the present system of debt serfdom and rising inequality? There is none in our financialized, Neofeudal-Neocolonial State-Cartel Rentier Economy that creates and distributes credit-money at the top of the wealth-power pyramid.

As Harun noted in another email, Governments cannot reduce their debt or deficits and central banks cannot taper. Equally, they cannot perpetually borrow exponentially more. This one last bubble cannot end (but it must).

–  Charles Hugh Smith

Why is India’s Gold Demand, the Best Hope for Gold Prices

Why is India's Gold Demand, the Best Hope for Gold Prices

Why is India’s Gold Demand, the Best Hope for Gold Prices

The main boost to gold prices in 2017 may well come from India, formerly the world’s top consumer of the precious metal.

Indian gold demand was pummeled in 2016, falling 21 percent to 675.5 tonnes from 857.2 tonnes the prior year, the biggest yearly decline in volume terms recorded by the World Gold Council.

One of the main factors driving the slump was the government’s ongoing efforts to attack the informal economy, culminating in the removal of high denomination 500 and 1,000 rupee notes in November, a demonetisation that effectively removed some 86 percent of bank notes by value.

In an economy where most transactions are still cash, the impact was to crimp retail gold demand as liquidity dried up.

But there are positive signs that India is recovering, with gold imports jumping to 50 tonnes in February, up more than 82 percent from the same month in 2016, according to data provided by GFMS.

While some of this was likely due to what GFMS called the release of pent-up demand, it’s also possible that stronger economic conditions will lift Indian demand for jewellery, the main driver of that market.

While India is looking more positive for gold, it’s worth noting that China, the world’s largest buyer, is less constructive, with soft jewellery demand and the lack of a clear price trend deterring investment appetite.

It’s likely that the best-case scenario for China this year is one of steady demand, with the main X-factor being the value of the yuan, as a depreciating local currency may spur Chinese investor appetite for gold as a hedge.

Another potential positive for gold is the usual suspect of geopolitical risk, although if elections in France and Germany follow the recent Dutch vote, where anti-European populists did less well than expected, it may not add much to gold demand from a risk perspective.

Overall, it appears there is no clear price trend for gold, and looking at a cross-section of forecasts from analysts shows hat those who are bearish are only mildly so, while those bullish are also expecting modest gains at best.

While the ebb and flow of news events will drive daily price movements in gold, it would appear that a driver to move the gold price away from the $1,100 to $1,300 an ounce range is lacking. – Clyde Russell

Why is the Gold Market Sanguine about Rising US Interest Rates?

Why is the Gold Market Sanguine about Rising US Interest Rates?

Why is the Gold Market Sanguine about Rising US Interest Rates?

It’s not unusual for a financial market to be pulled in different directions simultaneously by competing influences, but what is notable for gold currently is the apparent inability of the contradictory factors to gain momentum.

History and logic suggest that when the United States starts a monetary tightening cycle, gold will underperform, since as a non-yielding asset it loses out to instruments that will enjoy higher yields from the rising rates.

The Federal Reserve lifted interest rates on March 15 for the second time in three months, with expectations that it will raise at least twice more this year and perhaps three times in 2018.

But spot gold prices didn’t drop when the Fed pulled the rates lever, gaining 1.7 percent the day of the increase, and closing at $1,233.15 an ounce on Monday, up almost 3 percent since the day before the Fed move and 9.9 percent since the recent low in mid-December.

So, why is the gold market being sanguine about rising U.S. interest rates?

Part of the answer may be that investors are taking a view that the rise in real yields may not be as dramatic given U.S. inflation is also on an upward trend.

There also may be a U.S. dollar effect, with analysts at JP Morgan noting that it’s likely that the greenback has already seen the bulk of its rally in this tightening cycle.

“In the current cycle, the broad U.S. dollar has so far appreciated by 22 percent, and we see the dollar rallying another 2 percent higher into midyear before retracing to current levels by the first quarter of 2018,” JP Morgan said in a note published March 15.

“In short, the lion’s share of this cycle’s U.S. dollar appreciation could potentially be behind us,” the note said.

Rising U.S. inflation and a peak in U.S. dollar strength may mean that the traditional impact of a U.S. monetary tightening cycle may be less than usual.

What the gold market is currently signalling is that while U.S. interest rate rises are still a bit of a headwind, they may not be enough to offset some compelling tailwinds. – Clyde Russell

Physical Gold Demand is Collapsing – Nothing Could be Further Away From The Truth

Physical Gold Demand is Collapsing - Nothing Could be Further Away From The Truth

Physical Gold Demand is Collapsing – Can You Believe It?

Seriously? “Simon Black” (it’s a nom de plume) wrote an article titled “Demand For Physical Is Collapsing.”  He focused on retail bullion demand numbers. The headline and the content is largely fake news as it focuses on the demand for minted coins vs the paper gold market. We’re not really sure about the intent of article, but the content was devoid of any relevance to the actual global demand for physical gold.

While the retail minted coin and small-size bar demand is down from last year’s levels, there’s two factors to explain this. First is price. The price of gold and silver was lower in early 2016 than it is now. The price of gold in February 2017 averaged $1230-$1240 while the price of gold a year ago February averaged $1175. Retail buyers of physical gold/silver coins are highly sensitive to price and tend to chase the price higher, up to a point. On this basis, it’s not surprising that more minted coins were sold a year ago compared to this year. This “price effect” on the demand for retail gold and silver coins likely explains about 25% of the demand comparison between 2016 and now.

The second factor is the economy. Remember, the end user of minted bullion products is largely the retail buyer.  In the first two months of 2017, real wages have declined. Even more negative for retail sales of any sort is the fact that real disposable income has been declining on a year over basis since December 2015:

While we at the Shadow of Truth do not consider buying and owning bullion to be “discretionary,” retail sales, including sales of bullion coins, is highly dependent on the relative level of real disposable income. Thus once again it should not surprise, based on just looking at retail demand for physical bullion, that retail bullion sales are falling.

On the other hand, the Black article purports the idea that retail bullion sales represents global demand for physical gold and silver. Nothing could be further from the truth. Retail demand at the margin has no affect on price other than maybe the price premiums in the coin market based on mint supply and retail demand.

The majority of physical gold bullion demand comes from the jewelry industry, eastern hemisphere Central Banks and sophisticated wealthy and institutional investors. India and China alone import more gold than is produced from mines globally. This is why Black’s “paper gold” price is rising. It’s why the BIS and western Central Banks have failed to eliminate the significance of gold in the global monetary system.

Gold imports into India jumped 175% in February from February 2016 to 96.4 tonnes. In fact, official gold imports into India have been rising since December.  And that does not include dore bars or smuggled gold.  179 tonnes of gold was withdrawn from the Shanghai Gold Exchange in February.  This is 60% higher than February 2016.  The Russian Central Bank gold reserves have been rising almost monthly since mid-2007.

To claim that the global demand for physical gold is collapsing is seeded in either ignorance or  mal-intent.  But either way, the assertion is outright idiotic when the facts are examined. – Rory Hall and Dave Kranzler

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