Commodity Trade Mantra

In the Near Future, Gold is Certainly going to get very, very Overpriced

In the Near Future, Gold is Certainly going to get very, very Overpriced

In the Near Future, Gold is Certainly going to get very, very Overpriced

Earlier this week, we shared some of Jim Rogers’ insights from his recent interview with Real Vision Television.

Jim is a legendary investor, best-selling author and Guinness World Record holder. So when he speaks, smart investors listen.

Today, we’re sharing a few more of Jim’s insights… on fear in the market, how to buy gold and the one sector Jim is bullish on today…

Buy Gold – How being “fearless” is good… sometimes

Millennials (or, for that matter, young people – regardless of the generation) often get a bad press. But, in a bull market, Jim Rogers believes that under-35s can make serious gains because of their fearlessness.

“When things are going right, we all need a 26-year-old. There’s nothing better than a 26-year-old in a great bull market, especially in a bubble, because they’re ’fearless‘. To youthful investors, a bull market will never end…”

Now, that’s great in a bull market. But in stormier weather when things are going south, Jim thinks that older (and perhaps wiser) heads should take the helm because fearlessness can be very dangerous in a bear market.

As Jim says, most of these under-35s don’t know why they made money in the first place. So they don’t know why they lose money.

“The most dangerous time is when you’ve had a great success because you really think you’re smart, and you’re immediately looking for what’s next. And that’s when you should close the windows and go to the beach or do anything to get away.”

In short, during uncertain times, sometimes the best thing to do is nothing. And part of doing nothing is holding what’s maybe one of the most-hated assets of all: Cash. It doesn’t earn anything, inflation eats away at it, central banks can’t stop printing it, and you’re denying yourself the magic of compounding if you’re holding cash.

But cash is the perfect hedge. You don’t have to worry about the market crashing if you have a lot of cash.

Now, we don’t recommend ever pulling out of the market completely, as we’ve written before. But if the market starts looking uncertain, think about raising a little cash.

Why agriculture should be on your radar

Markets are more predictable than most people think. Stocks, sectors and markets rise and fall over time on repeat. For investors, it’s tempting to think that because a sector has been rising for some time… it will keep going up. Or that because another has been bearish for a while… that it won’t ever improve. This is called “status quo bias” – and it’s one of the most dangerous emotions in investing.

One sector that has been bearish for a long time is agriculture. It is down around 30 percent over the last two decades. But what goes up must come down (and vice-versa). Jim understands this, and that’s why he’s bullish on agriculture.

“Often throughout history if you find things that are disasters and you buy them, you may lose money first or you may go bankrupt first, but usually you make a lot of money in the end. It’s not the first time we’ve had big cycles in agriculture, in real assets, and probably not be the last time either.”

We’ve said something similar before: Often the best time to invest is when things are at their worst. That’s because shares are cheap when market confidence is low. And, since markets move in cycles, those cheap shares are bound to rise in value sooner or later.

If you want to follow Jim’s lead and buy into agriculture, he recommends the ELEMENTS Rogers International Commodity Agriculture ETN (New York Stock Exchange; ticker: RJA).

Everyone should own gold

Jim has been a long-time gold holder. And he believes everyone should hold gold – at least as an insurance policy.

Everybody should have coins, physical coins, as an insurance policy, as an emergency, if nothing else. You hope you never need them. But you’ve got to start by owning gold coins, coins that are recognized all over the world.”

History has proven time and again that gold is one of the best ways to hedge your portfolio – that is, to protect it when stock markets everywhere fall. And, unlike paper money, gold is a permanent store of value. Gold has withstood history and maintained its inherent value. It’s durable, easy to transport, looks the same everywhere, and it’s easy to weigh and grade. In short, gold is insurance against financial calamity.

But what about investing in gold today? Jim says he’s not selling, but he’s not buying right now either.

“I’ve owned gold for many, many years. I’ve never sold any gold. I haven’t bought any serious gold since 2010. Before this is over, gold is going to turn into perhaps a bubble. It’s certainly going to get very, very, very overpriced. I’m not buying it now. But short of war, I expect another opportunity to buy gold and silver. And if it happens, I hope I’m smart enough to buy a lot.”

When the time comes, Jim believes gold coins are the best way to buy gold. But if you want to make big profits, look at gold futures and miners.

“You should have physical possession of some gold coins. After that, gold futures are the best way if you want to make money and you’re a good trader. Gold futures, that’s where you can get the most leverage, unless you can find the right gold mine. But there are hundreds of gold mines. So if you find the right gold mine, do it. But otherwise, have some gold coins in your closet or in your safety deposit box or both. And then learn about gold futures because that’s the way to make a lot.”

Like Jim, we’re fans of owning physical gold. But if you can stomach the volatility, my preferred way to invest in gold stocks is through a gold-mining ETF like the Sprott Gold Miners Fund (New York Stock Exchange; ticker: SGDM).

As I told you earlier, it pays to listen to Jim. So I hope his latest ideas will serve you well. – M

This Could Send Gold Prices Much Higher Than $10,000

Jim Rickards is on record forecasting $10,000 gold.

But is China about to provide the catalyst to send gold even higher? And by how much?

Today, we fare forth in the spirit of speculation… follow facts down strange roads… and arrive at a destination stranger still…

China — the world’s largest oil importer — struck lightning through international markets recently.

According to the Nikkei Asian Review, China has plans to buy imported oil with yuan instead of dollars.

Exporters could then exchange that yuan for gold on the Shanghai Gold Exchange.

Not only would the plan bypass the dollar entirely… it would restore gold’s role in international commerce for the first time since 1971, when Nixon hammered the last nail through Bretton Woods.

If the rumors hold true, China’s plan could enter effect by the end of this year.

Billionaire business magnate and sound money advocate Hugo Salinas Price ran China’s plan through his calculator.

It turned up a basic math problem that spells drastically higher gold prices — if the plan is to work.

Details to follow.

But first some background on oil and gold… a brief detour down Bretton Woods Lane…

Price:

By 1970, it was evident to those running the U.S. that it would very soon be necessary to import large quantities of oil from Saudi Arabia. Under the Bretton Woods Agreements of 1945, the immense quantities of dollars that would shortly flow to Saudi Arabia in payment of their oil would be claims upon U.S. gold, at the time quoted at $35 an ounce. Those claims would surely deplete the remaining gold held by the U.S. Treasury in short order.

Washington found itself on the sharp hooks of a dilemma…

Dramatically raise the price of gold to limit redemptions — and devalue the dollar in the process — or repudiate its commitments under Bretton Woods.

Dishonor, that is… or dishonor.

It chose dishonor.

Price again:

To continue under the Bretton Woods monetary system would have meant that the U.S. would have been forced to raise the price of gold to an enormous figure in order to reduce the amount of gold payable to the Saudis to a tolerable level. But raising the dollar price of gold in that manner would have constituted a great devaluation of the dollar and collapsed its international prestige; that in turn would have ended the predominance of the U.S. as the No. 1 power in the world. The U.S. was not willing to accept that outcome. So Nixon “closed the gold window” on Aug. 15, 1971.

If China is willing to trade gold for oil under its latest plan, a similar dynamic enters play.

Consider:

China takes aboard some 8 million barrels of oil a day.

That’s 2.92 billion barrels per year — nearly 3 billion in all.

But China holds only a few thousand metric tons of gold (officially about 1,850. Some estimate the true figure much higher).

You see the problem, of course.

