Commodity Trade Mantra

Why Currencies Unbacked by Gold – the Sound Money are Doomed to Collapse

Why Currencies Unbacked by Gold - the Sound Money are Doomed to Collapse

Why Currencies Unbacked by Gold – the Sound Money are Doomed to Collapse

This article explains the money side of prices, and why government currencies, unbacked by gold, are doomed to collapse. And why gold, which is the sound money chosen by markets throughout history, will retain or increase its purchasing power measured in the goods it buys over the coming years. – Alasdair Macleod

Very few people have a full understanding of the relationship between money and goods. This is the relationship that sets prices. Yet, without that understanding, central banks will almost certainly fail in their policy objectives (as they always have done so far), and individuals unaware of gold’s monetary properties will be unable to protect their wealth in monetary and financial conditions that are becoming increasingly unstable.

Money is the link between our production and consumption. As individuals, we maximise the value of our production through specialisation. By making our personal production available to others, we then acquire the goods and services that they can produce better than we can ourselves, and at a far lower cost. This is why classical economists agreed that through the medium of money, we exchange goods for other goods. Money simplifies our exchange of goods immeasurably, by allowing us all to value our production in a common unit, accepted by all buyers and sellers in our own communities and further afield as well. But, and this is important, we only hold as much idle money as we need.

The defining quality of money is to be widely accepted and stable, so that changes in price are reflected solely in the demand for and supply of individual goods. These prices are set by the subjective values placed on them by buyers, because the decision to buy or not to buy and at what price, is always theirs. The producer, who is in business to sell, does not have this option, so prices are not set by the costs of production, as commonly asserted. It is a frequent mistake by politicians of all persuasions and government bureaucrats alike to assume that the cost of production determines prices. They assume if a good cannot be made profitably, the businessman will withhold production. No, if he withholds production, he will go out of business.

It is these incorrect assumptions about costs that are fundamental to the myth that the state as economic agent is superior to free markets. The truth is different. Unless a consumer is forced against his will, he will only buy the products he wants at prices he is prepared to pay. Producers must dance to the consumer’s tune, for in a capitalist society he is king. For this reason, producers strive to cut their costs and improve their products to compete. Assuming sound money, that is money which fulfils the conditions of monetary stability, prices will tend to decline over time, driven by improved production methods, technological progress, and competition for the buyer’s business.

This is confirmed in the real world of commerce, if not in the ethereal sphere of modern macroeconomics. Where it gets more complicated is when one considers the fact that the purchasing power of money, its objective exchange value, is never constant, as we all usually assume. Even sound money varies in its purchasing power, its objective exchange value being never fixed. The reason is that as individuals, our need for monetary liquidity is bound to vary, if not day to day, between pay-checks and between seasons. Each one of us contributes to changes in the overall price relationship between goods and money.

In practice, we tend not to maintain unnecessary cash balances, reserving enough liquidity for our foreseeable needs. This can be in the form of cash, cash balances at the bank, or credit available to draw down. Otherwise, money is either spent or saved to be reinvested productively.

There is an important difference between the money we use today and the sound money of yesteryear. All money not freely convertible at a fixed rate into gold is credit money. Even cash notes and coins are government credit, while customer deposits in the banks are unmistakably credit in both origin and fact. The quantities of government credit-money and bank-credit money can and do vary considerably. Gold as sound money varies less so, due to its inflexible nature.

Gold is continually mined, and the quantity allocated to money also varies as the proportion of the above-ground stocks assigned to other uses fluctuates, such as for jewellery and ornamentation. The dividing line between gold’s use as money and jewellery is itself slender. The human population has increased, particularly over the last two centuries, so there are more people on earth requiring monetary liquidity, and as their living standards improve, their aggregate demand for monetary liquidity is bound to increase as well.

Together, these factors lead to a continuing increase in the purchasing power of gold over time, when it is used as money. Even though today it does not circulate as money, this is still true. It flowed across national boundaries with implications for its local purchasing power, but worldwide, it’s availability was always restricted, though not inflexibly so.

Gold matters, because, excepting silver, it is the only form of money that has survived since individuals discovered the convenience of money over barter. It is also beyond the control of governments, as they cannot issue it without acquiring it first. It is subject to the constraints of its quantity, so that as a medium of credit it cannot be debauched, only defaulted upon. Its relative inflexibility and its soundness are the primary reasons governments do not like monetary gold, and force their preferred alternatives on their citizenry. The vested interest of governments is therefore to discourage, or even ban the use of gold as competing money.

Despite this, individuals numbering over half the world’s population, financially ignorant in the eyes of the West, still understand through experience and instinct that gold retains its role as superior money, compared with government paper and electronic digits in the banks. The educated people, who are the readers searching for an understanding of prices by reading Keynesian and monetarist-inspired journals and papers, are the ones who have lost their monetary compass entirely. This is all of us in the welfare states, educated but ignorant about the theory of money, literate but woefully uninformed about the true relationship between money and goods, believing money is a matter for the state. It is us who do not understand the dangers of fiat money issued by the banking system in increasing quantities.

Understanding the objective exchange value of money

The purchasing power of money in a general sense is regarded as its objective exchange value. The term “exchange value” needs no further explanation. “Objective” means in this context assumed, unquestioned, or taken for granted. Money is the anchor in a transaction, and contrasts with the subjective value placed on goods. As users of money, it is convenient for us to assume there are no price changes from the money side, so that all subjectivity in pricing is reflected in the goods being exchanged for it. When we render financial accounts, this assumption carries through, as it does in law as well. However, we are generally aware that over time, if not during our daily lives, the value of money is far from being an objective constant. This raises the question as to on what grounds we base our value of money.

Logically, we can only know the value of money by referring to our most recent experience of its value, and then incrementally back in time, that we might judge its soundness. This is the reason a resident in Switzerland is likely to have a different appreciation of his francs, compared with a resident in Argentina of his pesos.

Ultimately, this involves an assessment of a money’s value before it became money, which is why people the world over know gold has a value rooted in other uses, in turn based on its physical properties. Paper and digital money have no alternative use-value. To gain credibility, the longer-lived government currencies of today based their integrity on gold or silver, being at one time freely exchangeable into one or other of these monetary metals. This is no longer the case, which from a theoretical standpoint, places government currencies at a continual risk of losing their credibility as money altogether.

Today’s macroeconomic establishment persuades us that this concern must be dismissed, and any economist who questions the validity of fiat currencies as money is condemned as a maverick or simply nuts. This is not an acceptable refutation of the regression theorem described in the paragraphs above, and it is the duty of an economist seeking the truth not to duck this important issue.

No one has come up with a credible alternative explanation to the valuing of money on this regressive basis, partly because not many contemporary economists fully understand the subjective/objective relationship in pricing goods in monetary units, and partly because the implications undermine the whole thrust of monetary policy. This is nakedly evident in Keynes’s General Theory of Employment, Interest and Money, which still serves as today’s vade mecum for much of the economics profession.

The implications of this lack of sound price theory are indeed important. Without understanding the relationship between money and goods, errors of monetary policy are inevitable. And as those errors become manifest, the personal freedoms we enjoy between us, by exchanging goods at prices mutually agreed, become restricted through increasingly distortive and counterproductive government interventions. Increasing economic suppression is the result, as was demonstrated as the consequences of the soviet repression were finally revealed when the USSR’s command economy collapsed.

If total money and credit in an economy are constant over time, and assuming for a moment that the price-benefits of competition, improved manufacturing techniques and technology are put to one side, the general price level can only remain stable if the general preference for holding money relative to goods also remains constant. Otherwise, a fall in overall preference for holding money will result in a fall in money’s purchasing power, evidenced by a widespread increase in prices. Equally, an overall rise in preference for holding money will result in an increase in money’s purchasing power, evidenced by falling prices.

Money quantities have soared

Since the last financial crisis, there has been a massive expansion in the quantities of most currencies. The following chart shows the expansion of fiat dollars since 2009, which has been far greater than the rate of increase prior to the financial crisis, shown by the dotted line.

Screen Shot 2017 06 29 at 1.59.53 PM

The fiat money quantity records the total amount of money both in circulation and in the banking system in the form of cash and ready deposits. Some of the increase since 2008 has been in bank reserves held at the Fed ($2,000bn), but this is only a fraction of the $10,000bn increase.

Without resorting to the evidence of questionable government statistics, it is easy to see that this tripling in money quantity in only nine years has not yet led to the expected increase in the general price level. Part of the explanation is that monetary inflation has so far predominantly exaggerated asset prices. But any resident living in financial centres will attest that prices are indeed rising more rapidly than government statisticians admit. Far from being a mystery as to why prices have not yet reflected the rapid expansion of the quantity of money, price rises are indeed on their way, with much of the increases yet to come.

Since the financial crisis, monetary expansion has become the dominant factor in raising the general level of monetary preference. Bank deposits have become swollen as bank credit has been expanded, because it takes time for individuals to readjust their cash balances to their economic needs. Remember, the purpose of money is to act as a bridge between our production and consumption, not as an asset to accumulate.

The readjustment of money preferences back to normality is subject to a combination of factors, including the inflation of asset prices, before it affects prices of goods. The suppression of interest rates continues to generate new deposits by encouraging the expansion of bank credit as well, as the chart above shows. Furthermore, the ownership of all that cash tends to start in a few hands, dispersing into wider ownership over time.

However, the move towards a preference for goods, as people try to reduce their burgeoning cash balances, is never matched by an increase in their availability, leading to imports, trade deficits, currency weakness, and rising prices by that route. This is due to the inflexible rule that we produce to consume, so we cannot consume what we don’t produce, except by importing it. This is the reason trade deficits are a consequence of the expansion of bank credit in the hands of consumers. Indeed, without a ready supply of goods from abroad, domestic prices would rise more rapidly as the balance of monetary preferences readjusts towards normality.

There are, therefore, two routes through which prices can adjust to the change in monetary preferences for any given currency: the foreign exchanges, reflecting trade deficits that increase to supply demand not satisfied by domestic production, and supply from domestically-produced goods and services against a background of supply constraints. When goods are imported, the price rises are often delayed by this roundabout route, and the fact that domestic supply bottlenecks are thereby temporarily alleviated. Otherwise the consequences are the same. Prices rise to accommodate the swing from money preference towards a preference for goods, instead of production being sustainably stimulated.

We must now address the problem on a global basis, because the supply of goods to an individual nation-state expanding the quantity of money relies to a large extent on imports. This cannot be the case when central banks are following the same expansionary policies on a coordinated basis, ignoring, for the purpose of our argument, differentials in savings rates.

Imagine a world where money preferences in the hands of consumers everywhere are first pumped up by all central banks and by commercial banks expanding credit, only to subsequently recede towards normality. The shortage of goods as money-preferences recede cannot be satisfied from another planet, so in aggregate, prices everywhere must rise rapidly to absorb the adjustment in relative preferences. We do not need to imagine it, because these are precisely the conditions we now face, thanks to the coordination of monetary policies on a global basis.

The rate at which the general price level rises is broadly set by the rate at which the preference for money deteriorates in favour of a preference for goods. The result is the total money stock relative to the total value of all goods reverts to where it was before the quantity of money expanded, but each monetary unit buys considerably less. If we found it convenient before the monetary expansion to hold a balance of $5,000 in our bank accounts for our liquidity needs, we will now hold $15,000, which will buy the same original quantities of goods at roughly three times the price. Of course, if the ordinary person sees the purchasing power of money deteriorate to a significant degree, he will attempt to reduce his cash balances even more, ultimately collapsing money’s purchasing power entirely. This in common parlance is hyperinflation, and a crack-up boom as people scramble for goods in a rush to dispose of money altogether.

It may be easier to visualise this effect if the validity of objective exchange values for currencies is dispensed with entirely. The evidence then becomes clear. Today, it is missed by nearly all commentary in the financial press, which focuses on the rapid expansion of debt, ignoring the simultaneous increase in the quantity of money. Emphasising debt to the exclusion of its counterpart, deposits, is wholly consistent with a lack of appreciation of the problems concealed by the default assumption about money’s objective exchange value.

Inflation and deflation

The expressions inflation and deflation are too crude for a proper understanding of money and prices, particularly in the context in which they are commonly used. Inflation of prices is associated with improving economic conditions, and deflation with falling prices, taken to be evidence of deteriorating economic conditions. Both assumptions are incorrect, which should become evident from an understanding of the price effects of changes in preferences for holding money relative to goods. Changes in relative preferences are independent from economic performance, which continues regardless, except to the extent it is disrupted by the expansion and contraction of unsound money as described above.

The assumptions of central banks are otherwise, as we have seen. Monetary developments in the US are broadly reflected by similar increases in monetary preferences in other currencies, swollen by credit expansion. Central banks are following common monetary policies under common misconceptions, for the truth is that like Lord Keynes, today’s central bankers have a limited understanding of the price relationship between money and goods. Hence, a common mandate is to target price inflation at a modest rate, typically 2%. Central bankers believe, without foundation, that rising prices stimulate business, when all they stimulate are the statistics.

Bound up in the bankers’ psyche is the objective exchange value of money, so that despite all evidence to the contrary, central bankers believe they can expand the quantity of money without limitation, until official prices edge up towards the inflation target. They fail to understand the consequences of their actions. Like a reservoir full to overflowing, the non-financial community already has a far higher level of financial liquidity than is normal, and the consequences of it being normalised are prices rising beyond anyone’s control.

For the same reasons the establishment has an irrational fear of falling prices, the conditions that are typical of sound money.

The deflationists see a fragile banking system, unable to absorb losses from an economic downturn about which they are continually concerned. They argue that a financial crisis will wipe out bank collateral as asset prices fall, leading to a scramble for cash to cover debt obligations. They say this will lead to a fall in prices, repeating the experience of the 1930s depression.

Central bankers now appear to be more concerned about this outcome. The Fed wants to prepare its balance sheet for the next crisis, the Bank for International Settlements warns us we could be on the brink of a new financial catastrophe, and the Bank of England is ordering banks to boost capital reserves to protect themselves from rising credit risks.

Of course, these concerns are being expressed as an alternative to raising interest rates to slow credit growth. The Bank of England, for example, seeks to retain interest rates at these levels, or at least only slightly higher, while instructing the banks who to lend to and who not to lend to. As usual, the Bank misses the point entirely: price inflation will be driven by the currently high levels of money preference being unwound, not bank policy.

Monetary policy is an inglorious mess. The central banks are positioning themselves to handle the next crisis before the monetary consequences of the last have been unwound.

The outcome is inevitably cyclical. Prices will start rising at a greater rate, and interest rates must rise to keep pace. Unaffordable nominal rates in the near to medium term are a racing certainty. We can assume that a new financial and economic crisis will follow, in which case over-indebted businesses will go bust, asset values crash, and banks will move from insolvency towards bankruptcy, just as the deflationists fear. The response from central banks will unquestionably be to flood the financial system with yet more money to keep the banks alive, and insolvent businesses afloat. Quantitative easing to support asset prices and to fund government spending will have to be reintroduced at a greater level than seen heretofore.

Central banks might succeed in postponing a widespread crisis for a year or two, but the cost will be a new wave of money-creation into a private sector already holding too much money relative to goods. The ability to adsorb this extra money on top of existing liquidity levels is severely limited, and likely to trigger a substantial rise in prices for goods and services with very little time lag, once the initial uncertainty is over.

By way of contrast, sound money, which is physical gold, is not owned in the welfare states in sufficient quantities to provide the day-to-day liquidity required to exchange production under our division of labour. This appears to throw up an arbitrage opportunity between unsound and sound money rarely seen, and certainly never seen before on a global scale, at least not since Roman times.

 

Fundamentals in place for Gold with Fed Tightening amid Unjustified Stock Market Valuations

Fundamentals in place for Gold with Fed Tightening amid Unjustified Stock Market Valuations

Weak US dollar, economic and political stability support gold price recovery

The gold price changed very little in May, recovering towards the end of the month after early weakness brought on by the French presidential election and the FOMC (Federal Open Market Committee) meeting. From the first round of the French elections on 23 April to the final round on 7 May, markets became increasingly convinced that the pro-EU candidate Emmanuel Macron would win the election. This pressured gold as the risk of a Marine Le Pen-led Eurozone break-up lessened.