China rapidly depletes its gold reserves if too many oil exporters choose to exchange yuan for gold.

If the plan’s to be sustainable at all, gold must rise — drastically — in order to balance the vast amounts of oil it’s supporting.

As Price explains, “To balance the mass of oil received by China against a limited amount of available gold… it will be necessary for gold to skyrocket upward in yuan terms and, necessarily, in dollar terms as well.”

Price crunched the numbers…

One ounce of gold (about $1,300) currently fetches 26 barrels of oil (about $50 per).

One barrel of oil is worth 1.196 grams of gold.

Price calls this ratio “an unsustainably low purchasing power of gold vis-a-vis oil.”

Only a drastically higher gold price would render the plan plausible.

How far would gold have to climb before the relationship was stable in Price’s estimate?

Ten times. Thus, Price arrives at a reasonable gold price:

$13,000 per ounce.

Price:

At $13,000 per gold ounce, one barrel of oil, at $50, will be bought with 0.1196 grams of gold; perhaps we may see $13,000 per oz gold in the not distant future.

Here, a road map to $13,000 gold.

We don’t know if Price’s figure is correct.

But if not $13,000, it seems gold would have to rise dramatically if Price’s thesis is correct — or else China’s plan collapses.

We can only conclude that China knows the implications of the math.

$13,000 gold also means a massive devaluation of the yuan.

China prefers a weak yuan to goose exports. But a worthless yuan?

The plan may prove a mirage in the end for all we know.

But if the plan does proceed… Jim Rickards’ $10,000 gold prediction might be vindicated — fully and then some. – Brian Maher

 

Finance is the Tail that Wags the Dog – How Big Banks Became Our Masters

Finance is the Tail that Wags the Dog - How Big Banks Became Our Masters

Finance is the Tail that Wags the Dog – How Big Banks Became Our Masters

Ten years on from the financial crisis, it’s hard not to have a sense of déjà vu.

Financial scandal and wrangles over financial rule-making still dominate the headlines. The cyberhacking at Equifax compromised personal records for half of the adult population of the United States. At SoFi, a one-time fintech darling that crowd sources funding for student loans and other types of credit, the chief executive was forced to resign after revelations of sexual harassment and risky lending practices (the company misled investors about its finances and put inexperienced customer service representatives in charge of credit evaluations). The White House and Republicans in Congress in the meantime are trying to roll back hard-won banking regulations in the Dodd-Frank financial oversight law.

All of it brings to mind an acronym familiar to financial writers like myself — BOB, or “bored of banking.” Even some of us that cover the markets for a living can find ourselves BOB. Over the last 10 years, there has been so much financial scandal, so many battles between regulators and financiers, and so much complexity (more liquidity and less leverage with your tier one capital, anyone?) that a large swath of the public has become numb to the debate about how to make our financial system safer.

That’s a dangerous problem, because despite all of the wrangling and rule making, there’s a core truth about our financial system that we have yet to comprehend fully: It isn’t serving us, we’re serving it.

Adam Smith, the father of modern capitalism, envisioned financial services (and I stress the word “service”) as an industry that didn’t exist as an end in itself, but rather as a helpmeet to other types of business. Yet lending to Main Street is now a minority of what the largest banks in the country do. In the 1970s, most of their financial flows, which of course come directly from our savings, would have been funneled into new business investment. Today, only about 15 percent of the money coming out of the largest financial institutions goes to that purpose. The rest exists in a closed loop of trading; institutions facilitate and engage in the buying and selling of stocks, bonds, real estate and other assets that mainly enriches the 20 percent of the population that owns 80 percent of that asset base. This doesn’t help growth, but it does fuel the wealth gap.

This fundamental shift in the business model of finance is what we should really be talking about — rather than the technocratic details of liquidity ratios or capital levels or even how to punish specific banking misdeeds. The big problem is that our banking system would no longer be recognizable to Adam Smith, who believed that for markets to work, all players must have equal access to information, transparent prices and a shared moral framework. Good luck with that today.

While the largest banks can correctly claim that they have offloaded risky assets and bolstered the amount of cash on their balance sheets over the last decade, their business model has become fundamentally disconnected from the very people and entities it was designed to serve. Small community banks, which make up only 13 percent of all banking assets, do nearly half of all lending to small businesses. Big banks are about deal making. They serve mostly themselves, existing as the middle of the hourglass that is our economy, charging whatever rent they like for others to pass through. (Finance is one of the few industries in which fees have gone up as the sector as a whole has grown.) The financial industry, dominated by the biggest banks, provides only 4 percent of all jobs in the country, yet takes about a quarter of the corporate profit pie.

Perhaps that’s why companies of all stripes try to copy its model. Nonfinancial firms as a whole now get five times the revenue from purely financial activities as they did in the 1980s. Stock buybacks artificially drive up the price of corporate shares, enriching the C-suite. Airlines can make more hedging oil prices than selling coach seats. Drug companies spend as much time tax optimizing as they do worrying about which new compound to research. The largest Silicon Valley firms now use a good chunk of their spare cash to underwrite bond offerings the same way Goldman Sachs might.

The blending of technology and finance has reached an apex with the creation of firms like SoFi, which put the same old models on big data steroids. It’s an area we’ll likely hear much more about. A couple of weeks ago, at the Senate Banking Committee hearings on fintech, lawmakers once again struggled with how to think about these latest lending crises. But it’s not data or privacy or algorithms that are the fundamental issue with our financial system. It’s the fact that the system itself has lost its core purpose.

Finance has become the tail that wags the dog. Until we start talking about how to create a financial system that really serves society, rather than just trying to stay ahead of the misdeeds of one that doesn’t, we’ll struggle in vain to bridge the gap between Wall Street and Main Street. – Rana Foroohar

Here’s The Fundamental That Matters Most To The Price Of Gold

Here's The Fundamental That Matters Most To The Price Of Gold

The Fundamental That Matters Most To The Price Of Gold

There are all sorts of positive fundamentals when it comes to the price of gold. There are the positive supply/demand fundamentals. The gold market is in a supply deficit. Mine reserves are at a 30-year low. The price of gold is below what is necessary to sustain the gold mining industry.

There are the positive geopolitical fundamentals. The world’s two most-unstable leaders – Kim Jong-un and Donald Trump – have been constantly trading threats and insults. And both of these people have nuclear weapons at their disposal. There is the endless “War on Terror”.

There are the positive economic fundamentals. Western real estate bubbles in major urban centers are at never-before-seen levels of insanity. Western markets are generally also at bubble levels, with U.S. markets representing bubbles on steroids . Western governments are bankrupt.

In relative terms, none of these fundamentals count.

There is one more important fundamental for the price of gold. Not only is it the most important fundamental, but it involves a variable which dwarfs all other fundamentals in magnitude — combined.

Regular readers have heard many times before that gold (and silver) is “a monetary metal” . The definition is simple. Gold is money. Therefore the price of gold must change proportionate to changes in the supply of other forms of “money” (i.e. currency).

This is not a theory. It is a function of simple arithmetic. An elementary numerical example will illustrate this principle.

Suppose (in the entire world) there was a total of 10 oz’s of gold. Suppose also (in this hypothetical world) that there was a total of only $10,000 U.S. dollars. And in this hypothetical world, the price of gold is $1,000/oz.

Let us suppose the supply of US dollars increases by a factor of five, and thus there are now $50,000 USD’s. What happens to the price of gold? All other things being equal, the price of gold must increase by a factor of five (in this case, to $5,000/oz), to keep our hypothetical world in equilibrium.

Now let’s return to the real world. What happened in the real world? The supply of US dollars did increase by a factor of five. This was the most reckless money-printing binge since Germany’s hyperinflation during the 1920’s . Regular readers know this monetary orgy as “the Bernanke Helicopter Drop”.

The Fundamental That Matters Most To The Price Of Gold

Over a span of 50 years from 1920 through 1970 (while we still had a gold standard), the supply of US dollars was virtually unchanged. In five years, 2009 – 13, B.S. Bernanke quintupled the U.S. money supply .

Did the price of gold quintuple? No, not even close. At the time that Bernanke began his money-printing orgy, the price of gold was roughly $800/oz. That was right after, the price had been driven roughly 30% lower by the banking crime syndicate. And even before that point, the price of gold wasn’t close to reflecting its full value.

At a minimum, the Bernanke Helicopter Drop should have propelled gold to $4,000/oz (USD), concurrent with that money-printing. Arguably, the price should have gone much higher than that. In actual fact, as we all know, the price never even reached $2,000/oz: less than half of the absolute minimum price.

That should have been the base price for gold in 2013: $4,000/oz USD. The supply of U.S. dollars has never shrunk. Forget about “tapering”. It never happened.

How do we know? B.S. Bernanke told us so. From 2009 – 13, virtually every week Bernanke boasted about “the wealth effect” from his money-printing: how U.S. stock markets were being pumped higher and higher and higher.

Obviously if quintupling the supply of U.S. dollars pushed U.S. markets up to their bubble levels, then withdrawing dollars would cause those markets to fall from their all-time highs. What have we seen? Instead, the bubbles have gotten bigger and bigger and bigger .

Obviously the U.S. money supply hasn’t shrunk, it has continued to grow. Bernanke and the Fed lied when they claimed they were reducing the supply of US dollars. And as we also all know, the Federal Reserve absolutely refuses to allow any outside auditing.

Nobody knows what are on its books, we only know what the Fed-heads claim is on their books. And what they claim is not remotely plausible.

The U.S. market bubbles keep expanding, ergo the U.S. money supply keeps expanding. There is no other possibility. Yet the price of gold isn’t at $6,000/oz. It isn’t at $4,000/oz. It isn’t at $2,000/oz. It has been falling for most of the last six years.

During those six years, no one in the mainstream media (and very few in the Alternative Media) has made any mention of the gigantic disconnect with U.S. money-printing and the price of gold. The reason why the mainstream media propaganda machine has ignored this fundamental is obvious. Their job is to suppress the price of gold.

Why have practically no commentators in the Alternative Media been banging the drum on this subject? Ignorance. Sadly, few of these gold “experts” have a correct understanding of gold market fundamentals. They dwell on trivia.

Look at what we see around us today. These self-proclaimed experts debate whether or not the price of gold should rise above $1,300/oz. They point to North Korea. They point to incremental changes in demand for some of the major gold-consuming nations. Irrelevant.

The fact is that thanks to the success of the banking crime syndicate in discouraging the buying of (real) gold in the Western world, total gold demand hasn’t increased by that much. The largest, single incremental change was the switch by central banks from being net-sellers to net-buyers of gold. That was a very significant change, but it has flattened out and there is no indication that this will change further over the short term.

The fact is that (despite all the rhetoric) there is very little chance of any actual hostilities between the United States and North Korea. Discounted for this small probability, this is not a major driver of the price of gold.

The most ludicrous influence – and distraction – to the price of gold has been U.S. interest rates. High interest rates are a negative driver for the price of gold. The reasoning goes like this.

If savers can obtain a positive interest rate on their savings then they have an incentive to hold paper instead of gold. What is a “positive interest rate” in this context? If the interest rate on their savings is higher than the rate of inflation, then that is a positive interest rate.

If the savings rate is lower than the rate of inflation, savers lose money by putting it in the bank, and they are much better off holding gold instead.

Are current interest rates high? No, they are the lowest rates in history. This is despite the fact that B.S. Bernanke and all the other central bank liars promised to immediately normalize interest rates in 2009 – meaning in the range of 3% – 5%.

Today, after nearly nine years, the U.S. interest rate is at 1%. Meanwhile, real U.S. inflation has hovered between 4 – 8%, according to John Williams of Shadowstats. U.S. interest rates would have to rise by at least another 3%, just to begin to be a negative driver for the price of gold.

Current interest rates are a mildly positive driver for the price of gold. Otherwise, for the last nine years, everything said and done by the Federal Reserve with respect to U.S. interest rates has been totally irrelevant to the gold market.

If we combine every other variable that influences the price of gold, even put together they don’t come close to equaling the impact of the Bernanke Helicopter Drop. The US dollar is now worthless.

It is backed by nothing. It has been diluted more than any other major currency going back a hundred years. The U.S. government is bankrupt. The US dollar is currently being phased out as reserve currency – meaning the demand for U.S. dollars is shrinking to a fraction of previous levels.

What is the price of gold (or any hard asset), denominated in a worthless currency? The price is infinite. What is the current price for gold, denominated in worthless U.S. dollars? $1,300. The Crime of the Millennium.

For those readers who are still not convinced, just listen to Bernanke’s own words.

U.S. dollars have value only to the extent that they are strictly limited in supply.

– B.S. Bernanke, November 21, 2002

Strictly limited in supply.

According to the former Chairman of the Federal Reserve, the Bernanke Helicopter Drop rendered the US dollar worthless. That is why the Federal Reserve has falsified more recent versions of the chart above – to hide the dollar’s worthlessness. The phony chart produced by the Federal Reserve today bears no resemblance to what has actually happened to the US dollar.

The U.S. government, the Federal Reserve, and the mainstream media pretend that the US dollar still has value. They pretend that the price of gold should be at $1,300/oz (or less).

Ignore the trivia. Ignore the liars and idiots in the media. Ignore the Federal Reserve and all of its utterly pointless “meetings” about the U.S.’s irrelevant interest rates. Follow the money. It leads up – way, way up. – Jeff Nielson

Gold and Silver Test Key Support Zones on Dollar Bounce

Gold and Silver Test Key Support Zones on Dollar Bounce

Gold and Silver Test Key Support Zones on Dollar Bounce

Owing to a stronger US dollar, buck-denominated precious metals have fallen out of favor again. Both gold and silver currently find themselves in the red for the month of September with just a couple of trading days to go. The precious metals, which pay no dividend nor interest and cost money to store, have been undermined further by rising global bond yields as major central banks have abandoned their zero interest rate policy stances. The Federal Reserve, for one, looks set to raise interest rates one more time before the year is out, with further hikes expected in 2018. Indeed, the Fed’s Chairwoman Janet Yellen yesterday warned that policymakers should be “wary of moving too gradually” in tightening monetary policy, despite soggy inflation. Among other central banks, the Bank of Canada has also started raising interest rates and now the Bank of England looks set to follow suit. The European Central Bank is likely to announce its plan for tapering QE in the Eurozone, this autumn. As a result of tighter monetary conditions, gold in euro and pound terms also find themselves in the red this month.