On 3 May, comments by the Federal Reserve (Fed) following its May FOMC meeting convinced the market that a rate increase following the 13 June meeting would be likely. Gold hit its low for the month on 9 May at $1,214 per ounce, but was able to regain lost ground to end the month up $0.65 (0.05%) at $1,268.94 per ounce. Weakness in the US dollar also added support for gold prices during the month. The US Dollar Index (DXY) fell 2.1% in May and appears to have entered a bearish downtrend since reaching multi-year highs in early January. Economies in Europe and Japan have stabilized recently and the Trump administration has indicated a desire for a weaker US dollar. Gold should benefit if the US dollar trend seen so far in 2017 continues.

Asian physical gold demand appears strong in 2017

Physical gold demand from India and China has also been supportive of gold prices. We believe healthy demand in March and April along with anecdotal comments from analysts suggest that 2017 is shaping up to be a much better year for gold in Asia. Last year’s liquidity squeeze caused by the currency transformation in India seems to have dissipated and people are again making gold purchases. In China, bond market turbulence associated with government efforts to rein in debt and speculation have spurred investment demand for gold.

Juniors and mid-tiers underperform but not based on fundamentals

Chart patterns for the gold equity indices mimicked gold bullion in May. The NYSE Arca Gold Miners Index gained 1.07%, while the MVIS Global Junior Gold Miners Index fell 3.66%. The juniors and some mid-tier gold miners have underperformed the larger producers over the past two months with no significant change in gold bullion prices. We find no fundamental reason for the underperformance, and therefore expect some mean reversion to favour the juniors in the second half of the year.

Is US equity market bubble set to burst?

Following the November presidential election the “reflation” or “Trump” trade took the markets by storm. Presumably, the belief was that pro-growth policies would ignite animal spirits in the markets that would stimulate business and prosperity. As President Trump has struggled to implement policies and his administration has been dogged by controversy, the Trump trade has unwound. Metals such as copper and iron-ore have given up much, if not all, of their post-election price gains. Gold has rebounded from its post-election losses. Interest rates have subsided and the DXY has fallen to pre-election levels. The one asset class that appears to still believe in the reflation trade is US equities. As we write, the S&P 500 Index has reached new, all-time highs. In the past year, the likes of Apple and Tesla have posted gains of more than 50%. A chart of NYSE margin debt is worth a thousand words.

NYSE margin debt continues to grow, reaches record high in April

VanEck Gold ETFs

Notice the peaks at the tops of the tech (2000) and housing bubbles (2007) compared with current levels. Each of these bubbles was accompanied by strong 3% to 4% economic growth and each was preceded by a Fed tightening cycle. While the current stock market does not have the same feeling of mania seen before the tech bust, in the context of an economy that struggles to achieve 2% growth, we struggle to justify current stock market valuations – and the Fed is tightening. At the other end of the spectrum are gold stocks, fresh off of the worst bear market in their history from 2011 to 2015. A chart in our April update showed gold stock valuations below long term averages. Secular market tops and bottoms are notoriously difficult to predict, however, we believe the signs are there to make such a prediction for S&P stocks and gold stocks respectively.

Industry’s current growth strategy reflected in corporate activity level

Acquisition activity has been subdued in the sector, while strategic positioning has become a frequent occurrence. In some cases, two producers have taken a strategic stake in the same junior developer. Not all gold properties become profitable mines and not all producers will have the same success that Eldorado has had with Integra. Gold production is no longer growing globally and many companies will face declining production in the years to come. To offset this, once the current phase of strategic positioning has run its course, we believe there will be another robust M&A cycle, possibly beginning in 2018. – VanEck

 

Copper – True Economy Indicator & a Better Inflation Hedge than Gold

Copper - True Economy Indicator & a Better Inflation Hedge than Gold

Copper – True Economy Indicator & a Better Inflation Hedge than Gold

Since 1992, returns in copper were three times more than bullion. Fed eyes more rate increases in bet consumer prices will rally.

For centuries, gold has been a go-to asset among investors worried about all sorts of financial risks. In the past decade, exchange-traded funds backed by the metal drew more money than any other commodity. Even the world’s biggest central banks hoard bullion as a reserve asset.

But when it comes to inflation, which can erode the value of portfolios that don’t keep pace with rising consumer prices, anyone who bought gold as a hedge over the past 25 years missed out on a much better deal — copper.  While data show that broad commodity indexes provided the best bang for the buck during periods of rising costs in the U.S., the red metal stands out.

For every 1 percent annual increase in the consumer price index since 1992, copper jumped almost 18 percent, more than three times the 5.2 percent gain logged by gold, according to a correlation analysis of total return commodity indexes compiled by Bloomberg. Only a broader index of energy commodities, which includes oil and natural gas, performed better than copper.

Copper is “more sensitive to inflation and the dollar because of its uses and its growth with the economy,” Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices, said in an interview June 15. “Investors are more comfortable with gold. When you run the numbers, gold has relatively low sensitivity to inflation.”

Measuring that sensitivity is something called “inflation beta.” The correlation of any one commodity to rising consumer prices can be volatile. For example, copper fell in 2011 even as inflation accelerated. But over time, there are patterns to the relationship that make holding raw materials a good bet when inflation is accelerating, said Mike McGlone, analyst at Bloomberg Intelligence in New York.

“The traditional reason to hold commodities is for inflation,” because as the economy heats up, consumption increases for everything from cars and homes to appliances and travel, McGlone said in a June 19 phone interview.

Analysts have dubbed copper “the metal with a Ph.D. in economics” because it’s been a reliable bellwether. When construction and manufacturing are growing, so do sales of wire and pipe. While inflation has been relatively tame since the financial crisis almost a decade ago, there are signs it may start to accelerate again.

Federal Reserve Chair Janet Yellen this month pledged more interest rate increases in 2017 to keep the economy from overheating. On Tuesday in London, she reaffirmed her commitment to “price stability” and a 2 percent inflation target.

The Fed and other central banks have held interest rates near zero for a record period to stimulate growth, which has taken years to gain traction. Even with signs of a pickup in the U.S. economy, inflation remains below historical rates.

From 1970 to 1992, the monthly year-over-year gain in the consumer price index averaged 6.1 percent, reaching a high of 14.8 percent in March 1980, government data show. Since the financial crisis in 2008, prices rose on average just 1.4 percent, including some periods of deflation in 2009 and 2015.

“Inflation is a little bit lower than what we would like, but we think if the labor market continues to tighten, wages will gradually pick up,” Fed Bank of New York President William Dudley said June 19. “And with that, we’ll see inflation get back to 2 percent.”

Last year, copper prices jumped 18 percent, while spot gold rose just 8 percent. So far in 2017, bullion is the better gainer, up 9.2 percent, while copper on the London Metal Exchange rose 5.7 percent. But there are signs of improvement ahead for the industrial metal.

Prices had plunged early in 2016 to a six-year low as China’s economy slowed and production rose. But mining companies have cut output and demand for copper is growing again. Barclays Plc estimated in a June 26 report that global copper demand will exceed mine output this year by 56,000 metric tons, and widen to 72,000 tons in 2018. In 2016, there was a surplus of 102,000 tons, the bank estimates.

Gold’s Appeal

Still, gold has been the preferred metal to use for hedging. While investors can buy physical metal or futures and options, among the most popular method is holding exchange-traded funds that trade like stocks. The SPDR Gold Trust Holdings, the largest ETF backed by bullion, has about $34.5 billion invested in the precious metal. The ETFS Copper fund has $270 million, and other funds linked to the metal tend to be small and illiquid.

Not everyone is convinced inflation is going to take off, especially with low prices for energy, perhaps the biggest commodity influence on consumer costs. Oil futures are mired in a bear market after plunging from more than $100 a barrel in 2014 to less than $45 this week. The yield curve for Treasuries also has flattened, suggesting inflation poses little risk to interest-bearing securities in the near future.

“Up to this point, I think that we can still expect that inflation will go up to 2 percent, although I will say that the most recent inflation data make me a little nervous about that, so I think it’s much more challenging from here on out,” Charles Evans, the president off the Federal Reserve Bank of Chicago, said June 20. – Susanne Barton, Bloomberg

 

Paper Gold Bomb Detonated when World’s largest Buyers were Closed – Why?

Paper Gold Bomb Detonated when World's largest Buyers were Closed - Why?

Paper Gold Bomb Detonated when World’s largest Buyers were Closed – Why?

This isn’t some trader’s “fat finger” accidentally overloading the sell button and pressing “sell.” This is unadulterated BIS/ECB/BoE/Fed sponsored market intervention:

At 4:01 EST, a paper gold nuclear bomb was detonated in the Comex Globex computer system. The graph above is just the August “front month” paper gold contract on the Comex. In that contract 1.49 million ozs of paper gold were dumped into the Comex electronic trading system. Zerohedge is attributing 1.88 million ozs. That would include the selling in all of the paper gold contract months.

But that’s not the entire amount of the paper hit. There would have been a large amount of LBMA gold forward paper gold contracts dumped in correlation with the Comex paper avalanche. ZH attributes $2.2 billion in paper gold dumped. But the real number including LBMA forwards dumped was much larger.

“The mysterious plunge has the market spooked,” says some idiot named Bob Habercorn from RJO. This was not “mysterious.” It was intentional – a shock and awe market intervention that was intended to “spook” the market. That quote is from a Bloomberg report full of fake news ( caution, this article contains fake news:LINK).

The article claims that China bought less from Hong Kong in May. In fact, the amount of gold exported from Switzerland to India and Hong Kong was up 39% from April, according to Platts. Furthermore, we have no clue how much gold moves into China through Beijing and Shanghai, numbers which are intentionally hidden from the world.

Here’s the reason that today was selected by the BIS et al to attack gold in the paper market in an effort to scare the crap out of the market:

The day was well chosen as the Muslim world including Turkey was closed for the end of Ramadan as was India which has the amiable habit of observing the holidays of religious minorities .

Two of the largest buyers of physical gold in the world right now, India + Turkey, were closed for the observance of a religious holiday. And Shanghai closed for the day 31 minutes before the paper dump.

4:00 a.m. EST is one of the slowest, lowest volume trading periods during any 24 hour period. Why would a seller of a large number of contracts sell at that time of day, when the largest buyers of what is being sold are not in the market at the time of the sale?

If it were merely a “fat finger” – the fake news narrative – then the mistake would have been immediately corrected and the price would have quickly recovered. Anyone who buys the fat finger story is either tragically ignorant or hopelessly naive.

When India returns tonight to the market, I would expect gold to get a strong bid. Indians have a habit of buying a lot more physically deliverable gold than they might have otherwise when the western Central Banks put gold “on sale” by lowering the price in the paper market. I suspect Turkey and China will increase their appetite as well.

The mining stocks per the HUI barely acknowledge the artificial price take-down. The HUI is down less that 1%. In the past, on a day when gold was taken down to this degree, the HUI would have dropped at least 4-5%. It’s almost as if mining stock traders are laughing at the latest Central Bank antics. I know I am… – Dave Kranzler

Gold and Silver OR Stocks – Choose Between High Risk or High Reward

Gold and Silver OR Stocks - Choose Between High Risk or High Reward

Gold and Silver OR Stocks – Choose Between High Risk or High Reward

As the Mainstream financial media continues to promote the biggest market bubble in history, only a small fraction of investors are prepared for the disaster when it finally POPS.  The markets are so insane today, it seems as if fundamentals don’t matter any more.  However, they actually do if we look at the numbers closely.

In order to invest in the correct assets going forward, one must choose between those with a low RISK and high REWARD versus assets with a high RISK and low REWARD.  While this may seem like common sense, I can assure you, the market makes no sense whatsoever today.  And most investors are doing quite the opposite.  Go figure.

If we look at the following charts in this article, we can clearly see which of the following assets, the DOW JONES, GOLD or SILVER, enjoy the lowest risk and highest reward.

This chart shows the price action of the Dow Jones Index, gold and silver.  Since its low in 2009, the Dow Jones Index is up 229%, from 6,500 to 21,400 currently.  Even though the Dow Jones Index experienced a brief 17% correction in 2011, it hasn’t endured a healthy 30-50% market correction in over eight years.  It is most certainly overdue.

However, after the precious metals prices peaked in 2011 and then declined, silver is only up 22% from its low in 2015 and gold is up 20%.  Thus, the Dow Jones Index has surged higher for eight straight years, while gold and silver are still down considerably from their peak prices in 2011.

If we look at each asset class separately, we can see how over-valued the Dow Jones Index is compared to gold and silver.  The next chart shows that the gold price fell 46% from its peak in 2011 to its low in 2015.  Now, even considering the 20% current rise in the gold price from its low in 2015, it is still 35% below its 2011 peak:

Looking at the silver chart, its price movement is much more volatile than gold.  The silver price fell a whopping 73% from its peak in 2011 to its low at the end of 2015.  Currently, the silver price is still 66% below its 2011 high:

As I already mentioned, the silver price is only 22% up from its low in 2015.  Now, let’s look at the Dow Jones Index:

While the precious metals have experienced a healthy correction since 2011, the Dow Jones Index continues higher towards the heavens.  It is up a stunning 229% from its low in 2009.  If the Dow Jones Index fell 5,000 points, that would only be a 23% correction.  However, if it fell 11,000 points, down to 10,400, it would have fallen 51%, less than its 54% market correction decline from 2007 to 2009.

To get an idea of how overvalued the Dow Jones Index is, I am going to use the S&P 500 Index as an example.  Why?  Because the S&P 500 Index is up just about the same percentage as the Dow Jones Index since the low in 2009:

You will notice that the Dow Jones and S&P 500 charts are nearly identical.  So, what happens to one, will happen to the other.  To determine the fair value of the S&P 500, we look at the Schiller PE Ratio.  Basically, the Schiller PE Ratio (PE = Price to earnings ratio) is defined as the price (Index price) divided by the average ten years of earnings…. adjusted for inflation.

This historical Schiller PE Ratio mean is 16.8.  That means S&P 500 price is 16.8 times the average ten years worth of earnings.  So, if the Schiller PE Ratio has averaged around 16.8 in its history, what is the ratio today?

According to Gurufocus.com, the present Schiller PE Ratio is 30.2, or nearly 80% higher than the mean.  Not only is the current Schiller PE Ratio in bubble territory, it is even higher than the 27.4 ratio the last time it peaked in 2007.  Well, we all know what happened in 2008 and 2009.  During the first quarter of 2009, the Schiller PE Ratio fell to a low of 13.1.

Furthermore, before the stock market crash of 1929 and the ensuing Great Depression, the Schiller PE Ratio reached a high of 32.4 in September 1929….. only a few points higher than it is today.

So, what does that mean?  It means that the Dow Jones and S&P 500 Indexes are now in record bubble territory and their future reward is LOW while their future risk is quite HIGH.  However, if we look at gold and silver, we see quite the opposite.

Not only did the gold and silver prices experience a huge correction from 2011 to 2015, the current price of silver is very close to the cost of production.  Here is a chart of one of the largest primary silver mining companies in the world…. Pan American Silver:

This chart shows Pan American Silver’s estimated profit-loss per ounce (GREEN LINE), versus the average spot price (WHITE LINE).  As we can see in 2011, Pan American Silver made a $9.02 profit for each ounce of silver it produced when the average spot price reached $35.03.  However, as the price declined over the next five years, Pan American Silver lost money in 2013, 2014 and 2015. 

Even though Pan American Silver made an estimated $1.54 for each ounce of silver it produced 2016 YTD (last time I did the figures), it fell to about $1.00 and ounce during the first quarter of 2017.  With the average spot price of silver at $17.42 Q1 2017, my rough estimate is that Pan American Silver needs abut $16.40 +/- to breakeven.  With the current price of silver at $16.50, Pan American Silver isn’t making much money.

Moreover, my estimation for the average break-even for the primary silver mining industry is between $15-$17 an ounce.  I have not done any recent calculations for the estimated breakeven for gold, but it looks to be between $1,100-$1,500.  While the gold price has a bit more cushion than silver, we can plainly see that both gold and silver are much closer to a bottom than the Dow Jones Index.

According to this analysis, the HIGH RISK, LOW REWARD easily goes to the Dow Jones and S&P 500 Index, while the LOW RISK and HIGH REWARD belong to gold and silver. 

We must remember, when the Dow Jones Index suffered a mere 2,000 point correction at the beginning of 2016, the gold and silver price surged:

If the gold and silver price jumped 15% when the Dow Jones only fell 2,000 points in 2016… how high will their prices move when the Dow Index falls 5,000-10,000 points and suffers a 25-50% correction?  Because the entire market is held up by so much leverage and debt, I do believe the precious metals will enter into a new market of much higher prices.

Lastly, even though the Cryptocurrencies are getting hammered today, this is just an overdue correction.  Bitcoin and the other cryptocurrencies probably have a great deal more to fall before bottoming.  However, I do see some of the top cryptocurrencies to hit new highs in the future.  I mentioned this market because the same thing will happen to gold and silver.

All of a sudden one day and out of the blue, the price of gold and silver are going to surge higher.  Then the next day… they will have jumped even higher still.  Before investors or the public realizes it, the gold and silver prices will seem like they are too expensive to buy at this point….the same way when the cryptocurrencies shut up 200-1,500% in just brief period of time.

This is why an investor CANNOT TRY TO TIME WHEN TO GET INTO THE PRECIOUS METALS.  If one does not have a decent amount of physical gold and silver, it will be extremely difficult or likely impossible to acquire the metals when the prices have skyrocketed.  Sure, you might be able to get some metal, but the prices or premiums could be very high indeed.

So… as the folks who purchased Bitcoin and sat on them for several years before the huge move higher, the same thing will happen to gold and silver.   While retail gold and silver sales have fallen significantly, as well as precious metals sentiment, the fundamentals point to a LOW RISK and HIGH REWARD… if we are patient. – SRSroccoreport

 

Will Gold Investors get more Bullish in 2017 or will the Bears Take Control?

Will Gold Investors get more Bullish in 2017 or will the Bears Take Control?

Will Gold Investors get more Bullish in 2017 or will the Bears Take Control?

A second sharp jolt in gold prices in two days drew speculation someone seeking to reverse an erroneous trade on Monday again managed to unsettle the market. Gold prices spiked in early European trading with about 815,000 ounces of gold bought in five minutes. That erased most of gold’s losses the previous day, when 1.8 million ounces of the metal were sold in a single minute. Monday’s slump halted near the key 200-day moving average, a positive sign for gold prices. This morning prices are edging back to levels seen before the sharp selloff – Like it never happened.

Gold may hit $1,500 for the first time since 2013

U.S. Global Investors’ Frank Holmes talks about gold’s outlook and a new ETF. – Myra Saefong

Gold prices have climbed by around 8% year to date—close to what they gained for all of last year.

That comes as no surprise to Frank Holmes, chief executive and chief investment officer at U.S. Global Investors, and he sees lots of reasons why prices could rally further—potentially to as high as $1,500 an ounce. That would be a 20% rise from its current level of roughly $1,250.

In fact, a positive outlook for the gold is a key reason why U.S. Global Investors, whose Gold & Precious Metals Fund USERX, -0.41%  has a 4-star rating from Morningstar, plans to launch its first gold exchange-traded fund this week.

USERX was among the top 10 performers for equity precious metals funds, based on its five-year total return of -7.3%, according to data from Morningstar. Gold futures GCQ7, +0.30%  rose 8.6% last year, but tallied a loss of about 37% from 2012 to 2015.

“The metal is responding to the typical demand drivers that I always discuss, like geopolitical uncertainty, a weak dollar, low interest rates,” said Holmes. “Perhaps one of the most shocking things is that last week, for the first time since the November [U.S. presidential] election, gold was outperforming the U.S. dollar.”

Gold futures settled under $1,250 an ounce Monday, but they are up about 8% year to date. They haven’t traded above $1,500 in more than four years.

“The weakening of the U.S. dollar DXY, -0.59% [as President Donald] Trump’s policy agenda continues to get derailed by all kinds of distractions” has been one of the biggest influences on the gold market, said Holmes.

Holmes said he believes the Fed is taking a more dovish approach to raising interest rates than expected. The Fed, however, is still penciling in another hike in 2017 and more in 2018, and plans to begin reducing the size of its balance sheet before the end of this year.

And “geopolitical risk and uncertainty, from Brexit to Trump’s policies to unrest in the Middle East,” he said, have given gold an added boost.

The “fear trade”—the idea that factors such as geopolitical turmoil, both here and abroad, and low-to-negative government bond yields drive the demand for safe-haven assets—is likely to continue to support gold, said Holmes.

“Right now, with rates still historically low and inflation in the 2% range, government bond yields are low to negative, in some cases,” he said. “Why would investors want to lock in negative yields for the next two to five years?”

“In light of this, I think haven investors see gold as a much more reliable store of value,” he said.

Physical demand for gold has reached record levels in both China and India, according to Holmes. The devaluation of the yuan and a slowing real-estate market has helped to drive demand in China, while India saw its gold imports rise fourfold in May from the same time a year, he said, as traders fear a higher tax rate on jewelry.

Meanwhile, central-bank purchases of gold are still “robust” in China and India, Holmes said.

“Currently gold only represents 2% of China’s foreign reserves. Compare that to the U.S. where gold represents 75%,” he said. That means “there is still an enormous opportunity for China to continue to accumulate the yellow metal.”

Investor strategy

Right now it’s a buyers’ market for high-quality gold mining stocks, said Holmes.

That’s come on the back of a rebalance this month of the VanEck Vectors Junior Gold Miners exchange-traded fund GDXJ, -0.47% he said.

The market didn’t see junior gold miners follow through with the gains in gold because the GDXJ cut nearly half of its exposure to the space, with lots of high-quality and small- and midcap names getting pushed out—offering an opportunity for investors to pick up some the stocks at a discount, Holmes said.

Against that backdrop, U.S. Global Investors will offer its very first gold ETF this month. It already runs two gold-related mutual funds, the Gold & Precious Metals Fund and the World Precious Minerals Fund UNWPX, -0.64%

So far this year, the VanEck Vectors Gold Miners ETF GDX, -0.13%  is up around 8%, while the VanEck Vectors Junior Gold Miners ETF has climbed 7%. The physical gold-backed SPDR Gold Trust GLD, +0.38%  has also tacked on roughly 8%.

Shares that U.S. Global Investors’ prefers include Klondex Mines Ltd. KLDX, -3.04%Wesdome Gold Mines WDO, -0.95% and Kirkland Lake Gold KL, +2.88% which are “all frugal, small- to midcap names,” said Holmes.

While he contends gold could climb to as high as $1,500 an ounce, he also said that a low of $1,000 is a possibility. The low so far for 2017 was $1,162 at the start of the year.

Managing your expectations is essential, particularly when it comes to gold investing, said Holmes.

He said he’s “encouraged” by the gains that gold has seen in the first half of 2017, but “nobody can say what the future holds, so hope for the best but prepare for the worst.”

Will the Tumble in Gold Prices Continue?

This morning’s flash-crash dump of over $2 billion notional in gold futures broke numerous technical levels, but as the precious metal bounces back off support, the question is will the bounce continue? Citi answers…

Having tested up towards its 50-day moving average (green line), this morning’s sudden and heavy volume flash-crash plunged the precious metal below its 100- and 200-day moving average (orange and red respectively below).

But as Citi notes, Gold is presently testing a strong area of support from $1,233-$1,237 where the 200 day and week moving averages converge with the 76.4% retracement of the May-June rally.

Citi concludes… we have confirmed triple weekly momentum divergence on Gold and as a reminder, this is one of our favorite indicators to suggest that a trend (downtrend in this case) is running out of steam.Zerohedge

3 Reasons Why Goldman Just Turned Bullish On Gold

Following this morning’s flash crash in gold, in which a “fat finger” – usually a euphemism for any trade that can not be logically explained yet one which reprices a given asset class substantially lower as happened with gold – suddenly sold $2.2 billion worth of gold in under a minute, taking out the entire bidside stack, we were expecting banks to immediately come out with bearish reports on gold, piggybacking on the latest central bank-facilitiated smackdown, and allegedly allowing their prop desks to load up on the yellow metal on the cheap.

We were surprised, however, when moments ago Goldman came out with a report explaining why the bank is now bullish on gold, Further, in the note from Goldman’s x-asset strategist, the bank laid out three specific reasons why gold may trade well above the bank’s commodity team year-end target of $1,250.

This is what Goldman said moments ago:

Across asset classes last week copper was the best performing asset (+2.5%), while oil was the worst performing asset (-4.3%, Exhibit 3). Gold’s performance was flat (+0.1%) over the same period, but had an intraday min at 1.6% today. Much of the focus has obviously been on oil where concerns are that expanding supply in the US and Libya will counter OPEC cuts. Gold has received less focus, although its cross-asset correlations have quietly been rising to new extremes (Exhibit 1).

Our commodity team’s view is gold at $1250/oz over 12 months as higher real rates from Fed tightening could put further pressure on gold, but this may be offset by 3 things:

  1. lower returns in US equity (as we expect) should support a more defensive investor allocation,
  2. EM $GDP acceleration would add purchasing power to EM economies with high propensity to consume gold, and
  3. GS expects gold mine supply to peak in 2017.

Gold has been increasingly trading as a “risk off” asset, with its correlation with global bonds at the 100th percentile since 2002…

… and should thus be sensitive to our expectation of rising rates from here. However, with global growth momentum likely having peaked, gold could represent a good hedge for equity, in particular in currencies with low and anchored real yields.

Gold implied vol remains attractive for investors’ of either view: it trades at its 0th percentile relative to the past 10 years (Exhibit 28).

While Goldman’s arguments are sound, the fact that the bank is urging its clients to buy gold, ideally from Goldman, suggests that the selloff is most likely nowhere near done. – Zerohedge

Investors Will Not Abandon Gold As Fed Hikes

Gold traders will not “abandon” gold as the Federal Reserve (Fed) proceeds to hike rates further, TD Securities said in a report, adding that the yellow metal will be driven by geopolitical and economic risks.

Analysts from TD Securities said that within the next six months, gold will be trading around $1,275 level, supported by flat yield curve and dovish monetary policies around the world.

“Various risks, ranging from fully valued equity markets to geopolitical and economic concerns should keep the precious metals complex bid,” TD Securities’ global head of commodity strategy Bart Melek and the bank’s commodity strategists Ryan McKay and Daniel Ghali said in the report.

“This, in combination with a flat yield curve and very low real rates across the globe prompt us to believe that investors will not abandon gold, even as the Fed hikes more, and we still believe our $1,275/oz price estimate is still well within reach over the next six months,” they wrote.

Gold prices struggled after the Fed rate hike in June, which was followed by hawkish Fed speakers. In response, the precious metal dropped significantly, reaching $1,240 levels.

“After hitting the lows, the yellow metal jumped to $1,260, but fell to as low as $1,235/oz on Monday—apparently due to a large ‘fat finger’ trade,” the report said. “A busy week of Fed speakers and economic data in the US could well place gold prices on a more distinct path moving forward.”

This week, investors are paying close attention to the Fed speakers as well as the U.S. data releases, including the third reading of Q1 GDP, May core PCE and personal consumption, May personal income/ personal spending and construction spending, June Conference Board consumer confidence, as well as Chicago PMI and ISM manufacturing.

The macro releases will have an additional value this week, as they provide clues whether or not the Fed will actually be able to raise rates further this year, while also starting to reduce its balance sheet.

TD Securities expects the Fed speakers to remain “hawkish” this week, which could put pressure on gold. But, analysts noted that the data could surprise on the downside and send the yellow metal higher.

“The May core PCE deflator statistics are of particular interest, as a weak print will make the Fed’s inflation chatter sound hollow,” analysts wrote.

Other key elements that will keep gold prices from retreating are geopolitical uncertainties, according to the report.

“[There are] ever present uncertainties in the US political realm, Brexit negotiations, Italian elections, and tensions in Syria, North Korea, and Qatar which should provide support as investors hold onto the metal as an uncertainty hedge,” Melek, McKay, and Ghali wrote. – Anna Golubova

 

Can Indians Stop Tradition of Hoarding & Gifting Gold? Gold Target after Cash Ban

Can Indians Stop Tradition of Hoarding & Gifting Gold? Gold Target after Cash Ban

Can Indians Stop Tradition of Hoarding & Gifting Gold?

In November of last year, India banned certain cash notes in a bold move to force businesses into the banking system to better harvest more taxes from its livestock.

Now, under the guise of “improving transparency” and forming a “common market,” India has begun targeting gold with new taxes, regulation, and incentives for citizens to turn over their undeclared gold to the financial sector.

Can Indians Stop Tradition of Hoarding & Gifting Gold?

Roughly 86% of India’s economic activity happened in cash at the time much of it was banned. Presumably that includes the $19-billion-per-year retail gold industry. Again, it appears that India’s government (central bankers) wants a bigger cut of the action and to better track the private assets of citizens.

Bloomberg has been reporting that India’s government is teaming up with crony gold dealers to plan a complete revamp of its gold policy – which is always code for “control, regulate and tax.”

Bloomberg reports:

India, which vies with China as the top consumer of bullion, is working on new policies to improve transparency and help expand its $19 billion gold jewelry industry, according to people with knowledge of the matter.

The plans being worked out by the finance and commerce ministries along with industry groups should be finalized by the end of March, the people said, asking not to be identified because they aren’t authorized to speak publicly….

The start of a spot bullion exchange, to make gold supply more transparent and help enforce purity standards, is under consideration, the people said. An import tax of 10 percent could also be reduced as the government seeks to eliminate smuggling, they said. The plans also include a dedicated bank for the jewelry industry, according to one of the people.

The overhaul of India’s disorganized and fragmented gold jewelry industry is meant to bolster confidence among consumers, where the gifting of gold at weddings and festivals or its purchase as a store of value are deeply held traditions. Ensuring quality standards and allowing supply chains to be easily tracked are ways to enhance trust.

In addition to a 10% import tax on gold, which authorities admit causes smuggling, India recently placed a 3% nationwide goods and services tax on gold that goes into effect on July 1st. Grateful slaves celebrated the event as a “lower than expected rate” and as creating a “common market,” Bloomberg reported when the tax passed:

India fixed the duty at 3 percent over the weekend, lower than the 5 percent expected, Ketan Shroff, joint secretary at the India Bullion and Jewellers Association Ltd., said Monday. The goods and services tax, to be implemented from July 1, will replace more than a dozen domestic levies including excise tax and state tariffs, drawing India for the first time into a common market.

ProTip to wannabe dictators: If you’re a tyrant who wants to centralize power over an industry, first frighten large businesses into your cartel protection racket. Then, eliminate local sovereignty over markets while imposing your own regulations and taxes. But call it “drawing into a common market” and “improving transparency to protect them.” Works every time. The final step is to prosecute non-compliance using men with guns.

The creation of a spot market and special bank for gold jewelers (as rumored above) seems like a function that doesn’t require government at all. Yet if your goal was to track, trace and database your citizens’ undeclared gold assets, it makes perfect sense.

Bloomberg makes clear that the new policies aim to encourage citizens to turn over their “idle gold” to the financial system:

The government is also keen to get the public to recycle its jewelry to reduce the nation’s reliance on imports. After a slow start to its plans to monetize the precious metal held in households and institutions, the government is looking to tweak the scheme and attract more participants, the people said, without giving details. The initiative, launched in November 2015, was aimed at returning an estimated 20,000 metric tons of idle gold to the financial system.

It’s reminiscent, albeit a softer version, of Franklin D. Roosevelt’s Executive Order 6102 “forbidding the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States” which criminalized the possession of monetary gold. Citizens were forced to turn over their gold for a set amount of government currency. We’ll have to wait and see how India “tweaks the scheme.”

Credit Suisse confirmed the latest moves in India are designed to force the gold trade onto the banking system in partnership with the central government to better track and tax the industry.

Credit Suisse Group AG told Bloomberg the (gold) sector will find it tougher to evade taxes as legal imports go through the banking system, and a full trail will now be established by the new nationwide tax compared with previous duties which were levied at the state level only.”

This echoes what Credit Suisse Group AG analysts Arnab Mitra and Rohit Kadam previously said of the coming changes to the Indian gold industry: “Over the next two to three years, the new tax should gradually force smaller, unregulated players to become tax compliant and take away their price advantage, increasing market share for bigger, organized businesses.

There you have it. The cashless agenda of control laid bare. There shall be no economic activity outside of State control. Cartels that play nice will be rewarded with more market share.

It remains to be seen if an already angry Indian citizenry can be persuaded to give up their tradition of storing and gifting gold. – Jeff Paul

Driving Force behind Silver Prices will be Base Metals, Not Gold

Driving Force behind Silver Prices will be Base Metals, Not Gold

Driving Force behind Silver Prices will be Base Metals, Not Gold

A general rule for silver and gold is that both precious metals follow cyclical patterns observed by watching the calendar. Simply put, silver and gold tend to peak in April before trending downward from there. This annual cycle suggests that silver has already peaked, or will do so very soon. But is the cycle applicable this year?

As of 26 April (2017), future silvers were up just over 9% while gold was up closer to 10%. Just two days earlier, silver was up more than 10% year-on-year. But does a two-day downward trend reflect reality? That depends on who you ask.