Can gold make an unlikely comeback?
But despite all of that, can gold make an unlikely comeback? Sure it can. The dollar could very easily weaken again and boost the dollar-denominated precious metal directly. Even if the dollar remains bid, it is not unheard of for both gold and the dollar to go up in tandem, as indicated by the chart of the euro/U.S. dollar (EUR/USD) currency pair vs. gold, below. After all, gold is gold, right? There is also a risk that the U.S. stock markets could correct themselves due, among other things, to valuation concerns, raised geopolitical risks and the prospects of tighter monetary conditions. If so, this could boost the appetite for safer assets, which include gold and silver. Gold may find an additional boost from changes in its physical supply and demand forces. With Indian wedding season, for example, about to start, jewelry demand could easily rise over the next three months or so.

Gold and silver testing key long-term levels
That being said, gold is currently showing no signs of support. For the second time in as many weeks, the metal is threatening to break the lower bound of key support between $1,290 and $1,295, an area which was formerly resistance. If the sellers win the battle here, they will still need to push gold prices below the $1,276 level to confirm the bearish reversal, as this level was the last swing low prior to the latest rally. Any potential move below $1,276 could pave the way for a significant drop. Meanwhile, if the buyers managed to defend their ground around these levels and gold goes on to rise back and hold above $1,300 then the bullish trend would re-establish.

Silver, meanwhile, has given up the entire gains made in August and at the time of this writing, it was testing the closing price of the July’s range at $16.80. In July, silver prices flashed crashed before closing the month higher with the formation of a rather bullish-looking hammer candlestick pattern on the monthly chart. If that hammer marked the low for the year then price ‘should’ find support around the current levels, leading to another push higher. However, the metal is obviously below this month’s opening price of around $17.56, so the short-term bias is clearly bearish at the moment. Still, I can’t stress the importance of the $16.80 support level and despite all the negativity out there, I wouldn’t rule out the possibility of a strong bounce here.


Courtesy: Fawad Razaqzada

Volatile Silver Prices Love to Violate Technical Levels – Expect Anything but Smooth Sailing

Volatile Silver Prices Love to Violate Technical Levels - Expect Anything but Smooth Sailing

Volatile Silver Prices Love to Violate Technical Levels

Silver prices have been hit hard recently but one analyst remains optimistic even if he warns volatility will likely remain high for the metal.

“Trading silver is not for the faint of heart… Trading silver requires a nimble approach to the market,” said Andy Hecht, author of the weekly Hecht Commodity Report on Marketplace, in a recent post.

Silver prices hit a four-week low following a hawkish speech by Federal Reserve chair Janet Yellen Tuesday afternoon. December Comex silver futures last traded at $16.89 an ounce, down 1.5% on the day.

But Hecht is not giving up on silver just yet, especially given his long history trading the metal.

“In the mid-1990s, I was part of a small team of traders that structured one of the largest and most significant long positions in the physical and derivatives market for silver. That trade wound up making Warren Buffett lots of money but that is a story for another time,” he wrote.

“My foray into the silver market taught me a great deal about the mysterious commodity that has tempted speculators for centuries and perhaps longer. Trading silver is not for the faint of heart.”

On a technical basis, Hecht said there is one key level he is watching for silver prices right now.

“As the daily chart illustrates, silver prices had been making higher lows since the July 10 bottom at $15.2450,” he explained. “To keep that constructive pattern intact, the volatile precious metal will need to hold the $16.80 level on December futures, which was the August 25 low.”

However, silver bugs should expect anything but smooth sailing.

“Volatile silver loves to violate technical levels, so while $16.80 stands as a critical line in the sand for some technicians, it is possible that it will make any longs with stops below that level pay dearly,” he warned.  – Sarah Benali

 

Dollar Rebounds while the Yen starts it’s Descend

Dollar Rebounds while the Yen starts it's Descend

Dollar Rebounds while the Yen starts it’s Descend

The yen began to slip around September 19th 2017, as the US dollar rose to reach a two month high. These financial developments did not happen in a vacuum but were clearly motivated by the international political climate, particularly with relation to North Korea.

Why has the yen been falling?

The recent fall of the yen is not as drastic as it may sound: the yen had in fact been rising earlier in the month. This is because the yen usually rises during actual or perceived international crises. As Japan has long been the largest national creditor in the world, its currency is seen to be a ‘safe haven’ in difficult times. An analogous phenomenon can be detected with the Swiss franc. Swiss currency is also seen to be a very safe haven during times of political upheaval and so, like the yen, the Swiss franc will get stronger and stronger as international turmoil increases. Commentators have attributed the rise and subsequent fall of the Swiss franc and the yen to the increase and subsequent easing of tensions regarding North Korea. The fall of the yen was swift and decisive: as we entered the final half of September, it had reached a 21 month low against the euro as well as falling significantly against the dollar.

The yen – more responsive to international events than national ones

Historically, the yen has been impacted much more by international upheavals and periods of instability than by events occurring within Japan. This has remained the case this September when the seemingly imminent decision from the Japanese Prime Minister to call a snap election in Japan barely ruffled the value of the yen.

The dollar reaches a new high

On September 19th 2017, the dollar reached its highest level since July last year. The euro echoed this rise: on September 19th it was valued by traders at 134.16 yen. Meanwhile, the sterling, which had been sliding as traders lost confidence in it due to the Brexit decision and its aftermath (which are already impacting negatively on British trade relations), steadied very slightly. Nevertheless, as sterling had dipped by almost 1% in recent months, the fact that it has steadied does not mean that it is now as reliable as it was prior to the Brexit referendum. Nor is it likely to remain in this steady position for as long as British relations with Europe remain so chaotic.

Will the dollar continue to rise?

On the very day that the dollar began to ascend, and the yen to descend, once more, the Trump Administration put the dollar into doubt again with Trump’s aggressive speech against North Korea at the UN. This is likely to destabilise the dollar once more and to cause traders to turn to the yen as a more reliable option. As a result, the dollar is likely to fall once more, and if it does spike again in the future, it is likely to spike much less dramatically. The Trump administration has become notorious for precipitating significant instability in the dollar, and this instability has had something of a cumulative effect.

The importance of monitoring political events if you are a trader

Understanding the impact that political events can have on the relative trading values of different currencies is essential for traders who wish to succeed. Keeping your finger on the pulse of political events will enable traders to anticipate how trading values will dip or spike in response to international events. Using a good quality trading platform or trading software, such as that provided by CMC markets, will make incorporating knowledge about trading values into your trading decisions much more simple and efficient. With binary options trading, traders can ensure that no matter how complex political events are at any given time, they can boil every trade down to a simple question of two options. In addition, good quality trading software will indicate which decision is the best one to take at any given time.

 

YES – This Rally in Oil Prices has a Long Way to go Ahead

YES - This Rally in Oil Prices has a Long Way to go Ahead

Oil Prices Consolidate After Soaring To 2-Year Highs

Matt Smith: Brent crude oil prices were propelled to a two-year high yesterday, triggered by concerns about a Kurdish referendum vote to seek independence from Iraq. Although the vote is non-binding, a yes vote would pave the way for negotiations to secede from Iraq.

Neighboring countries such as Iran and Turkey are against the referendum, fearing that it will stoke separatist sentiment among the Kurdish population in its own countries. The vote prompted Turkey’s President Tayyip Erdogan to threaten cutting off the key supplyroute for Kurdish crude out of northern Iraq.

The Kirkuk-Ceyhan pipeline runs from northern Iraq to the port of Ceyhan in Turkey, and is the main route by which light sour Kirkuk crude leaves the Kurdish region.