If you believe that the precious metal slide of silver will catch up to base metals and eventually be the dominant force moving forward, you are likely to feel that silver is on its way down. But if you are prone to believe base metals will stay up front, you might be getting ready to buy silver in May and June.

Precious vs. Base Metals

Unlike gold, which trades primarily as a precious metal used for jewelry and other like purposes, silver is sold on two fronts. It is used as a precious metal for jewelry, high-end furnishings, etc., but it is also used extensively for industrial purposes. Those industrial purposes provide the foundation of the base metals market.

Silver and gold’s annual cycle is the direct result of higher demand for precious metals between December and April. More silver and gold are needed to meet the demands of jewelry makers and other precious metal users during the first quarter of the year before that demand starts to dry up. Thus, we have the seasonal markets. Yet 2017 is not shaping up to be normal where silver is concerned.

The driving force in silver thus far has been base metals. That was not the case in the run-up to the 2016 presidential election. Rather, base metals were significantly behind until Trump won. They started catching up almost instantly on Trump’s promise to boost infrastructure spending after taking office. That promise is also what suggests that silver has not yet peaked in 2017.

Now could be a very good time to buy silver if you are the kind of investor betting on Donald Trump to keep his promises of rebuilding infrastructure and reducing taxes on corporations and small business. If he does, and Congress goes along, base metals could do very well at a time of year they are supposed to decline.

What the Cycle Says

The annual gold and silver cycle says that both precious metals peaked in April before declining. Silver tends to fall sharply from May through June, then stabilize in July before beginning the upward trend in the fall. Conventional wisdom says hold on to your silver through the summer; if you plan to buy, do so before mid-summer.

Conventional wisdom still prevails despite the political turmoil in the U.S., UK, and France. Commodities traders believe the tried-and-true cycle of silver will go on as normal. What do you think?

Tax Cuts Could Determine Silver’s Direction

While you are thinking about the annual cycle of silver in relation to current political turmoil, there is one more thing to consider: President Trumps recently released tax cut. If Trump succeeds in getting everything he wants, and that is not beyond the realm of possibility, silver could easily become the runaway favorite among base metals. Before you dismiss this idea as being crazy, take a minute to think it through.

Trump’s tax proposals include a reduction in the corporate income tax from 39% to 15%. The president also proposes eliminating nearly all the tax deductions currently in place and reducing the total number of tax brackets from the current seven down to three. Finally, Trump is proposing a temporary ‘tax holiday’ for American corporations willing to repatriate profits they have sent overseas.

Succeeding with all these proposals would instantly stimulate the economy at a level we have not seen in more than a decade. It would encourage companies to bring manufacturing back home. It would put people to work who, in turn, would pay income taxes and boost government revenues. If expectations were strong enough, they would spur a run on base metals that would include silver and copper.

The question is, can the president get it done? There is a good chance he can. We already know that the proposal closely mirrors that offered by Speaker Ryan, so the House should not have any trouble getting the package through. As for the Senate, the GOP is already fearful of losing control in 2018. Passing the tax proposals could, and should, help them maintain that control.

None of the tax proposals offered by the president harms the average Joe on the street. That gives the Senate the confidence it needs to pass the proposals even without Democrats support. Lower taxes for everyone equals positive votes for the GOP.

It Might Be Time to Buy

With all this analysis now at your feet, you are probably wondering whether it’s a good time to buy silver or not. Obviously, no one can provide a concrete answer. Precious metals in general, and silver in particular, tend to be volatile throughout the year. Even with an annual cycle to look at, you never really know where silver is going from one quarter to the next.

Whether you should buy silver or not really depends on where you think base metals will go for the remainder of 2017. The demand for silver as a precious metal is not likely to have any real effect on the market until the start of the annual climb in December. Right now, it is all about base metals.

If you are confident in Trump’s promises to rebuild infrastructure, buy silver. If you are confident that his tax package will become law, buy silver. If you’re not confident of either one, all you have left to look at is the annual cycle of base and precious metals. – Nikole Wilson

Oil Price Decline may Reverse Trajectory from July – Here’s Why

Oil Price Decline may Reverse Trajectory from July - Here's Why

Oil Price Decline may Reverse Trajectory from July

Here we go again…

The price of oil is plunging.

For the first quarter of 2017 West Texas Intermediate (WTI) held a pretty stable range between $54–58 per barrel. Now it is back to the roller coaster that we have been on since mid-2014.

As I write this, WTI is struggling to hold $43 per barrel and is sinking like a rock.

Oil prices are falling fast

This time though, I think the market is acting on some bad information. If not bad, then at the very least I think the information is incomplete.

I believe that this most recent drop in oil prices is not being caused by the actual fundamentals of supply and demand. Those fundamentals are actually improving the bullish case for oil — slowly, but steadily.

This recent oil price decline is more likely being caused by the market focusing not on the full picture, but rather on one stubbornly bearish detail:

The amount of oil held in storage in the United States…

Oil Is a Global Commodity

Every week traders, investors and oil industry participants heavily scrutinize one set of data. That data set involves the weekly movements in United States oil inventory levels.

Inventory levels going up suggest an oversupplied market. Inventory levels going down suggest that the market is undersupplied.

It has been a long time since this particular piece of data provided much for oil bulls to be optimistic about. U.S. oil inventory (storage) levels continue to remain stubbornly high, and that is weighing heavily on the price of oil.

It isn’t wrong to look to U.S. inventory levels to try to understand the supply-and-demand fundamentals in the oil market. I even understand why these U.S. figures get so much attention.

This is the most transparent source of data that is available to oil traders. Further, these data belong to the country that consumes by itself roughly one-fifth of global oil supply on a daily basis.

What I think the market gets wrong is that it focuses almost exclusively on these U.S. oil inventory levels and ignores what is going on globally. The U.S. is a big piece, but there is a whole world out there, and it represents the other 80% of the global oil market.

Today if someone would take the time to look, the information on oil inventories that is coming from sources outside of the United States is much more bullish.

Over the past couple of months there have been multiple indications that floating oil storage has been coming down rather quickly.

ClipperData reported that floating oil in storage off Singapore has dropped from 64 million barrels to 50 million barrels.1 Additionally, OPEC sources have indicated that total floating storage globally has dropped by one-third in 2017, a decline of 50 million barrels in total.2

We can also see that total OECD oil inventory levels have been declining. The graphic below tells that story.

The blue bars represent the amount by which OECD storage exceeds the five-year average. In January OECD inventory levels were 339 million barrels above the five-year average.

As of April that number had shrunk to 251 million barrels.

OECD Commercial crude stocks take a dive

There is still a lot of oil in storage, but the excess over the five-year average has shrunk by 88 million barrels over just the last three months.

That provides pretty compelling evidence that daily oil demand has been exceeding supply by a good amount, almost 1 million barrels per day.

It won’t happen overnight, but that excess inventory is being worked down.

Why U.S. Oil Inventories Have Been Slow to Show This Rebalancing

Honestly, I don’t think it should really be a surprise to anyone that the oil market is tightening.

OPEC and non-OPEC producers agreed last fall to reduce production by 1.8 million barrels per day starting on Jan. 1, 2017. Compliance with those agreed cuts has actually been very high, almost 90%.

You can’t take almost 1.8 million barrels per day of production out of global oil supply and not have the market tighten significantly.

The problem is that global oil market data are notoriously unreliable and the information passed on by the media is often contradicting.

That is why everyone focuses so much on U.S. inventory levels. It is the one piece of data that traders believe to be accurate. Nothing else gets much attention.

Not seeing these U.S. inventory levels declining significantly has undermined the market’s confidence that OPEC cuts are actually achieving the tightening that they were expected to generate.

Which begs the obvious question: Why, with OPEC’s strong compliance to production cuts, aren’t U.S. inventory levels declining?

The answer, I believe, was recently revealed by Saudi Arabian Energy Minister Khalid al-Falih at a meeting with reporters late in May.3

Al-Falih noted that despite cutting production, OPEC nations have not been reducing the amount of oil that they ship to the United States. Instead, they have been drawing down their own inventory levels.

That makes sense. This allows them to sell the same amount of oil despite producing less. The result of this is shrinking inventory levels within OPEC and steady inventory levels in the United States.

In fact, late in May the Saudi energy minister acknowledged this to be the case. For the first five months of 2017 Saudi shipments of oil to the United States have actually risen to 1.21 million barrels per day despite lower production.

No reduction here!

Saudi Arabia has intentionally reduced oil shipments to other countries while actually increasing shipments to the United States.

No wonder U.S. inventories haven’t yet felt the impact of the OPEC production cuts.

Starting in July, that is going to change. The Saudi plans revealed by al-Falih now involve reducing shipments to the United States by over 200,000 barrels per day.

It seems that the Saudis may have finally figured out that the key to improving the price of oil isn’t just to cut production, but to make sure those cuts show up here in the United States.

Once that happens we should start to see a more bullish (and accurate) view of the global oil supply-and-demand fundamentals hit the mainstream. This would mean that now is a great time to be once again looking at bonds of oil producing companies.

Keep looking through the windshield – Jody Chudley

 

Thinking about Buying Gold? A Major Opportunity about to Ignite

Thinking about Buying Gold? A Major Opportunity about to Ignite

Thinking about Buying Gold? A Major Opportunity about to Ignite

If you’re thinking about buying gold, pay close attention… says Greg Guenthner

A major buying opportunity is about to ignite in everyone’s favorite precious metal.

But you won’t uncover this signal for buying gold by visiting mines, studying gold production, or watching CNBC. In fact, I couldn’t even see it with my naked eye. I needed a sophisticated computer program to alert you to this hidden opportunity.

It was our in-house “quant” Jonas Elmerraji who spotted it thanks to the proprietary indicator he has spent the last five years coding.

And the window is about to kick off this week.

The signal Jonas has pinpointed is highly reliable. It’s made investors money almost 80% of the time over the last 12 years. His system has nailed the price action in gold this year. And that’s not the result of some hypothetical back test, either. In fact, Jonas shared his research on gold with you back in March…

Have a look at an indicator called the Kinetic Composite for GLD, the popular SPDR Gold ETF (NYSE:GLD):

You can think of the Kinetic Composite chart above as a sort of “idealized” price chart for GLD. Jonas’ algorithm crunches decades of price data and mutates it into the chart above. It shows you when a stock is predisposed to rally… up to a year in advance.

You can see how the Kinetic Composite signaled a rally at the start of the year, followed by a volatile sideways period, and then another rally kicking off this summer.

Here’s how GLD’s price has played out in the months since:

It’s been dead on, from the rally at the beginning of the year, followed by a volatile sideways stretch

Back in March, Jonas recommended staying away from gold during the unpredictable spring months when traders have no statistical edge on gold prices. That’s been a good bet. Gold has gone nowhere — and there have been a lot of opportunities to lose money during the wide swings.

Now, gold looks ready to kick off its next major K-Sign buy signal.

Here’s a quick refresher:

A K-Sign is the 100% proprietary pattern that’s formed by the simplified price line of a stock and its Kinetic Composite. It looks like this:

Kinetics

When you see that pattern, the one that looks like a “K” tipped on its back, it means you’re looking at an important buy signal.

Here’s where the next K-Sign triggers in gold:

Kinetics

This dead-simple price chart is all you need to look at to make money in gold in 2017.

It shows the next Kinetic Window in gold and the K-Sign date that kicks it off. That date is June 23 – this Friday – That’s TOMORROW.

Buying Gold is the Important First Step to “Freedom Insurance”

Buying Gold is the Important First Step to “Freedom Insurance”

Buying Gold is the Important First Step to “Freedom Insurance”

It’s predictable…

A government in need of cash will turn to destructive “solutions.”

Money printing, higher taxes, and more regulations often come first. Unfortunately, these are just the hors d’oeuvres before a 10-course meal.

As they become increasingly desperate, governments implement increasingly destructive policies. This might include capital controls, price controls, people controls, official currency devaluations, wealth confiscations, retirement account nationalizations, and more.

The same pattern has played out again and again around the world and throughout history. The worse a government’s fiscal health gets, the more destructive its policies become.

This is the root of political risk.

It’s no secret that political risk is snowballing in many parts of the world. This is especially true in the US and Europe, where welfare and warfare spending continues unabated. It doesn’t matter which party is in power.

But no matter where you live, international diversification can greatly reduce the threat your home government poses to your personal and financial wellbeing.

You know the benefits of diversifying your investment portfolio. If you put all of your asset eggs in one basket, you could lose your entire portfolio if that basket breaks.

The same idea applies to political risk. If your home country “breaks”—and turns to the destructive policies I just mentioned—you could lose everything.

Most people have medical, life, fire, and car insurance. You hope you never have to use these policies, but you have them anyway. They give you peace of mind and protect you if and when the worst does happen.

International diversification is the ultimate insurance policy against an out-of-control government. Think of it as “freedom insurance.”

It frees you from absolute dependence on any one country. Achieve that freedom, and it becomes very difficult for any group of bureaucrats to control you.

The results can be life changing.

The Easiest First Step

It’s crucial to place some of your savings beyond the easy reach of your home government. It keeps that government from trapping your money if and when it implements capital controls or outright asset seizures. Any government can do either without warning.

The ultimate way to diversify your savings is to transfer it out of the immediate reach of your home government and into something tangible.

Something that cannot be easily confiscated, nationalized, frozen, or devalued at the drop of a hat or with a couple of taps on the keyboard—while retaining as much privacy as legally possible.

Something whose value is recognized around the world and is not controlled by any government.

Gold and silver fit the bill perfectly.

There is nothing particularly American, Chinese, Russian, or European about gold. Different civilizations have used it as money for millennia. It’s always been an inherently international asset.

Buying gold is perhaps the easiest step you can take towards diversifying your savings.

When you buy gold, you trade in paper money—which the government can devalue and confiscate at will—for a hard asset that’s been a stable store of value for thousands of years.

Gold is universally valued. Its worth doesn’t depend on any government.

In other words, simply buying gold is the easiest way to lessen the political risk to your savings.

Freedom Insurance

Somehow, someway, your home government will keep squeezing your pocketbook harder. It will keep subjecting you to escalating, arbitrary, and burdensome regulations and restrictions.

Expect more government and less freedom all around.

With each passing week, the window to protect your personal and financial freedom closes a bit more.

Fortunately, you don’t need to be hostage to a desperate and out-of-control government.

International diversification is a time-tested route to freedom. Wealthy people around the world have used it for centuries to effectively protect their money and their families.

Buying gold is an important first step.

But there’s much more to do…

The US government gets bigger, more invasive, and more aggressive by the day. But you can take concrete steps to protect yourself from this hostile giant. – Nick Giambruno

 

With Several Opposing Factors, can we expect Higher Oil Prices anytime soon?

With Several Opposing Factors, can we expect Higher Oil Prices anytime soon?

Can we expect Higher Oil Prices anytime soon?

Oil prices have cratered in recent weeks, dipping to their lowest levels in more than seven months and any sense of optimism has almost entirely disappeared. All signs point to a period of “lower for longer” for oil prices, a refrain that is all too familiar to those in the industry.

WTI Crude oil dipped below $44 per barrel on Tuesday, and the bearish indicators are starting to pile up.

Libya’s production just topped 900,000 bpd, a new multi-year high that is up sharply even from just a few weeks ago. Libyan officials are hoping that they will hit many more milestones in the coming months. Next stop is 1 million barrels per day (mb/d), which Libya hopes to breach by the end of July.

U.S. shale is arguably the biggest reason why prices are floundering again. The rig count has increased for 22 consecutive weeks, rising to 747 as of mid-June, up more than 100 percent from a year ago. Production continues to rise, with output expected to jump by 780,000 bpd this year, according to the IEA. Ultimately, the shale rebound appears to have killed off yet another oil price rally, the latest in a series of still-born price rebounds since the initial meltdown in 2014.

Hedge funds and other money managers slashed their bullish bets on crude oil futures in the latest data release. Sentiment is profoundly pessimistic at this point, and because the IEA, OPEC and EIA recently published very downbeat assessments about the pace of rebalancing, a grim mood will be sticking around for a little while. The next reports from those energy watchers won’t come out for almost another month.