We can see from our ClipperData that over 500,000 bpd of Kirkuk crude has been loaded in Ceyhan so far this year, after being delivered via the Kirkuk-Ceyhan pipeline. The crude then heads to destinations predominantly in the Mediterranean:

This is in contrast to flows out of the south of the country, which predominantly head elsewhere. Iraq’s Minister Councilor for Energy Affairs, Dheyaa Jaafar Hajam al-Musawi, said yesterday at the APPEC conference in Singapore that 56 percent of Iraqi exports head to Asia, and that this number will grow to 80 percent by 2020.

The minister’s numbers jibe with what we see in our ClipperData, with nearly 59 percent of Iraqi crude loadings from Basrah heading to Asia so far this year through August.

While Asia remains a key focus for Iraq, flows to the U.S. continue to surpass year-ago levels. Imports so far this year are averaging 580,000 bpd, a third higher than last year (which in itself was nearly double the volume in 2015).

Last month, however, we saw deliveries dip below year-ago levels for the first time since November 2014. But this was more related to hurricane activity limiting imports, as opposed to a supply-side issue from Iraq. Hence, as some semblance of normalcy returns to the U.S. Gulf Coast, imports of Iraqi crude have rebounded above year-ago levels once more:

Does This Rally in Oil Prices Have Legs?

Yup, you heard it here first (or second, maybe even third), last week was the week that it all happened, the week that we can finally call the crisis in oil prices officially over.

Okay, maybe not completely over, or even close to almost over, but is sure was nice for a while to taste the sweet nectar of oil prices over $50, no matter how fleeting that might be.

So what happened? Well, a few things.

Storage

Global storage and inventory finally seems to have turned the corner. Although as mentioned before the data is hopelessly lagged, completely untransparent and unreliable at the best of times, the anecdotal evidence is piling up. From completely unsubstantiated stories of critical supply hubs in Africa being drained of oil to another article exposing China as an oil hoarder, the trend is unmistakable – inventories are coming down. Now, if only we could have some proof…

OPEC/NOPEC

Aside from Libya and Nigeria, the OPEC/NOPEC production restraint alliance has held up surprisingly well. With compliance high and the market seemingly turning the corner, it was interesting to hear the speculation that extending the cuts further into 2018 from the current March end date was on the table. While not explicitly discussed at this Friday’s meeting to assess the effect of the production-cap agreement and progress toward a balance between supply and demand, it will surely be on the agenda for the November semi-annual fooferah and bait and switch session.

Rhetoric and Global Instability

The world is a funny place. Just when you think we have reached some measure of peace and stability, someone throws a wrench into things. Now, aside from the usual nonsense in the Middle East, we have specific hot spots which should see the risk premium in the price of oil rise over the next few months. These include:

• The ongoing conflict in Yemen, which is increasingly expensive and distracting for Saudi Arabia and threatens to drag in the United States

• The Monday referendum on Kurdish independence in Iraq and what it means for oil production in the important Kirkuk region. Right now, it’s up in the air.

• The on-again, off-again sabre rattling by the Americans towards Iran and threats to cancel the nuclear agreement and reinstate sanctions

• The very frightening escalation of tensions on the Korean Peninsula between North Korea and pretty much the rest of the world but particularly South Korea, Japan and the United States. While presumably cooler heads on either side should and will prevail, the war of words between “Rocket Man” and “the Dotard” risks allowing events to spiral out of control.

• And who can forget the ongoing covfefe crisis in Nambia.

U.S. field activity, draw-downs of fuel supplies with the refinery shutdowns in the United States.

As noted previously, the rig count seems to have plateaued in the U.S., held back by range-bound oil prices, rising field costs and skittish capital markets. This makes the predicted tsunami of tight oil less likely to overwhelm the market (at least until oil hits $55 to $60, then watch out!). That said, the oil and gas sector has a tendency to over-invest at absolutely the worst time so keep an eye out.

Another significant influential factor is the knock-on effects of the shutdown of refineries due to Hurricane Harvey and the after effects of both Harvey and Irma. In a nutshell, huge draw-downs in fuel and distillates (think cars, diesel for heavy machinery) are not being supported fully by refinery runs which will serve to draw down the excess inventory and are quite bullish for prices.

The impact of lower investment

The IEA published a chart showing the upstream oil and gas investment was down 44 percent in 2016 from 2014. While a modest uptick is expected in 2017 (mostly U.S. tight oil and Canada), the spillover effect of this drawback in investment is in most analyst’s views likely to be tight supply starting perhaps as early as late 2018, especially if the OPEC cuts hold and the US has really plateaued.

But the big catalyst?

Let’s face it, most of the above are supply side and are all at the margin. The biggest factor in any strength of prices or longer-term reduction in inventory has to be demand driven. Well I guess it’s fair to say that the consumer has finally delivered on cue. According to the IEA, demand growth is a robust 1.6 million barrels a day so far this year, far ahead of earlier forecasts and supporting some of the highest levels of global GDP growth in recent memory, proving yet again that the world craves nothing more than sweet, cheap oil. Can we go to $60 and not knock the recovery on its ass? I believe so.

The Jeff Rubin Effect

OK, not a big factor, but I read an article this week that reminded me of it. Canada’s very own wavy haired and silver-tongued prognosticator of all things extreme has emerged from hiding and pronounced that new pipelines are unnecessary because oil is dead and oilsands are uneconomic, too expensive and that we should all move on with our lives. This is the same Mr. Rubin who predicted $200 oil prices back in 2006 right before oil plunged from $147 to $40 a barrel and subsequently predicted the demise of the industry right before the last run-up in oil prices. Always the contrarian, always provocative and entertaining but often negatively correlated with the market – the Jeff Rubin effect is a real thing. If he’s telling me to sell, I’m thinking it may be time to buy.

So are the good times here to stay?

Good times is such a relative term right? In 2014 $50 oil was the nightmare scenario. Here at the end of the third quarter of 2017, a full three years after prices started to crater, it’s time to break out the bubbly. Realistically, I don’t think we are out of the woods by any stretch and we are certainly not in good times quite yet. Where we are is better times. Better than last week. Better than a few weeks ago. Absolutely better than February 2016 that’s for sure. I don’t think there is any sense in getting too carried away on the back of a one-week rally in oil prices that puts us barely over $50 a barrel, but it sure feels better this week than last.

Am I changing my forecast yet again? Nope. $56 is where I revised myself to. Seems a pretty good call at this point. – Stuart Parnell

Robust Demand Could Send Oil Prices Above $60

Healthy demand growth for fuel not only in emerging economies led by China and India, but also in Europe, is helping global inventories to draw down faster now, keeping the oil market on the right track towards rebalancing, according to industry executives who spoke at a conference on Tuesday.

“We see the market over the next six months going well above $60 for a simple reason … surprisingly good demand,” Adi Imsirovic, Head of Oil Trading at Gazprom Marketing and Trading, said at the S&P Global Platts APPEC conference in Singapore, as quoted by Reuters.

Global demand growth is “coming somewhere close to 1.6 to 1.7 million barrels per day and is driven by distillates,” BP’s Regional CEO for Supply and Trading for the Eastern Hemisphere, Janet Kong, said at the conference.

Diesel demand surged after Hurricane Harvey knocked offline more than 20 percent of U.S. refinery capacity at the peak of shutdowns, but demand was strong even before the storm, according to executives and analysts.

“What Harvey did is accelerate a process that was already underway,” Reuters quoted Robert Campbell, head of oil products analysis at Energy Aspects, as saying.

According to Mike Muller, Vice President of Crude Trading & Supply at Shell Trading, the soaring diesel fuel demand and the buying of crude oil to fill strategic reserves have been the key drivers of this year’s higher oil demand growth.

Earlier this month, the International Energy Agency (IEA) revised upwards its forecast for oil demand growth this year to 1.6 million bpd from the previous estimate for 1.5 million bpd growth.

The expected strong demand growth, coupled with OPEC’s production cuts, is making oil analysts and traders at the Singapore conference more bullish this year than at the same event last year, according to Bloomberg. But experts warn that OPEC needs to extend the cuts beyond March 2018 in order to continue depleting crude oil stockpiles.

The outlook for the rest of this year looks bullish, but the market will be put to the real test in March 2018, when demand will be seasonally lower. Oil prices are unlikely to keep a sustainable level above US$60 because U.S. shale supply would rapidly increase, effectively capping oil prices, oil traders tell Bloomberg. – Tsvetana Paraskova

 

QT Driven Overdue Stock Bear will Fuel a Big Renaissance in Gold Investment

QT Driven Overdue Stock Bear will Fuel a Big Renaissance in Gold Investment

QT Driven Overdue Stock Bear will Fuel a Big Renaissance in Gold Investment

This week’s landmark Federal Open Market Committee decision to launch quantitative tightening is one of the most-important and most-consequential actions in the Federal Reserve’s entire 104-year history.  QT changes everything for world financial markets levitated by years of quantitative easing.  The advent of the QT era has enormous implications for stock markets and gold investment that all investors need to understand.

This week’s FOMC decision to birth QT in early October certainly wasn’t a surprise.  To the Fed’s credit, this unprecedented paradigm shift had been well-telegraphed.  Back at its mid-June meeting, the FOMC warned “The Committee currently expects to begin implementing a balance sheet normalization program this year”.  Its usual FOMC statement was accompanied by an addendum explaining how QT would likely unfold.

That mid-June trial balloon didn’t tank stock markets, so this week the FOMC decided to implement it with no changes.  The FOMC’s new statement from Wednesday declared, “In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.”  And thus the long-feared QT era is now upon us.

The Fed is well aware of how extraordinarily risky quantitative tightening is for QE-inflated stock markets, so it is starting slow.  QT is necessary to unwind the vast quantities of bonds purchased since late 2008 via QE.  Back in October 2008, the US stock markets experienced their first panic in 101 years.  Ironically it was that earlier 1907 panic that led to the Federal Reserve’s creation in 1913 to help prevent future panics.

Technically a stock panic is a 20%+ stock-market plunge within two weeks.  The flagship S&P 500 stock index plummeted 25.9% in just 10 trading days leading into early October 2008, which was certainly a panic-grade plunge!  The extreme fear generated by that rare anomaly led the Fed itself to panic, fearing a new depression driven by the wealth effect.  When stocks plummet, people get scared and slash their spending.

That’s a big problem for the US economy over 2/3rds driven by consumer spending, and could become self-reinforcing and snowball.  The more stocks plunge, the more fearful people become for their own financial futures.  They extrapolate the stock carnage continuing indefinitely and pull in their horns.  The less they spend, the more corporate profits fall.  So corporations lay off people exacerbating the slowdown.

The Fed slashed its benchmark federal-funds interest rate like mad, hammering it to zero in December 2008.  That totally exhausted the conventional monetary policy used to boost the economy, rate cuts.  So the Fed moved into dangerous new territory of debt monetization.  It conjured new money out of thin air to buy bonds, injecting that new cash into the real economy.  That was euphemistically called quantitative easing.

The Fed vehemently insisted it wasn’t monetizing bonds because QE would only be a temporary crisis measure.  That proved one of the biggest central-bank lies ever, which is saying a lot.  When the Fed buys bonds, they accumulate on its balance sheet.  Over the next 6.7 years, that rocketed a staggering 427% higher from $849b before the stock panic to a $4474b peak in February 2015!  That was $3625b of QE.

While the new QE bond buying formally ended in October 2014 when the Fed fully tapered QE3, that $3.6t of monetized bonds remained on the Fed’s balance sheet.  As of the latest-available data from last week, the Fed’s BS was still $4417b.  That means 98.4% of all the Fed’s entire colossal QE binge from late 2008 to late 2014 remains intact!  That vast deluge of new money created remains out in the economy.

Don’t let the complacent stock-market reaction this week fool you, quantitative tightening is a huge deal.  It’s the biggest market game-changer by far since QE’s dawn!  Starting to reverse QE via QT radically alters market dynamics going forward.  Like a freight train just starting to move, it doesn’t look scary to traders yet.  But once that QT train gets barreling at full speed, it’s going to be a havoc-wreaking juggernaut.

QT will start small in the imminent Q4’17, with the Fed allowing $10b per month of maturing bonds to roll off its books.  The reason the Fed’s QE-bloated balance sheet has remained so large is the Fed is reinvesting proceeds from maturing bonds into new bonds to keep that QE-conjured cash deployed in the real economy.  QT will slowly taper that reinvestment, effectively destroying some of the QE-injected money.

These monthly bond rolloffs will start at $6b in Treasuries and $4b in mortgage-backed securities.  Then the Fed will raise those monthly caps by these same amounts once a quarter for a year.  Thus over the next year, QT’s pace will gradually mount to its full-steam speed of $30b and $20b of monthly rolloffs in Treasuries and MBS bonds.  The FOMC just unleashed a QT juggernaut that’s going to run at $50b per month!

When this idea was initially floated back in mid-June, it was far more aggressive than anyone thought the Yellen Fed would ever risk.  $50b per month yields a jaw-dropping quantitative-tightening pace of $600b per year!  These complacent stock markets’ belief that such massive monetary destruction won’t affect them materially is ludicrously foolish.  QT will naturally unwind and reverse the market impact of QE.

This hyper-easy Fed is only hiking interest rates and undertaking QT for one critical reason.  It knows the next financial-market crisis is inevitable at some point in the future, so it wants to reload rate-cutting and bond-buying ammunition to be ready for it.  The higher the Fed can raise its federal-funds rate, and the lower it can shrink its bloated balance sheet, the more easing firepower it will have available in the future.

But QT has never before been attempted and is extremely risky for these QE-levitated stock markets.  So the Fed is attempting to thread the needle between preparing for the next market crisis and triggering it.  Yellen and top Fed officials have been crystal-clear that they have no intention of fully unwinding all the QE since late 2008.  Wall Street expectations are running for a half unwind of the $3.6t, or $1.8t of total QT.

At the full-speed $600b-per-year QT pace coming in late 2018, that would take 3 years to execute.  The coming-year ramp-up will make it take longer.  So these markets are likely in for fierce QT headwinds for several years or so.  At this week’s post-FOMC-decision press conference, Janet Yellen took great pains to explain the FOMC has no intentions of altering this QT-pacing plan unless there is some market calamity.

Yellen was also more certain than I’ve ever heard her on any policy decisions that this terminal $50b-per-month QT won’t need to be adjusted.  With QT now officially started, the FOMC is fully committed.  If it decides to slow QT at some future meeting in response to a stock selloff, it risks sending a big signal of no confidence in the economy and exacerbating that very selloff!  Like a freight train, QT is hard to stop.

With stock markets at all-time record highs this week, QT’s advent seems like no big deal to euphoric stock traders.  They are dreadfully wrong.  CNBC’s inimitable Rick Santelli had a great analogy of this.  Just hearing a hurricane is coming is radically different than actually living through one.  QT isn’t feared because it isn’t here and hasn’t affected markets yet.  But once it arrives and does, psychology will really change.