In the meantime, the weekly EIA data on production and inventories will have outsized importance, mainly because it is one of the few concrete indicators that comes out on a routine basis. Analysts are now worried that a string of bearish data could push oil prices down even further. “We cannot afford to have another build in crude or gasoline,” Bob Yawger, director of futures at Mizuho Securities USA Inc., told Bloomberg before the latest data release. “The market’s just dying for a reason to buy this thing, but you can’t really do that before” the EIA publishes its next batch of weekly data on Wednesday. Gasoline demand also looks weak, just as the summer driving season in the U.S. gets underway, a period of time that typically sees demand rise.

The market got a bit of a reprieve on Wednesday when the EIA reported some decent figures – a drawdown in crude oil inventories by 2.5 million barrels. Also, imports were flat and gasoline stocks fell slightly.

Still, the figures aren’t enough to put the market at ease.

Amid all this doom and gloom, Saudi Arabia’s energy minister Khalid al-Falih tried to put on a brave face, arguing on Monday that the market will “rebalance in the fourth quarter of this year taking into account an increase in shale oil production.” He waved away the recent price drop, dismissing the importance of such short-term movements in the market.

But with WTI dropping below $45 per barrel, most sober oil market analysts are not nearly as sanguine. OPEC’s objective of bringing global crude oil inventories back into five-year average levels is looking increasingly difficult to achieve, at least in the timeframe laid out by the cartel. “There seems to be very low conviction in the market that there really will be any inventory drawdown in the second half of the year,” said Bjarne Schieldrop, chief commodities analyst at SEB AB.

This is like a falling knife right now, I genuinely haven’t seen sentiment this bad ever,” Amrita Sen, the co-founder and chief oil analyst at Energy Aspects, told CNBC on Wednesday. “We have had clients emailing saying they have been trading this for 20 or 30 years and they have never seen something like this.”

One pivotal factor that could really cause prices to plunge is if compliance with the agreed upon cuts starts to fray. There are several reasons why some participants might start to abandon their pledges. Russia, for example, tends to produce more oil in summer months, a fact that might tempt them to boost output. Iraq is also eyeing higher production capacity this year. In addition, weak prices could start to undermine the group’s resolve. “Lack of major upside price response to the OPEC output cuts upping the odds of reduced compliance to the agreement in our opinion,” Jim Ritterbusch, president of energy advisory firm Ritterbusch & Associates, wrote in a research note.

Moreover, simmering conflict in the Middle East could continue to grow, threatening to derail cooperation between OPEC members. The conflict between Saudi Arabia and its Gulf allies on the one hand, and Qatar and Iran on the other, could deteriorate. Although that could spark some price gains for crude oil if supplies are affected, it could also undermine the OPEC deal.

One unknown factor that could prevent oil prices from falling further is the possibility that prices floundering in the mid-$40s actually puts a lid on shale production. If U.S. shale underperforms over the next year, the OPEC deal could succeed in balancing the market. But if U.S. shale continues to rise, and OPEC fails to extend its deal beyond the first quarter of 2018, oil prices could fall to $30 per barrel, according to Fereidun Fesharaki, chairman of consultants FGE. –  Nick Cunningham

Can U.S. Shale Survive Below $40?

Many U.S. shale drillers have said that they have full-proofed their operations for $40 oil, having lowered breakeven prices substantially over the last few years. They may soon have to prove it. Oil prices dropped to fresh seven-month lows on Tuesday, officially entering bear market territory, down more than 20 percent year-to-date. The declines have raised questions about the possibility of WTI hitting $40 soon.

A rising U.S. rig count, multi-year record production levels from Libya, and a general mood of pessimism more than outweighed the positive news that OPEC and non-OPEC producers increased their compliance rate in May. There is now a growing consensus that the OPEC deal won’t be sufficient to bring down inventories at a fast enough pace to balance the market this year.

Can U.S. shale survive in a world of $40 oil prices?

There are very different answers out there depending on who you ask. Most of the oil majors and some top shale companies such as EOG Resources, are said to have break-even prices below $40 per barrel. That would suggest that their drilling campaigns would not stop even after taking into account the latest slide in oil prices.

But those are just the top companies, not everyone across the industry. Some smaller companies in more marginal parts of U.S. shale basins will face much more pressure in today’s market.

A long list of shale drillers have dramatically reduced their breakeven thresholds, lowering costs so that they could make money, by and large, with oil prices in the $50s. That is why the rig count surged over the past year.

But $40 oil is much different than $50-$55 oil. “We had $52 on average in Q1 and everyone said we are going to start growing again. Everyone said our balance sheets are fine,” Paul Sankey, a senior analyst at Wolfe Research, said on CNBC. “The market is now testing who can really stand up and run. At $52 the answer was too many people. Now at $43 we are going to really find out as we go into Q2 earnings who can really get this done at $43. And I can tell you, there’s not many companies that we like…Most of the sector has got an awful problem down here for sure.”

UBS says that oil prices at $45 per barrel “slows most U.S. shale plays.” The Bakken, the Eagle Ford and the Niobrara struggle below $45. But if oil prices drop to $40, companies will be forced to “hit the brakes,” even in the highly-sought after Permian Basin.

So even as shale executives talk up their cost reductions, they will be put to the test in the near future. “We are nearing the point where it’s going to be a challenge for them as well, if you break $40 per barrel,” John Kilduff of Again Capital told CNBC.

“With oil prices at $45, there will be very little movement in capital globally, and fewer projects will get sanctioned,” David Pursell, an analyst at the investment bank Tudor, Pickering, Holt & Co., told the Houston Chronicle.

Because there is a lag between oil price movements and rig counts, the effect of the recent slide in oil prices might take some time to become apparent. Moreover, with rigs already out in the field drilling, production might continue to rise even if oil prices fall.

But if oil prices fail to rebound, the gains in the rig count could start to slow. Companies would have to start thinking about paring back their drilling campaigns the longer that oil prices stay in the low or mid-$40s. “[T]he rate of growth in drilling we’ve seen over the past year might not be sustainable through the year and certainly not into 2018,” said Jesse Thompson, a business economist at the Houston branch of the Federal Reserve Bank of Dallas, according to the Houston Chronicle. “At a certain price point, you’ve eventually saturated the drilling you can afford to do.”

The equation, however, would really change if oil prices continue to fall even more. “I think we most definitely go to $40. We’re probably looking at the upper-$30s at this point now,” John Kilduff told CNBC. –  Nick Cunningham

 

Oil Prices are most Definitely Heading to the Upper US$30s

Oil Prices are most Definitely Heading to the Upper US$30s

Oil Prices are most Definitely Heading to the Upper US$30s

Oil prices hit their lowest levels since mid-November last year, with WTI entering a bear market, and analysts now see the price of oil sliding further down to below US$40 and even into the US$30s, as rising output from Libya and Nigeria adds to the persistent concerns over global oversupply.

As of 2:21pm EDT, WTI Crude had tumbled 3.11 percent to US$43.05, while Brent Crude had plunged 2.79 percent at US$45.60.

According to analysts, the slide will continue, and oil prices could drop to levels they hadn’t seen in more than a year.

Oil is in a downtrend and risks trending into the $30’s,” Paul Ciana, a technical strategist at Bank of America Merrill Lynch, said in a note on Tuesday, as quoted by Business Insider.

Oil prices have now dropped to the levels they traded before OPEC and 11 non-OPEC producers agreed to a production cut deal in an effort to kill the glut and push prices up. The nine-month extension to the deal, until March 2018, failed to lift oil prices, with analysts and traders questioning if OPEC’s cuts have had or would have an effect on global supply, given the US shale resurgence, rising output from other producers that are not part of the deal, and increased production within OPEC, where exempt Libya and Nigeria, and non-complying Iraq, have recently increased output.

Like BofA, Fereidun Fesharaki, chairman of oil and gas consultancy FGE, on Monday said that oil prices could plunge to US$30 a barrel in 2018 and maintain that low price for some two years, if OPEC fails to make steeper output cuts.

Oil prices are “most definitely” heading to US$40 and are likely to slip into the upper US$30s, John Kilduff, founding partner at energy hedge fund Again Capital, told CNBC’s Squawk Box on Tuesday.

“The future might be bright for oil prices but the present is not,” Tamas Varga with London-based broker PVM told FT. Any immediate price gain would be “wishful thinking”, according to the analyst. –  Tsvetana Paraskova

$40 Oil Prices In The Near Future

Despite a busy week in oil news, oil prices are hovering around the mid-$40s mark as inventories remain high and production from OPEC members Libya and Nigeria ramps up.

• The EIA downgraded its oil production forecasts for this year and next in its most recent Short-Term Energy Outlook, largely due to the OPEC agreement.

• But the EIA said that the OPEC agreement could boost oil prices later this year, which would end up spurring new output from U.S. shale.

• Ultimately, that would lead to a small inventory build in 2018, and likely a ceiling on price increases. EIA predicts Brent prices to average $56 per barrel in 2018.

Oil prices broke fresh seven-month lows on Tuesday, with WTI dropping below $44 per barrel and Brent dipping below $46. Renewed and heightened pessimism over the pace of rebalancing has sunk in as OPEC is struggling to induce inventory drawdowns. U.S. shale continues to grow production and Libya is also adding large volumes of supply back onto the market at the worst possible time. The North African OPEC member is now producing 900,000 bpd and is aiming to top 1 million barrels per day by next month.

Most oil companies adjusting to “lower for longer.” The Wall Street Journal reports that most in the oil industry are resigned to low oil prices for years to come, recognizing that a range of $50 to $60 might be a semi-permanent equilibrium. After going through rough waters in the early part of the downturn – between 2014 and 2015 – which saw the bankruptcies of an estimated 105 oil producers and 120 oilfield service companies, the survivors are settling in to turn a profit at today’s prices. Some drillers are actually hoping that oil prices do not return to $100 per barrel for fear of sparking another boom and bust.

Oil hedging “turned on its head.” Oil producers are no longer hedging their production because oil prices have fallen too much. As a result, major consumes are the ones now doing the hedging. Bloomberg reports that options prices are now being driven by airlines and shippers hoping to lock in cheap fuel. “This is a significant shift in the relative producer-consumer hedging behavior,” David Schenck, a cross-commodity strategist at Societe Generale, said in a note. “While consumers may try to lock in low oil prices, most producers will simply refuse to lock-in loss-making prices.”

Middle East conflict escalates. A flurry of security events took place in the Middle East on Monday, raising fears of an escalating political crisis that has been described as the worst in decades. Iran launched missiles into Syria, targeting ISIS. It was the first Iranian military attack in another country in three decades. Also, the U.S. shot down a Syrian government plane, a move that sparked a warning from Russia. Russia said any U.S. plane flying west of the Euphrates River would be treated as a target. Meanwhile, Saudi Arabia said it has detained three members of Iran’s Revolutionary Guard Corps, which it says was approaching the Saudi offshore oil field of Marjan. The events come as tensions have spiked over the suspension of diplomatic relations with Qatar. There is a lot going on, but for now, the oil markets are shrugging off the tension. In the past, events like these would cause an immediate price spike of a few dollars per barrel. With the market so oversupplied these days, traders are hardly worried about a disruption.

Saudi energy minister says market on course for rebalancing. Saudi energy minister Khalid al-Falih said that the oil market would rebalance by the end of the year, a prediction that is unchanged despite the recent downturn in oil prices. “Current expectations indicate the market will rebalance in the fourth quarter of this year, taking into account an increase in shale oil production,” al-Falih said. He dismissed the negativity in the market as irrelevant and the work of speculators. “Markets determine prices but are themselves driven by unpredictable variables beyond the control of producing nations…Short-term volatility is mostly a reaction to short-term factors … as well as the role of speculators in stock markets that increase market volatility.”

Bakken coming back, but shortage of workers hits industry. After laying off so many people, Bakken oil drillers are struggling to fill vacancies as they ramp up their drilling efforts. According to E&E News, the biggest need is in trucking, although there are thousands of job openings. A worker shortage is one constraint that could hinder a rapid rebound in production.

Total to move forward with Iran deal. Total SA (NYSE: TOT) said that would go ahead with the development of an Iranian gas field, which would mark the first involvement of a major western oil company since Iranian sanctions were lifted. The $1 billion investment comes even as the U.S. government is considering harsher treatment towards Iran. “It is worth taking the risk at $1 billion because it opens a huge market. We are perfectly conscious of some risks. We have taken into account (sanctions) snap-backs, we have to take into account regulation changes,” Pouyanne said in a Reuters interview.

Frackers and conventional drillers collide. The WSJ reports that shale companies that are drilling much longer laterals are starting to collide with existing wells. As drilling proliferates, companies are starting to encroach on each others’ territory, an event now known as a “frack hit.” The situation is leading to rise in lawsuits. “It’s becoming a pretty sizable issue,” James West an analyst with Evercore ISI, told the WSJ. “I suspect every basin is probably facing the same type of challenge.”

U.S. oil companies frozen out of Russia. Sanctions from the U.S. on Russia are much more stringent than the sanctions from the EU, leading to an uneven playing field in Russia. European oil companies are moving forward with new projects will their American counterparts are locked out. –  Tom Kool

 

Silver seems to be Coiling Back now for a Big Leap-Up soon

Silver seems to be Coiling Back now for a Big Leap-Up soon

Silver seems to be Coiling Back now for a Big Leap-Up soon

This spring, gold vastly outperformed silver, leaving the white metal looking for direction. The silver chart shows prices winding up within a huge wedge pattern. – Stefan Gleason

June 16, 2017 - Silver Chart

As the trading range gets narrower and narrower, it sets up a resolution in the form of a very strong directional move one way or the other.

A few more weeks of consolidation are still possible before a decisive break out from the pattern.

In 2016, silver was very strong in the first half of the year and weak in the second half. The first half of 2017 has been something of a wash, setting up something potentially big in the back half of the year.

Silver In Focus Amid Changing Fed Policy

The big news this week comes from the Fed, which announced two things. One, it hiked the Fed Funds rate another 25 basis points. – Keith Weiner

The target is now 1.00 to 1.25%, and there will be further increases this year. Two, the Fed to reduce its balance sheet, its portfolio of bonds. It won’t do this by actually selling, but by not reinvesting some of the principle repaid as the Treasury rolls over each bond at maturity. This is like reducing the workforce by a hiring freeze and attrition, rather than by layoffs.

We are no Fed insiders, but if we were to take an educated guess, we would read the last part as a shuffle between the Fed and the banks. No one can afford rising long-term bond yields, as the banks hold plenty of them and this would be a capital loss. Also, if bond prices drop then all other asset prices would drop too. Banks would take another hit.

Right now, the banks are lending to the Fed at 1.25%. The Fed uses this cash to finance its purchase of long Treasury bonds. The 10-year bond closed on Friday at a yield of 2.16%. If the Fed can arrange for the banks to swap, basically slowly draw down their excess reserves and buy the bonds, then it would not cause the bond market to crash. At the same time, the Fed can say that it has shrunken its balance sheet. There would be no change in the bond market, but the banks can bypass the Fed, while increasing their net interest by about 0.9%.

This move would have one nonobvious side effect. The duration risk moves from the Fed to the banks. This is the risk of capital loss, if the interest rate should move upwards. At least the risk moves to the banks nominally. In practice, the Fed will have to bail out the banks should they get hit by this (or assure the banks that the Fed will do everything it can to prevent long bond yields from rising).

We present the issue in these terms, because bank solvency (and the Fed’s own solvency) is the real motivation of the Fed. Price stability—defined to make Orwell proud, as rising prices of 2% per year—is not occurring right now. That is, the Fed has failed to stimulate the price increases that it wishes.

And the Yellen Fed does wish for rising prices. In a key paper she wrote in 1990 with her husband George Ackerlof, Yellen presented her theory of inflation and the labor market. Let’s strip the academic regalia, to see it in plain terms.

  1. Disgruntled employees don’t work hard, and may even sabotage machinery.
  2. So companies must overpay to keep them from slacking.
  3. Higher pay per worker means fewer workers, because companies have a finite budget. Yellen concludes—you guessed it:
  4. Inflation provides corporations with more money to hire more people.

It’s not much as a theory of labor, but does rationalize money printing rather neatly.

The mainstream belief held by Yellen, along with her most trenchant critics, is that rising quantity of money causes rising prices. Never mind that it has failed to work out that way since the Fed turned on the printing press afterburners in 2008. It remains the prevailing belief. So it is somewhat amazing that, with consumer prices falling short of the Fed’s official policy goal of 2% per annum, the Fed is decelerating.

Maybe, Yellen feels that jawboning—saying the economy is getting stronger, etc.—will be more effective than another round of quantitative easing. Maybe. The Keynesians have a cherished belief that so called animal spirits animate markets (and Yellen is a member of the New Keynesian School).

Or, it could be that banks are getting strangled. Banks don’t care about unemployment, nor about consumer prices. They don’t even care about the dollar, being both long and short. That is, they are both borrowers and lenders. They borrow short to lend long.

While the short-term rate has been rising, the long-term rate is back to falling again (which has been the trend since 1981). The effect on banks is: margin compression. The banks are choking, for lack of net revenue oxygen. They will breathe a bit easier if they can make 2.16% rather than the 1.25% as now.

What does this have to do with inflation? Another news item this week illustrates. Amazon bought Whole Foods. Amazon has unlimited access to credit through the bond and stock markets. The lower the interest rate, the more access the big corporations have, to dirtier cheaper credit. They can’t necessarily use this credit to grow their real businesses (one cause and also effect of it being so cheap) but they can use it to make acquisitions. Acquisitions that would not be economic at higher rates.

What will Amazon do with Whole Foods? We would guess that they will pursue Jeff Bezos’ stated vision for the future: that people will always want faster delivery and lower prices. Amazon will use its superior information technology, logistics, scale—and dirt cheap credit—to drive down costs, prices, and margins at Whole Foods. And all other grocers will likely have to follow suit.

So much for higher prices. An expansion of the credit supply (the dollar is not money, which would be gold) is supposed to stoke higher prices, and here is a case where it causes lower prices.

By the way, lest anyone think that this is good because consumers get lower prices, it’s not. Sure, consumers benefit for now. But the real damage comes from the fact that the whole process is fueled by burning investor capital. That is the real nature of too-cheap credit.

And this right here is the indictment of the dollar. Not rising prices, skyrocketing prices, or hyperinflation. At least not now nor the foreseeable future. Falling interest, capital consumption, wage pressures, and unfair advantages handed to crony corporations. All managed by a Fed Chair with a frivolous theory on inflation who knows not what she does.

What does this have to do with the price of gold? Well, the price jumped up early on Wednesday as weak retail sales and inflation data numbers came out. But when Yellen spoke, the gold price fell back down, giving back the whole move and then some.

Which is all just noise. Speculators gonna speculate, but the fundamentals of gold supply and demand do not change with an inflation data report or a Fed Chair monetary policy announcement.

Over time, if people perceive gold as an inflation hedge, and continue to see a lack of inflation, maybe they won’t buy gold or even sell it. If so, they are betting on the dollar as it continues on in its ultra-low interest rate (and long-term falling) environment.

We will take a look at the Wednesday intraday gold basis overlaid with the gold price, below.

This week, the prices of the metals fell. Gold went down about $13, and silver about 50 cents. As always, we are interested in the supply and demand fundamentals. But first charts of their prices and the gold to silver ratio.

letter-june-18-prices2

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved up a sharply.

In this graph, we show both bid and offer prices. If you were to sell gold on the bid and buy silver at the ask, that is the lower bid price. Conversely, if you sold silver on the bid and bought gold at the offer, that is the higher offer price.

letter-june-18-ratio2

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

letter-june-18-gold2

We had a rising price of the dollar (the mirror image of the dropping price of gold). The abundance fell (the basis) and the scarcity increase (the cobasis).

Our gold fundamental price shows a decrease of about $10 to $1,334.

Here is the intraday graph of Wednesday (all times are London) showing the gold price overlaid with the August basis.

letter-june-18-wed-intraday-gold2

The basis starts a little over 0.6% and droops along with the price from about $1,266 to $1,265. As the price shoots up $12, the basis shoots up 12bps. Later, the price begins to drop and so does the basis.

While the amount is coincidence, the relationship is not. It is causal. This is what first speculative buying, then speculative selling, looks like. All in one day.

Now let’s look at silver.

letter-june-18-silver

In silver terms, the dollar rose more (i.e. the price of silver fell more). The decrease in abundance and increase in scarcity were correspondingly greater.

Our silver fundamental price increased two cents (to $17.54). That gives us a fundamental gold to silver ratio of 76.07. Not too far from the close on Friday of 75.12 bid and 75.29 offer.

 

A Bearish Tilt to the Gold and Silver Market – A Great Risk-Reward Setup

A Bearish Tilt to the Gold and Silver Market - A Great Risk-Reward Setup

A Bearish Tilt to the Gold and Silver Market – A Great Risk-Reward Setup

With analysts at most public gold and silver websites now turning decidedly bearish, with the summer doldrums staring us in the face, with the new rate hike raising interest rates (on paper making gold less desirable as it provides no yield), and with the gold seasonals suggesting that “sell in May and go away” was the play, there is a definite bearish tilt to the sector right now.  That’s why (among other things) we have a great risk-reward setup staring us in the face.

Pining thinks it’s a great place to go long (with stops)!  Let me give you a few reasons why, then I’ll outline the trade:

Sentiment:

A quick review of 7 popular and publicly available precious metals analytics/trading sites, and a glance through the comments on those sites, made clear to me that there is (at least roughly) a general consensus in the metals complex right now: after failing to break through 1300, and first pushing through then falling back below the long-term downtrend line in gold, the summer doldrums are upon us and consensus sentiment has turned bearish.  The two most likely scenarios I saw discussed were either (1) we languish and churn lower for the next few months following typical gold seasonals pattern into a July or August low, or we cascade from here into an earlier low, perhaps late June or early July.

I like this widespread bearishness very much.  This is precisely the type of setup the metals love; wrong-foot the investing public, going against well-known patterns (because it’s never that easy in the metals) and making sure the majority of retail is not on the train and has to chase price. That’s also why the so-so COT doesn’t bother me much, that pattern has been a bit TOO clear recently and has been becoming a little too easy to trade, so I think it’s due for a wrong-foot.  In fact it is this “juking the crowd” and subsequent chasing of price on the way up that provides the fuel for the best runs in the metals.  This is an excellent setup from a sentiment standpoint.  Just ask yourself, when was the last time the majority of retail sentiment was dead-on correct and on the right side of the trade in the metals?  Thought so.

GDJX rebalancing is behind us

Regardless of where you stood on the whole GDXJ/JNUG issue, the fact remains that it is now largely in the rearview-mirror.  This means a genuine, significant source of instability in the sector is now largely behind us, removing some of the unpredictability which had been a drag on both price and sentiment.  Additionally, it is likely that money managers who may have previously been hesitant to allocate funds until this nonsense was sorted may now be prepared to put that money back to work, thus bringing an unexpected tailwind that could help things to the upside.  If instability was a negative, then stability should be a positive.  Bullish!

Crossing over of the 50,100, and 200 DMA on the Gold Daily chart:

Don’t look now, but for all the wailing and gnashing of teeth, gold is about to see the 50 DMA above the 100 DMA above the 200 DMA.  This golden cross setup is seemingly timed to catch people off-guard given the poor sentiment we see now, yet will trigger buy signals for technical traders and algos.  With about 60% of stock “market” volume now quants, this is not immaterial.  With a massive turnover in shares last week, especially the huge volume on Fed day last Wednesday (see black arrow on chart, look at that volume level) and follow-up churning, there has been a significant rinse in the complex. Lots of longs have been spooked out of their positions, and some shorts have covered profitably.  This actually looks good to me, with Quad witching just passed on Friday, and particularly the Thursday and Friday follow-on action- no waterfalls, just tons of repositioning.

The tinfoil hat wildcard, but worth a mention: Is the Fed schizophrenic or working a plan?

Traditional analysis says that when the Fed raises rates, gold price craters.  Yet during this recent cycle, when the Fed raised rates Gold took off.  And guess what? The Fed just raised rates.  Short version-  Bullish!

Long version:  I actually think there is a reason for this counter-intuitive recent action in gold when the Fed has raised.  Traditionally, why did the Fed raise rates, and when did they do it?  They raised when the economy was getting hot and genuine fears of inflation were taking hold, and they did so to cool-off inflation and that hot economy by sucking liquidity into bonds through higher yield.  So with better options (yield) available, gold (which produces no yield and is an inflation hedge) went down.  But recently, the Fed has raised with (1) no real signs of inflation, and (2) and a genuinely poor economic picture.  So gold didn’t do what it usually does, and in fact one could argue that gold was simply performing another of its traditional roles- that of the Safe Haven in times of uncertainty- since raising rates into a poor economy is quite possibly a recipe for a stock market crash (given that the market is in a highly overvalued position historically).  In this context, gold rising (insurance) when the Fed (stupidly) raised rates actually makes perfect sense.

Tinfoil Hat version: Has the Fed decided to become as part of “le Resistance” like so much of the Washington establishment has, and is this the sign?  Before you dismiss me as a nutter, answer this simple question: After 8 years of keeping what was initially billed as “extraordinary measures that are historically unprecedented and temporary” in place for nearly a decade now, why has the supposedly ‘data-dependent’ Federal Reserve suddenly just hiked rates AGAIN at a time when economic data just missed so badly? Again? And yes, the previous sentence showed how what the Fed once described as temporary is now permanent, what was once extraordinary is now standard, and how “data dependent” means ignoring the data no matter how bad it is.  This is sheer Schizophrenia. Or, you know, Central Banking.

The most recent miss inspiring our data-driven Fedsters to hike more was so big it was the worst miss in six years!  In fact, the last time economic data disappointed by this great a margin the situation was considered dire to such a degree that Bernanke unleashed “operation twist”… back in August of 2011. So how is this rate hike in any way logical for a “data-dependent” Fed, absent the deliberate intent to muck things up?

If the Fed were truly making policy as economic data dictates, they wouldn’t be doing this.  So why keep hiking rates into a dumpster-fire of an economy when they know could easily lead to a major stock market correction, crash, and/or recession at some point (maybe soon)?  Occam’s razor suggests: because they’ve decided that’s what they want!  If you do A, knowing it will probably cause B, that strongly suggests you desire B as an outcome.  Simple. Call me crazy all you want, but that explanation seems quite consistent with the tone and behavior I’ve seen coming from the rest of the DC/government establishment for the last half year, so I don’t see why the Fed would be any different. When the feeding trough is threatened, some folks ‘resist’, some folks leak, some folks hike.  Potato, po-tah-to.

And if you think the market won’t be allowed to drop because it’s never allowed to drop, ask yourself WHO has not been allowing it to drop for the last 8 years?  The PPT/Fed.  And what are these rate hikes suggesting they might want now?  Ummm hmmm.

Regardless, don’t totally sleep on the long-shot catalyst folks; the S&P finally heading south as a possible catalyst for gold…

Trendline test, rise above, and rejection:

One of the lessons I’ve learned the hard way in the metals is that trend lines are not what classical trading theory says they are.  In classical trading theory, a trend line should act as a psychological level of support or resistance, and when (for example) price rises then bumps up against it then breaks through, it is supposed to trigger a new wave of buying as other market participants (seeing the strength of price in breaking through the barrier) join in the buying, driving price higher (or of course, in some cases rejecting price and sending it back down).

But all that supposes free and fairly traded markets among participants of equal standing before the law.  And these are the metals. HAHAHAHAHAHAHA!!!!!  So here, trend lines are places where, when resistance is breached, once price breaks through and attracts new buyers, THEN the market “makers” crush price with an avalanche of paper to harvest all that new money that just came in. Ring the register, bank the bonus.

So the way trend lines work in the metals is that price bumps against resistance or trend lines, and if it goes through bringing in new longs, THEN it gets smashed back down below, and only when everyone who just got run has either been cleared out or turns bearish will price finally be allowed the possibility to rise back up through that line at some point.

In other words, in the metals, trend lines are only valid indicators after the gang-rape has occurred there.  We’ve now had that in gold (twice, actually), so in my book, we are finally clear for a rise up through 1300.  Strange?  Yeah, but that’s how it works around here.

The Bottom Line: Risk vs. Reward

In the end, all of the above is just food for thought, or fun speculation.  As the wizened sage of the trading pits atlee once said, “That’s a nice story.  Ms. Market doesn’t care about your story, she will go where she wants.”

This is a basic range-trade with well-defined risk vs. reward.  You take the known trading range, buy-in near the recent low of that trading range, and use that as your stop- it’s a simple play, regardless of whether any of the above winds up being a catalyst or not.  Right now, GDX is just above the recent lows of May, so we have a very clear and recently defined low. We need to make a higher low above this level if we are going to continue moving up, so there is your well-defined stop-loss level.  GDX is around 22, and 20.75 would be my stop-loss for this trade… we go below that, the trade is busted, so get out (FYI, I find that gold and silver are gamed so much day to day that setting stops, entries and exits via GDX is much more reliable and predictable, even if the vehicles I am trading are gold and silver).  A tight, well-defined 5-6% stop-loss if you’re wrong is acceptably low risk IMO.

But the reward… if this takes off like I think it could, we would at least revisit the highs of GDX 31.5 of last summer. The safe play would be to take 50% profits near that point, then wait for market action to decide further, but I suspect it’s possible that the momentum generated by a rise from 22 to 31 would mean that bull might very well keep running until we hit the 36, and possibly on the outside the 40-42 range. But let’s stay conservative (recent range-bound) in our calculations and stick with the 31.5 figure- that would be an unleveraged gain of 43%.  Put another way, that’s a risk/return ratio of 7.7 to 1 on this trade.  (Best Borat voice) Verra Niiiiiiiice!!!! And if it keeps rolling to 36 or even 40? Ka-ching!

.     .     .

So you can have your summer doldrums, your new lows, and your gold seasonals.  This parrot, with disciplined stops, is going long. – Pining 4 the Fjords

Don’t Worry, Gold Prices Will Soar – These 7 Worrisome Signs Will Ensure It

Don't Worry, Gold Prices Will Soar - These 7 Worrisome Signs Will Ensure It

Gold Prices Will Soar – These 7 Worrisome Signs Will Ensure It

Gold prices got crushed in the post-election rally, but a little over five months into 2017, the yellow metal is up 10.5%—making it one of the best-performing assets of the year so far.

While the outlook for the US economy is more positive than it was 12 months ago, if we zoom out for a moment, the big picture “ain’t so rosy.”

Gold has historically done well in times of uncertainty and panic… and with these seven worrisome signs, there could be plenty ahead.

#1: Interest Rates Are Still Near Record Lows

Source: St. Louis Fed

In the wake of the financial crisis, the Fed lowered the federal funds rate—the main determinate of interest rates—to 0%. That zero-interest-rate-policy (ZIRP) has had wide-ranging implications for conservative investors.

And even though the Fed has been hiking rates recently, rates are still nowhere near a range that would provide savers and income investors the healthy 4–6% yields they saw before the 2008 Financial Crisis.

Gone are the days when people could keep their savings in a bank account and watch their money compound. This is also a major problem for pension funds (and retirees) that rely on high-grade investments like US Treasuries to earn returns.

Which brings us to…

#2: Bonds Offer Measly Returns

A direct consequence of the Fed’s ZIRP is that bond yields have collapsed.

Although the benchmark US 10-year Treasury yield is up around 60% from its July 2016 lows, it’s still way below its 40-year average.

Meager returns on offer have pushed investors into riskier assets in search of decent yield. That includes dividend stocks, which have seen a huge influx of capital.

#3: Dividend Stocks Aren’t What They Used To Be

Source: multpl

As ZIRP sent bond yields south, investors piled into dividend-paying stocks as a way to generate returns. A direct consequence of this is that dividend yields on S&P 500 stocks have fallen to 1.91% and are now 32% below their long-term average.

Along with falling yields, investors who want to buy income-producing stocks these days are facing rich valuations. The average price-to-earnings ratio of the S&P 500 Dividend Aristocrats ETF (NOBL) is 21.1—higher than that of the broader S&P 500 index. An ETF tracking that index, SPDR S&P 500 ETF (SPY), has an average P/E ratio of 18.7. This number is itself high, which only reinforces the point that dividend-paying stocks have reached unsustainable levels of valuation.

As such, dividend stocks are richly valued and a poor alternative to bonds today, especially as they are reliant on economic growth. And, well…

#4: Economic Growth Is Anemic

Source: St. Louis Fed

Between 1967 and 2007, the US economy grew at an average nominal rate of 7.3% per annum. However, in the last nine years, GDP growth has averaged just 2.8%.

President Trump said he can get the economy growing “bigly” again. But that’s unlikely, given major barriers to growth, such as a massive debt burden…

And it looks like he will have to face the fact that US economic growth is losing its momentum. Second-quarter GDP growth projections were lowered by Wall Street analysts and the Fed forecasting arms alike. Morgan Stanley revised its 2Q17 GDP forecast to 2.5% while the Atlanta Fed has dropped its second-quarter number from 3.4% to 3%.