Make no mistake, quantitative tightening is extremely bearish for these QE-inflated stock markets.  Back in late July I argued this bearish case in depth.  QT is every bit as bearish for stocks as QE was bullish!  This first chart updated from that earlier essay shows why.  This is the scariest and most-damning chart in all the stock markets.  It simply superimposes that S&P 500 benchmark stock index over the Fed’s balance sheet.

Between March 2009 and this week’s Fed Day, the S&P 500 has powered an epic 270.8% higher in 8.5 years!  That makes it the third-largest and second-longest stock bull in US history.  Why did that happen?  The underlying US economy sure hasn’t been great, plodding along at 2%ish growth ever since the stock panic.  That sluggish economic growth has constrained corporate-earnings growth too, it’s been modest at best.

Stocks are exceedingly expensive too, with their highest valuations ever witnessed outside of the extreme bull-market toppings in 1929 and 2000.  The elite S&P 500 component companies exited August with an average trailing-twelve-month price-to-earnings ratio of 28.1x!  That’s literally in formal bubble territory at 28x, which is double the 14x century-and-a-quarter fair value.  Cheap stocks didn’t drive most of this bull.

And if this bull’s gargantuan gains weren’t the product of normal bull-market fundamentals, that leaves quantitative easing.  A large fraction of that $3.6t of money conjured out of thin air by the Fed to inject into the economy found its way into the US stock markets.  Note above how closely this entire stock bull mirrored the growth in the Fed’s total balance sheet.  The blue and orange lines above are closely intertwined.

Those vast QE money injections levitated stock markets through two simple mechanisms.  The massive and wildly-unprecedented Fed bond buying forced interest rates to extreme artificial lows.  That bullied traditional bond investors seeking income from yields into far-riskier dividend-paying stocks.  Super-low interest rates also served as a rationalization for historically-expensive P/E ratios rampant across the stock markets.

While QE directly lifted stocks by sucking investment capital out of bonds newly saddled with record-low yields, a secondary indirect QE impact proved more important.  US corporations took advantage of the Fed-manipulated extreme interest-rate lows to borrow aggressively.  But instead of investing all this easy cheap capital into growing their businesses and creating jobs, they squandered most of it on stock buybacks.

QE’s super-low borrowing costs fueled a stock-buyback binge vastly greater than anything seen before in world history.  Literally trillions of dollars were borrowed by elite S&P 500 US corporations to repurchase their own shares!  This was naked financial manipulation, boosting stock prices through higher demand while reducing shares outstanding.  That made corporate earnings look much more favorable on a per-share basis.

Incredibly QE-fueled corporate stock buybacks have proven the only net source of stock-market capital inflows in this entire bull market since March 2009!  Elite Wall Street banks have published many studies on this.  Without that debt-funded stock-buyback frenzy only possible through QE’s record-low borrowing rates, this massive near-record bull wouldn’t even exist.  Corporations were the only buyers of their stocks.

QE’s dominating influence on stock prices is unassailable.  The S&P 500 surged in its early bull years until QE1 ended in mid-2010, when it suffered its first major correction.  The Fed panicked again, fearing another plunge.  So it birthed and soon expanded QE2 in late 2010.  Again the stock markets surged on a trajectory perfectly paralleling the Fed’s balance-sheet growth.  But stocks plunged when QE2 ended in mid-2011.

The S&P 500 fell 19.4% over the next 5.2 months, a major correction that neared bear-market territory.  The Fed again feared a cascading negative wealth effect, so it launched Operation Twist in late 2011 to turn stock markets around.  That converted short-term Treasuries to long-term Treasuries, forcing long rates even lower.  As the stock markets started topping again in late 2012, the Fed went all out with QE3.

QE3 was radically different from QE1 and QE2 in that it was totally open-ended.  Unlike its predecessors, QE3 had no predetermined size or duration!  So stock traders couldn’t anticipate when QE3 would end or how big it would get.  Stock markets surged on QE3’s announcement and subsequent expansion a few months later.  Fed officials started to deftly use QE3’s inherent ambiguity to herd stock traders’ psychology.

Whenever the stock markets started to sell off, Fed officials would rush to their soapboxes to reassure traders that QE3 could be expanded anytime if necessary.  Those implicit promises of central-bank intervention quickly truncated all nascent selloffs before they could reach correction territory.  Traders realized that the Fed was effectively backstopping the stock markets!  So greed flourished unchecked by corrections.

This stock bull went from normal between 2009 to 2012 to literally central-bank conjured from 2013 on.  The Fed’s QE3-expansion promises so enthralled traders that the S&P 500 went an astounding 3.6 years without a correction between late 2011 to mid-2015, one of the longest-such spans ever!  With the Fed jawboning negating healthy sentiment-rebalancing corrections, psychology grew ever more greedy and complacent.

QE3 was finally wound down in late 2014, leading to this Fed-conjured stock bull stalling out.  Without central-bank money printing behind it, the stock-market levitation between 2013 to 2015 never would have happened!  Without more QE to keep inflating stocks, the S&P 500 ground sideways and started topping.  Corrections resumed in mid-2015 and early 2016 without the promise of more Fed QE to avert them.

In mid-2016 the stock markets were able to break out to new highs, but only because the UK’s surprise pro-Brexit vote fueled hopes of more global central-bank easing.  The subsequent extreme Trumphoria rally since the election was an incredible anomaly driven by euphoric hopes for big tax cuts soon from the newly-Republican-controlled government.  But Republican infighting is making that look increasingly unlikely.

The critical takeaway of the entire QE era since late 2008 is that stock-market action closely mirrored whatever the Fed was doing.  Ex-Trumphoria, all this bull’s massive stock-market gains happened when the Fed was actively injecting trillions of dollars of QE.  When the Fed paused its balance-sheet growth, the stock markets either corrected hard or stalled out.  These stock markets are extraordinarily QE-dependent.

The Fed’s balance sheet has never materially shrunk since QE was born out of that 2008 stock panic.  Now quantitative tightening will start ramping up in just a couple weeks for the first time ever.  If QE is responsible for much of this stock bull, and certainly all of the extreme levitation from 2013 to 2015 due to the open-ended QE3, can QT possibly be benign?  No freaking way friends!   Unwinding QE is this bull’s death knell.

QE was like monetary steroids for stocks, artificially ballooning this bull market to monstrous proportions.  Letting bonds run off the Fed’s balance sheet instead of reinvesting effectively destroys that QE-spawned money.  QE made this bull the grotesque beast it is, so QT is going to hammer a stake right through its heart.  This unprecedented QT is even more dangerous given today’s bubble valuations and rampant euphoria.

Investors and speculators alike should be terrified of $600b per year of quantitative tightening!  The way to play it is to pare down overweight stock positions and build cash to prepare for the long-overdue Fed-delayed bear market.  Speculators can also buy puts in the leading SPY SPDR S&P 500 ETF.  Investors can go long gold via its own flagship GLD SPDR Gold Shares ETF, which tends to move counter to stock markets.

Gold was hit fairly hard after this week’s FOMC decision announcing QT, which makes it look like QT is bearish for gold.  Nothing could be farther from the truth.  Gold’s post-Fed selloff had nothing at all to do with QT!  At every other FOMC meeting, the Fed also releases a summary of top Fed officials’ outlooks for future federal-funds-rate levels.  This so-called dot plot was widely expected to be more dovish than June’s.