Whether Mr. Trump can reverse this trend is yet to be seen. But it appears that he is looking at an uphill battle.

#5: The Federal Debt Has Exploded

Source: St. Louis Fed

From George Washington, to George W., the federal debt went from $0 to $9.2 trillion. Since 2008, US government debt has skyrocketed to $19.85 trillion—a 116% increase in just eight years.

The non-partisan Congressional Budget Office (CBO) projects $10 trillion will be added to the federal debt over the next decade and estimates the cost of servicing the debt will triple over the next 10 years. That would bring interest payments alone to over $600 billion per annum.

For some context, that’s more than the total 2016 outlays for the Department of Defense and Education… combined.

#6: The Dollar Has Lost 87% Of Its Value

Source: St. Louis Fed

The US dollar may be rising against other fiat currencies like the euro and the yen, but its purchasing power has fallen 86.5% in 50 years.

The dollar’s decline has slowed somewhat in the last decade. However, with the Federal Reserve doing its level best to create inflation, you can be sure it will continue.

But there’s something that may not continue for much longer…

#7: We Are Overdue For A Bear Market

Source: S&P Global

In March, the bull market in common stocks celebrates its eighth birthday—making it the second longest of its kind in US history. With the current bull run having exceeded the average length by over three years, it may be time to take some money off the table.

So, how can savers and investors protect their wealth from any negative consequences that could arise from these unhealthy trends?

Now Is The Time Add Gold To Your Portfolio

With the measly returns offered up by bonds, an overextended bull market, and a bleak economic outlook, adding gold to your portfolio is a wise move.

Gold bullion has proven to be a store of value and a reliable wealth preservation tool over many centuries… unlike the dollar. In the event of a stock selloff, it can serve as “portfolio insurance.”

Even if markets continue to rise in the interim, gold will do well. Since late 2015, the yellow metal has outperformed the S&P 500 by 30%.

Placing 5%–10% of your assets in bullion adds a crisis-nullifier to your portfolio… and the current setup certainly lends itself to it. – Stephen McBride

Fed Rate Hikes hurt Stock Markets, but are Bullish for Gold Prices

Fed Rate Hikes hurt Stock Markets, but are Bullish for Gold Prices

Fed Rate Hikes hurt Stock Markets, but Bullish for Gold Prices

Gold prices reversed sharply lower after the Fed’s latest rate hike this week, on heavy selling from speculators and investors alike.  Bearish sentiment flared on traders’ long-held belief that higher rates spell trouble for zero-yielding gold.  But market history reveals the opposite, that Fed rate hikes are actually bullish for gold prices.  This week’s Fed-induced gold dump is likely to flag gold bottoming just before a major new rally erupts.

There’s nothing gold futures speculators fear more than Fed rate hikes.  Their rationale is simple and logical.  Gold pays no interest or dividends, it’s a sterile asset with returns solely dependent on capital gains.  So as interest rates rise and boost yields for bonds and stocks, gold struggles to compete.  Thus gold investment demand wanes as yield differentials grow between it and major competing asset classes.

This idea often leads gold futures speculators, and to a lesser extent gold investors, to sell leading into and immediately after Fed rate hikes.  Higher rates are viewed as gold’s mortal nemesis, lowering its relative attractiveness to investors.  So this Wednesday after the Federal Open Market Committee hiked its key federal-funds rate for the fourth time in this cycle, gold prices plunged from $1276 to $1257 within a couple hours.

Fed-rate-hike fears have plagued gold prices for years, if not decades.  Back in late 2015, the Fed had held its FFR near zero for a mind-boggling 7 years!  It was preparing to end its stock-panic zero-interest-rate policy with its first rate hike in nearly a decade.  I needed to better understand how Fed rate hikes really affected gold prices historically, so I did a comprehensive study before that hike which I just recently updated.

Before today’s rate-hike cycle was born in mid-December 2015, the Fed had executed fully 11 rate-hike cycles since 1971.  Those are defined as 3 or more consecutive FFR increases by the FOMC with no interrupting decreases.  Our current rate-hike cycle to which the Fed added a fourth hike this week is the 12th of the modern era, certainly nothing new.  So there’s a substantial rate-hike dataset to evaluate gold’s action.

Far from being slaughtered in Fed-rate-hike cycles, zero-yielding gold actually thrives during them.  Gold prices rallied 26.9% higher on average during the exact spans of all 11 before today’s!  That was driven by huge average gains of 61.0% in the 6 of these 11 where gold prices rallied, and asymmetrically-modest losses averaging just 13.9% in the other 5.  Two key factors governed whether gold prices rallied or slumped in any rate-hike cycle.

The lower gold’s price relative to preceding years heading into a cycle, the greater its gains during that set of rate hikes.  And the more gradual a cycle’s hiking pace, the better gold’s gains.  These conditions have been perfectly met in today’s 12th cycle.  Gold entered it trading at major 6.1-year secular lows, and there has never been a more-gradual Fed-rate-hike cycle!  These rate hikes have indeed proven gold-bullish.

While the fat lady has yet to sing on today’s 12th cycle, the 11th is historical fact.  It ran from June 2004 to June 2006.  During that span, the FOMC hiked at every meeting for 17 consecutive hikes!  All these catapulted the FFR 425 basis points higher, more than quintupling it to 5.25%.  If Fed rate hikes are truly gold’s kryptonite, that aggressive cycle should’ve killed it.  Yet gold prices blasted 49.6% higher over that exact span!

History decisively proves higher rates aren’t a problem for gold investment demand.  Between January 1970 and January 1980, gold skyrocketed a stupendous 2332% higher.  The FFR averaged 7.1% in that span, extreme levels by today’s standards.  From April 2001 to August 2011, gold soared 640% in still another secular bull.  Despite the Fed’s ZIRP implemented in December 2008, the FFR averaged 2.1% then.

So clearly the ever-popular thesis that zero-yielding gold can’t compete in a higher-rate environment is dead wrong.  This week’s aggressive gold selling by speculators and investors alike on a hawkish Fed was emotional and irrational.  All three previous Fed rate hikes in this 12th cycle have actually proven very bullish for gold prices.  This week’s 4th hike shouldn’t play out any differently after the kneejerk selling abates.

To help illustrate why this week’s rate hike is really bullish for gold prices, I built a couple charts.  They examine the holdings of gold futures speculators and gold ETF investors during the Fed’s current rate-hike cycle.  The gold futures data comes from the weekly Commitments of Traders reports.  We’ll start on this speculator side since these gold futures traders wield extremely-outsized influence over short-term gold price action.

Fed Rate Hikes hurt Stock Markets, but are Bullish for Gold Prices

Way back in mid-December 2008 in the epic fear maelstrom of the first stock panic in a century, the Fed implemented its zero-interest-rate policy.  Nearly 7 years after ZIRP’s wildly-distorting artificially-low rates were forced on markets, the FOMC warned of an imminent rate hike at its late-October-2015 meeting.  So gold futures speculators fled in terror, jettisoning longs while simultaneously amassing huge short positions.

It was back then as gold prices plunged on fears of the first rate hike in nearly a decade when I did my original studyon gold in Fed-rate-hike cycles.  In financial markets, popular wisdom is always wrong at extremes.  The consensus view and bets are the wrong ones to make.  All that heavy selling pummeled gold prices to a brutal 6.1-year secular low as the Fed hiked its FFR for the first time in 9.5 years in mid-December 2015.

On that actual FOMC-rate-hike day, gold prices managed to bounce 1.1% off such deep lows.  But the next day foreign traders panicked, igniting heavy selling here in the US.  So gold prices plunged 2.1% to that secular low of $1051 in the wake of the first rate hike of the Fed’s 12th cycle of modern times.  Naturally gold sentiment was off-the-charts bearish.  With ZIRP over, there was just no way zero-yielding gold could compete any more.

Yet what happened?  Over the next 6.7 months gold prices powered 29.9% higher and birthed a major new bull market!  This was partially driven by the same gold futures speculators terrified of Fed rate hikes adding a staggering 249.2k long contracts while covering 82.8k more short ones.  That was the equivalent of 1032.4 metric tons of gold buying, a major amount in a world gold market with 4315.0t of total demand in 2016.

If Fed rate hikes are so bearish for gold prices, why didn’t it collapse 30% over the half-year after that first hike in nearly a decade instead of soaring 30%?  The Fed stayed on hold for an entire year after that, so the sharp plunge in gold prices in the second half of last year had nothing to do with rate hikes.  An improbable series of extreme anomalies centered around the Trumphoria stock-market rally crushed gold 17.3% lower by late 2016.

Gold was stuck in a sickening freefall after the election with the next Fed rate hike looming imminently in mid-December.  The Fed not only hiked the FFR a second time, but its outlook on 2017 rate hikes was more hawkish than expected.  Markets including gold-futures speculators were looking for two, but the so-called dot-plot summary of FOMC members’ predictions instead showed three more rate hikes this year.

So gold prices tanked hard on that FOMC-rate-hike day, falling 1.4%.  The next day this selling continued with another 1.2% drop to $1128.  Again traders were exceedingly bearish on gold prices.  With the Fed proving its hiking wasn’t just a one-off deal, how could sterile gold rally in a higher-rate world?  Yet the next day after that Fed rate hike, gold’s brutal post-election plunge bottomed.  Gold prices surged out of that very Fed rate hike!

Gold futures speculators get so worked up about Fed rate hikes that they sell too much leading into them and in their immediate aftermaths.  That spawns selling exhaustion, leaving big room to buy in order to mean revert those extremely-bearish gold futures bets back to more-normal levels.  So excessive gold futures shorts are covered and new longs are bought.  This catapults gold prices higher in the wake of rate hikes.

You’d think these elite traders would learn, maybe spend a few hours digging into some historical data on how gold really works instead of succumbing to herd emotions and losing money.  But nope, they are too darned stubborn.  So just a couple months after gold prices had bottomed and surged on the Fed’s second rate hike of this 12th cycle, Fed-rate-hike fears crept in again!  The FOMC was paving the way for a third rate hike.

Oh the horror, that would surely prove the final nail in zero-yielding gold’s coffin.  That third rate hike was special, as it would actually finally confirm that a new Fed-rate-hike cycle was indeed underway.  Gold futures speculators fled on soaring Fed-rate-hike odds per the federal-funds futures.  These handicap the likelihood of FOMC rate changes at upcoming meetings based on the bets of elite speculators and hedgers.

The second upleg of gold’s young bull, which were respectively birthed by the Fed’s second and first rate hikes of this cycle, was powering higher into late February.  At that time futures-implied rate-hike odds at the FOMC’s upcoming mid-March meeting were just 22%.  But incredibly over just the next 6 trading days, top Fed officials collectively did so much hawkish jawboning that rate-hike odds nearly quadrupled to 86%!

The FOMC won’t hike until markets expect it, as the Fed doesn’t want to risk surprising the markets and sparking a serious bond or stock selloff.  70% rate-hike odds per federal-funds futures is the minimum necessary for the Fed to actually hike.  So as the certainty crossed that and hit 95% just before the mid-March FOMC meeting, gold futures speculators again fled.  That pounded gold prices sharply lower into that rate hike.

Gold prices fell as low as $1198 the day before that FOMC meeting.  And as usual when markets give it a free pass on hiking rates via very-high federal-funds-futures odds, the Fed indeed executed its third rate hike and confirmed its 12th cycle had indeed begun 15 months earlier.  The gold-futures speculators were so hypnotized by the hawkish Fedspeak that they expected the 2017 rate-hike outlook to climb from three to four.

But it didn’t, so they were once again caught offside in a big way.  You’d think it would get frustrating to keep losing money on making big bearish gold futures bets on Fed-rate-hike fears.  But these guys can’t seem to learn.  So they flooded back into gold with a vengeance on mid-March’s very FOMC-rate-hike day, blasting it 1.9% higher!  That ignited a major new rally that would soon push gold prices to new second-upleg highs.

See the pattern here friends?  Gold yields nothing, so everyone assumes it can’t fare well with higher prevailing interest rates.  Thus the gold futures speculators who dominate short-term price action thanks to their extreme leverage wax super-bearish leading into any expected Fed rate hike, and sell aggressively.  The resulting gold drops spread that bearishness like a virus, infecting everyone else into believing that fiction.

Then the Fed indeed hikes, and the irrational gold futures selling sometimes continues on momentum for another day or two.  But it doesn’t take long for the speculators to realize gold isn’t collapsing on that Fed rate hike.  And their collective bets became so bearish that they have far too many shorts and far too few longs.  So big mean-reversion gold futures buying soon erupts in the immediate wake of Fed rate hikes.

Fed-rate-hike cycles have been very bullish for gold prices historically for the past half-century or so.  The first three Fed rate hikes of this current 12th cycle have proven very bullish for gold prices, igniting a major new bull, sparking its second major upleg, and driving a sharp rally within its uptrend.  So why on earth is anyone the least-bit worried about the Fed’s fourth rate hike this week?  It too should fuel big gold futures buying.

History inarguably proves that Fed rate hikes are bullish for gold prices!  Full stop.  Sooner or later even those gold futures speculators will realize this.  The reasons are as simple and logical as those of that fallacy’s that argues higher rates are the mortal nemesis of zero-yielding gold.  But before I delve into them, let’s briefly switch our focus to gold ETF investors instead of gold futures speculators.  They are major gold players.

The world’s leading and dominant gold ETF is the American GLD SPDR Gold Shares.  It effectively acts as a conduit for the vast pools of stock-market capital to flow into and out of physical gold bullion.  GLD’s holdings are reported daily, offering the highest-resolution read available of gold investment capital flows.  Fed rate hikes not only spark speculator buying, but the ultimately-far-more-important investor buying.

Fed Rate Hikes hurt Stock Markets, but are Bullish for Gold Prices

Way back heading into December 2015 when the Fed was warning of finally staking ZIRP, investors wanted little to do with gold.  The Fed-levitated stock markets starting with the open-ended QE3 in early 2013 had convinced investors stock markets were essentially riskless.  If the Fed was effectively backstopping stock markets so they would rally indefinitely, why bother diversifying stock-heavy portfolios with gold?

Gold is a unique asset that tends to move counter to stock markets, making it the ultimate portfolio diversifier.  Gold investment demand wanes when stock markets are high and volatility is low, generating extreme complacency among investors.  So GLD’s physical gold bullion held in trust for its shareholders hit a 7.3-year secular low the day after that initial Fed rate hike of this cycle back in mid-December 2015.

That quarter-point hike wasn’t much, but after 7 years of ZIRP it signaled the hyper-easy Fed was finally shifting back to tightening mode.  Thus the stock markets sold off sharply in early 2016 as traders feared the Fed was becoming a stock headwind instead of a tailwind.  The S&P 500 dropped 13.3% in several months leading into mid-February 2016.  That was its biggest correction since mid-2011, spooking investors.

As they realized stock markets don’t climb forever but can fall too, investment capital flooded back into long-neglected gold through GLD.  All gold’s quarterly price action last year, from Q1’s surge to Q4’s plunge, can be directly explained by stock-market capital flowing into and out of gold via GLD shares.  And that’s the key to understanding why gold thrives in Fed-rate-hike cycles contrary to expectations of the opposite.

Gold is essentially an anti-stock trade.  Investors shun gold when stock markets are high, so investment demand collapses and gold languishes.  But as lofty stock markets start rolling over into what could be inevitable major bears between the bulls, gold investment demand explodes.  Investors rush back to GLD shares to start diversifying their stock-heavy portfolios.  Higher perceived stock-market risk boosts gold demand.

This is why Fed rate hikes are bullish for gold.  While higher rates indeed lift prevailing yields, they drive major losses in existing bonds and stocks.  Fed rate hikes directly drive bond selloffs, as issued bonds are sold down until their lower yields equal new higher prevailing ones.  But Fed rate hikes also indirectly drive stock selloffs through a couple key mechanisms, more competitive bonds and harder stock buybacks.

Many investors seek incomes, so ZIRP and the still-super-low rates since forced countless traditional bond investors into dividend-paying stocks.  Fed rate hikes make new bond investment relatively more attractive than these yield stocks, leading to selling.  The crazy-low rates also fueled a record boom in corporate stock buybacks.  American companies borrowed cheap money to use to buy back their own stocks.

This stock-price manipulation is greatly curtailed by Fed rate hikes, which naturally make borrowing more expensive.  History has also proven in spades that the monetary tightening inherent in rate-hike cycles is a serious headwind for stock markets.  It’s this stock weakness spawned by Fed rate hikes that drives gold investment demand higher bidding up its price.  Gold’s yield differential has absolutely nothing to do with it.

Speculators dumped gold futures after this week’s fourth rate hike because they expected the weak recent economic data to lead the FOMC to lower its collective 2017 rate-hike forecast below the three from mid-March’s dot plot.  That didn’t happen, as this Fed is hellbent on hiking regardless of the data as long as the stock markets are near record highs.  But this week’s FOMC was exceptionally ominous for stocks.

For years along with ZIRP, this extreme stock-market bull was levitated by Fed quantitative easing.  That involved the Fed literally conjuring up trillions of dollars out of thin air to buy bonds, ballooning its balance sheet to grotesque levels.  This week the FOMC laid out the groundwork for starting to reverse QE through the opposite quantitative tightening.  That is likely to start as early as the Fed’s September meeting!

QT is every bit as bearish for stock markets as QE was bullish for them.  Less Fed bond buying as it gradually allows maturing bonds to roll off its books will force interest rates higher.  That’s a huge problem for wildly-overvalued stock markets precariously kept aloft by abnormally-low interest rates!  QT’s downside impact on stock markets ought to drive exceptional gold investment demand in the coming months and years.

So just like every other Fed rate hike in this cycle, and the past Fed-rate-hike cycles, this week’s Fed rate hike and first-ever QT warning is super-bullish for gold prices.  It’s very likely to again birth a major gold rally as this kneejerk selling passes.  Investors can play this coming upside via that leading GLD ETF, or through the stocks of the gold miners with superior fundamentals.  They are deeply undervalued with vast upside potential.

The bottom line is this week’s latest Fed rate hike is actually bullish for gold prices.  Kneejerk selling based on a false premise isn’t uncommon, but that soon passes.  Both this young gold bull, and its current second major upleg, were born the very next days after Fed rate hikes.  Gold has not only already powered higher in today’s newest Fed-rate-hike cycle, but has thrived on balance in all the past cycles of this modern era.

Fed rate hikes hurt stock markets, which boosts gold investment demand for diversifying portfolios.  And this week’s FOMC announcement heralding the first-ever quantitative tightening is exceedingly bearish for these Fed-levitated record-high stock markets.  As they inevitably roll over, gold investment demand will once again surge and catapult gold much higher.  This trend will generate great wealth for prudent contrarians. – Adam Hamilton

 

The Gold to Silver Ratio – Is it a Fact or Just a Myth?

The Gold to Silver Ratio - Is it a Fact or Just a Myth?

The Gold to Silver Ratio – Is it a Fact or Just a Myth?

A 16-to-1 gold to silver ratio has been the Holy Grail of some silver investors since the mid-sixties.

Unfortunately, fifty years later, it is a quest that continues unabated without success.

In fact, there is evidence that contradicts and widens the chasm that separates wishful thinking from reality.

In the Mint Act of 1792, the U.S. government arbitrarily chose a 16 to 1 ratio of gold prices to silver prices.  The actual prices were set at $20.67 per ounce for gold; and $1.29 per ounce for silver.

Prior to 1792 the U.S. did not strike its own coinage.  That changed with the establishment of the Philadelphia Mint, which was also authorized by the Mint Act of 1792.

The official price of silver and the market value of silver remained relatively close until the late 1800s.

In 1859, prospectors discovered the Comstock Lode in Virginia City, Nevada.  It was the largest silver vein in the world.

Combined with silver already in circulation, this additional supply “flooded the market” and forced the value of silver well below its official price of $1.29 per ounce.  This is another classic, historical example of inflation in a pure sense – a devaluation of the money supply.  The silver in a silver dollar was now worth much less than the official price of $1.29 per ounce.

Congress responded promptly by passing the Coinage Act of 1873, ceasing all production of silver coinage in the U.S.   Five years later it reversed itself by passing the Bland-Allison Act which restored silver as legal tender and required the U.S. Treasury to buy large quantities of it.  Silver producers were awash with the metal and it was hoped that this new agreement would create more jobs within the mining industry.

A series of other legislative efforts either repealed earlier bills, and/or furthered the requirements of the U.S. Treasury to purchase silver to support the market or to use in the production of silver coinage.

For the next seventy years, the U.S. government ramped up its efforts to control the price of silver.  It offered to buy silver at artificially high prices which in turn over-stimulated production of the white metal.  This was pleasing to voters in silver mining states. But in the process, the U.S. government acquired a stockpile of over two billion ounces of unneeded silver.

All the while, the market price for silver continued to decline.  In 1887, the average annual price of silver dropped below $1.00 and by 1932, at the depths of the Depression, reached a low of $.25 per ounce.

Also concurrent with this, the gold to silver ratio continued an upward march.  By the time silver reached its Depression era low of $.25 per ounce, the gold to silver ratio had risen to 80-to-1 ($20.67 divided by $.25).   By 1940, the ratio had risen to an all-time high of 97-to-1 ($34.00 divided by $.35).  (http://www.macrotrends.net/1441/gold-to-silver-ratio)

Silver’s primary value as an industrial commodity asserted itself  beginning with U.S. involvement in World War II and the gold to silver ratio began a gradual decline that lasted for twenty-seven years reaching a low of 16-to-1 in 1968.

After that, and coinciding with free markets for both gold and silver, the gold to silver ratio proceeded to climb all the way back to near 100-to-1 in 1991. There was one, very brief, period of six months between July 1979 and January 1980 when the ratio fell from 32 down to 16 but was back up to 40 almost immediately after that.

Silver investors who are depending on a declining gold to silver ratio are betting that silver will outperform gold going forward.  But, if anything, the chart (see link above) shows just the opposite. For the past fifty years, the ratio has held stubbornly above a rising trend line taking it to much higher levels.

The last spike of any consequence below that trend line happened in 2011; and lasted all of three months.

Other than that, any downward moves of significance in the gold to silver ratio were from much higher levels.  And, to add further discouragement, some favorable – for silver – changes in the ratio occurred with actual silver prices either in decline or already at much lower levels.

Gold and silver are two different items with their own independent functions and uses.

Gold is real money.  Silver is an industrial commodity with a secondary role as money.

The gold to silver ratio that existed one hundred fifty years ago was mostly the result of political influence and appeasement.  It was an arbitrary number.

It might be reasonable to expect a ratio for purposes of consistency and uniformity within the existing monetary system. However, the price used for silver at $1.29 per ounce was considerably in excess of the current (then) market price. It was an early form of price support.

There is no fundamental reason which justifies any particular ratio between gold and silver.  – Kelsey Williams

 

You Realize the Importance – Now here’s how You go about Investing in Gold

You Realize the Importance - Now here's how You go about Investing in Gold

Gold Investment – Here’s how You go about Investing in Gold

Here’s what you need to know after realizing that you need Gold Investment. Before investing in gold – paper or physical – look at the charges, lock-in period, convenience and returns.

We are a gold obsessed country. According to a recent World Gold Council report, it was India’s gold demand that supported the global demand in the first quarter of 2017. While global jewellery demand rose just 1% year-on-year from 474.4 tonnes in the first quarter of 2016 to 480.9 tonnes in the same period of 2017, India’s jewellery demand was up 16% to 92.3 tonnes. Indian households have been buying gold in the form of jewellery. But in the first quarter of 2017, demand for coins and bars also grew 14% year-on-year from 27.5 tonnes to 31.2 tonnes. “This quarter, we have seen growth in both jewellery and investment instruments, but it was on a small base because in Q1 2016, we lost one month due to (jewellers’) strike, implementation of 1% excise duty and hold-back in purchases due to price rise,” said Somasundaram P.R., managing director (India), World Gold Council. If you plan on investing in gold, there are many options. Mint Money decodes the major gold products so that you can see what suits you best.

You Realize the Importance - Now here's how You go about Investing in Gold

Sovereign gold bonds

Sovereign gold bonds, first introduced in 2015, are government securities issued in the units of grams and available in paper or demat form. The bonds are issued by the Reserve Bank of India (RBI) on behalf of the government. The bond’s nominal value is based on the simple average closing price in the week preceding the subscription period, published by the India Bullion and Jewellers Association Ltd. The bonds are issued in tranches. The first series for this financial year was issued in April. The bond was priced at Rs2,901 per gram, which included a Rs50 per gram discount. Minimum investment is 1 gram and maximum, 500 gram, per financial year. This tranche gives an interest of 2.5% per annum on the initial investment, which will be paid half-yearly. The total tenure is 8 years but you can withdraw prematurely after 5 years. In the recent issue, capital gains tax was exempted for individuals but the interest will be taxed. When an issue opens, you can buy it at a bank, designated post offices or stock exchanges. There are no additional charges for holding them.

Gold ETFs

Before sovereign gold bonds entered the market, gold exchange-traded funds (ETFs) existed as the paper gold product. Launched in 2007, gold ETFs give returns in line with the change in gold prices. Each unit is backed by 24-carat gold of 99.5% purity. To buy gold ETFs, you need to open a demat account. Gold ETFs track domestic price of gold and usually each unit of ETF is equivalent of 1 gram gold. The underlying asset is physical gold and some cash left for adjustment. Charges are in the form of expense ratio—mostly 0.9-1%. Returns on gold ETFs are the value minus the expense ratio. So, if the value of the ETF is up 10% and the expense ratio is 1%, your returns will be 9%. You will also need to factor in the brokerage cost of opening a demat account, and taxes. Unlike sovereign gold bonds, there is no cap on the amount for investing in gold ETFs.

Gold mutual funds

Not everyone has a demat account to buy gold ETFs. So, asset management companies (AMCs) launched gold mutual funds. With this you can invest in paper gold without a demat account. The money is invested in the fund house’s gold ETF. You can invest in fractions; for example, you can invest an amount that’s worth 12.8 gram. “In gold mutual funds, you can do fractional holding, which is not possible with gold ETFs. It gives you the flexibility to invest through SIP (systematic investment plan) or in lump sum, but remember that the expense ratio is higher,” said Srikanth Meenakshi, co-founder, FundsIndia.

Charges are in the form of expense ratio. “Gold funds will add the gold ETF expense ratio as well,” said Lakshmi Iyer, chief investment officer (debt) and head-products, Kotak Asset Management Co. Ltd. For instance, the expense ratio of Canara Robeco’s gold fund is 0.76% and the gold ETF’s is 1%. Since the mutual fund invests in the gold ETF, you end up with an expense ratio of 1.76% in this case. There are no other costs attached to gold mutual funds. AMCs also offer some schemes that invest in shares of gold mining companies.

Gold coins and bars

Gold bars and coins are sold at jewellery stores, banks, online portals and even by a fintech company. If you buy from a bank, you can’t sell it back to them. The unit size varies. For example, according to the State Bank of India website, you can buy gold coins of 2, 4, 5, 8, and 10 grams, while 20 and 50 gram are in the form of bars. With Bank of India, the lowest denomination is 4 gram.

Prices are based on the day’s gold price, and are usually displayed on the bank’s website. While buying coins and bars, check for purity. You also have to pay value added tax, sales tax and, in some cases, making charges. Also remember that the sell price will be lower than the buy price.

Gold jewellery

With investing in gold jewellery, besides the cost of gold, consider making charges, charges on stones, if any, purity and buyback offer. To check purity, look for hallmarking, which tells you the official proportion of the metal. You also need to look for caratage. For instance, 22K means 91.6% purity (percentage of gold content) or 916. Making charges are usually a percentage (6-25%) of the cost of gold, and you can bargain. With stone-studded jewellery, it is difficult to check the purity. Also, at the time of selling, you will have to let go of the making charges and the cost of semi-precious stones.

What should you do?

Gold as a product is a long-term hedge against inflation. If you plan to buy gold for investment, keep four things in mind. One, any gold-related investment comes with the risk of capital loss if the market price of gold declines. Two, only if you are looking to diversify your overall portfolio is an exposure of 5-10% of investing in gold recommended. Three, compare the pricing, costs, service and returns of the instruments. Four, know the reason for buying gold—self-consumption or investment purposes. For instance, jewellery is the worst way of investing in gold since you will incur a loss in the form of making charges and taxes.

When it comes to selecting a gold investment option, sovereign gold bonds bode well, followed by gold ETFs. “If you are looking to invest for a longer duration and don’t mind the lock-in period, sovereign gold bond will work because you also earn an interest. But if you want liquidity, you may want to consider investing in gold ETF,” said Surya Bhatia, a New-Delhi based financial planner. Do remember that gold mutual funds are more expensive than gold ETFs due to higher expense ratio. “The benefit is that one can do SIPs or STPs (systematic transfer plans) with the benefit of rupee cost averaging, and without a demat account. We recommend sovereign gold bonds as the best option currently, followed by gold ETFs,” said Vishal Dhawan, a Mumbai-based financial planner.

The government has also introduced the Gold Monetization Scheme, which allows you to earn interest on the gold that you own by depositing it with a bank. – Vivina Vishwanathan

 

The Gold Bull Market Appears to have Much More Room to Run

The Gold Bull Market Appears to have Much More Room to Run

The Gold Bull Market Appears to have Much More Room to Run

Even with gold’s recent pullback from $1,290 last Thursday to $1,269 today, gold prices are up almost 20% since the beginning of 2016.

Gold stocks also rocketed up before settling back into the current range.

Today, we’re going to look at how much upside we could experience from here…

Before we look ahead, though, let’s take a brief look back. Below is a chart depicting the past 17 months of gold and mining stock price movement, since the beginning of 2016.

The chart shows the price of gold ($GOLD) versus a well-run exchange traded fund, the Sprott Gold Miners ETF (SGDM).

As you can see, miners had a great run in 2016, certainly through August. Since then they’ve pulled back.

But the point is we’re still looking at a healthy market.

Fundamentals are good across the gold mining space. They’re trading in a range for now while markets figure out what happens next.

The recent rally is even more dramatic when you look at how deep in the tank things were back before 2016.

Here’s a similar chart depicting the past four years of price movement using the same comparison:

Clearly, gold and mining shares were way down in 2014 and 2015. We lived through a historic bear market — the Mining Zombie Apocalypse, as I call it.

The recovery and breakout between January and August 2016 created a lot of new wealth. Yet the pullback since last August has placed the overall market into a long trading range.

Highs and lows are narrowing, so sooner or later, we’re due for some sort of breakout.

The logical question to ask is what could the upside be from here?

For each of the past 11 years, an investment firm called Incrementum has issued a well-regarded summary of gold entitled In Gold We Trust. The 2017 edition was released earlier this month, and it’s packed with insights making the positive case for gold.

Incrementum’s institutional view is that the gold price turnaround last year “marked the end of the cyclical bear market.” Incrementum pounds the table, figuratively, writing that “the rally in the precious metals sector has probably only just begun.”

To illustrate the point, Incrementum tracked the performance of the six bull markets for gold miners since 1942, using the Barron’s Gold Mining Index. Their data reveals that past bull markets soared into the range of 600–700% gains. Of course, many individual companies performed even better than that.

Based on that history, the bull market for gold that began in 2016 appears to have much more room to run.

Indeed, based on past bull markets, it looks like we’re very much in the early days of our bull market. There’s more beef on the bones of this bull, with dramatic upside ahead.

Aside from historical analogy, consider the current market drivers for gold and miners…

As my partner Jim Rickards notes over and over, we’re looking at higher gold prices for a host of reasons. Indeed, Jim wrote an entire book on the topic, The New Case for Gold.

At the level of the industry itself, gold miners have learned to profit at lower metal prices — comparable to how the oil fracking industry has learned to make money at relatively low oil prices.

It’s all about capital discipline and applying new technology.

From 2012–15, many gold miners generated significant negative cash flows. Now, though, the situation has brightened. In 2016, gold mining companies in the HUI Gold Index generated free cash flows totaling $4.8 billion, which exceeded the previous record high of 2011.

At the “macro” level of investment logic, there’s a strong case to be made that it’s time for a cyclical turn of institutional funds into gold mining shares. The reasons are not exactly shocking. Unstable global debt levels, the erosion of the dollar as a global reserve currency and the potential for a looming U.S. recession are serious factors at play here.

Then we have the Fed and its interest rate games. According to the Incrementum report, rising interest rates preceded nearly every U.S. recession going all the way back for 100 years.

“The historical evidence is overwhelming,” say the report. “In the past 100 years, 16 out of 19 rate hike cycles were followed by recessions.” As Jim has explained in the past, gold does well in recessions. Meanwhile, we’re awaiting a Fed rate hike tomorrow.

All of this reminds me of a quote from the great financier Bernard Baruch: “A speculator [is] a man who observes the future and acts before it occurs.” – Byron King

 

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