Yellen herself had given speeches in the quarter since that implied this Fed-rate-hike cycle was closer to its end than beginning.  She had said the neutral federal-funds rate was lower than in the past, so gold-futures speculators expected this week’s dot plot to be revised lower.  It wasn’t, coming in unchanged from June’s with 3/4ths of FOMC members still expecting another rate hike at the FOMC’s mid-December meeting.

This dot-plot hawkish surprise totally unrelated to QT led to big US-dollar buying.  Futures-implied rate-hike odds in December surged from 58% the day before to 73% in the wake of the FOMC’s decision.  So gold-futures speculators aggressively dumped contracts, forcing gold lower.  That reaction is irrational, as gold has surged dramatically on average in past Fed-rate-hike cycles!  QT didn’t play into this week’s gold selloff.

This last chart superimposes gold over that same Fed balance sheet of the QE era.  Gold skyrocketed during QE1 and QE2, which makes sense since debt monetizations are pure inflation.  But once the open-ended QE3 started miraculously levitating stock markets in early 2013, investors abandoned gold to chase those Fed-conjured stock-market gains.  That blasted gold into a massive record-setting bear market.

In a normal world, quantitative easing would always be bullish for gold as more money is injected into the economy.  Gold’s monetary value largely derives from the fact its supply grows slowly, under 1% a year.  That’s far slower than money supplies grow normally, let alone during QE inflation.  Gold’s price rallies as relatively more money is available to compete for relatively less physical gold.  QE3 broke that historical relationship.

With the Fed hellbent on ensuring the US stock markets did nothing but rally indefinitely, investors felt no need for prudently diversifying their portfolios with alternative investments.  Gold investment is the anti-stock trade, it tends to move counter to stock markets.  So why bother with gold when QE3 was magically levitating the stock markets from 2013 to 2015?  That QE3-stock-levitation-driven gold bear finally bottomed in late 2015.

Today’s gold bull was born the very next day after the Fed’s first rate hike in 9.5 years in mid-December 2015.  If Fed rate hikes are as bearish for gold as futures speculators assume, why has gold’s 23.7% bull as of this week exceeded the S&P 500’s 22.8% gain over that same span?  Not even the Trumphoria rally has enabled stock markets to catch up with gold’s young bull!  Fed rate hikes are actually bullish for gold prices.

The reason is hiking cycles weigh on stock markets, which gets investors interested in owning counter-moving gold to re-diversity their portfolios.  That’s also why this new QT era is actually super-bullish for gold prices despite the coming monetary destruction.  As QT gradually crushes these fake QE-inflated stock markets in coming years, gold investment demand is going to soar again.  We’ll see a reversal of 2013’s action.

That year alone gold prices plunged a colossal 27.9% on the extreme 29.6% S&P 500 rally driven by $1107b of fresh quantitative easing from the massive new QE3 campaign!  That 2013 gold catastrophe courtesy of the Fed bred the bearish psychology that’s plagued this leading alternative asset ever since.  At QT’s $600b planned annual pace, it will take almost a couple years to unwind that epic $1.1t QE seen in 2013 alone.

Interestingly the Wall-Street-expected $1.8t of total QT coming would take the Fed’s balance sheet back down to $2.6t.  That’s back to mid-2011 levels, below the $2.8t in late 2012 when QE3 was announced.  Gold prices averaged $1573 per ounce in 2011, and it ought to head much higher if QT indeed spawns the next stock bear.  That’s the core bullish-gold thesis of QT, that falling stock prices far outweigh monetary destruction.

Stock bears are normal and necessary to bleed off excessive valuations, but they are devastating to the unprepared.  The last two ending in October 2002 and March 2009 ultimately hammered the S&P 500 49.1% and 56.8% lower over 2.6 and 1.4 years!  If these lofty QE-levitated stock markets suffer another typical 50% bear during QT, huge gold investment demand will almost certainly catapult it to new record highs.

These QE-inflated stock markets are doomed under QT, there’s no doubt.  The Fed giveth and the Fed taketh away.  Stock bears gradually unfold over a couple years or so, slowly boiling the bullish frogs.  So without a panic-type plunge, the tightening Fed is going to be hard-pressed to throttle back QT without igniting a crisis of confidence.  As QT slowly strangles this monstrous stock bull, gold investment will really return to vogue.

The bottom line is the coming quantitative tightening is incredibly bearish for these stock markets that have been artificially levitated by quantitative easing.  QT has never before been attempted, let alone in artificial QE-inflated stock markets trading at bubble valuations and drenched in euphoria.  All the stock-bullish tailwinds from years of QE will reverse into fierce headwinds under QT.  It truly changes everything.

The main beneficiary of stock-market weakness is gold investment, as the leading alternative investment that tends to move counter to stock markets.  The coming QT-driven overdue stock bear will fuel a big renaissance in gold investment to diversify stock-heavy portfolios.  And the Fed can’t risk slowing or stopping QT now that it’s officially triggered.  The resulting crisis of confidence would likely exacerbate a major stock-market selloff. – Adam Hamilton

 

No Arguments – Every Investor Should Own Physical Gold

No Arguments - Every Investor Should Own Physical Gold

All Arguments Against Gold Are Just Nonsense

It’s no secret that I am a big believer in gold.

But today, I want to take a look at the case against gold.

Starting from a low of about $250 per ounce in mid-1999, gold staged a spectacular rally of over 600%, to about $1,900 per ounce, by August 2011.

Unfortunately, that rally looked increasingly unstable towards the end.

Gold was about $1,400 per ounce as late as January 2011.

Almost $500 per ounce of the overall rally occurred in just the last seven months before the peak.

That kind of hyperbolic growth is almost always unsustainable.

Sure enough, gold prices fell sharply from that peak to below $1,100 per ounce by July 2015. It still shows a gain of about 350% over 15 years.

But gold has lost nearly 40% over the past five years. Those who invested during the 2011 rally are underwater, and many have given up on gold in disgust.

For long-time observers of gold markets, sentiment has been the worst they’ve ever seen.

Yet it’s in times of extreme bearish sentiment that outstanding investments can be found — if you know how and where to look.

So far this year, there’s already been a change in the winds for gold.

A change that, in many ways, I predicted in my most recent book: The New Case for Gold.

But today, I want to show you three main arguments mainstream economists make against gold.

And why they’re dead wrong.

The first one you may have heard many times…

Argument #1: Not enough gold to support the financial system

‘Experts’ say there’s not enough gold to support a global financial system.

Gold can’t support the entire world’s paper money, its assets and liabilities, its expanded balance sheets of all the banks, and the financial institutions of the world.

They say there’s not enough gold to support that money supply; that the money supplies are too large.

That argument is complete nonsense.

It’s true that there’s a limited quantity of gold. But more importantly, there’s always enough gold to support the financial system.

But it’s also important to set its price correctly.

It is true that at today’s price of about $1,300 an ounce, if you had to scale down the money supply to equal the physical gold times 1,300, that would be a great reduction of the money supply.

That would indeed lead to deflation.

But to avoid that, all we have to do is increase the gold price.

In other words, take the amount of existing gold, place it at, say, $10,000 an ounce, and there’s plenty of gold to support the money supply.

In other words, a certain amount of gold can always support any amount of money supply if its price is set properly.

There can be a debate about the proper price of gold, but there’s no real debate that we have enough gold to support the monetary system.

I’ve done that calculation, and it’s fairly simple. It’s not complicated mathematics.

Just take the amount of money supply in the world, then take the amount of physical gold in the world, divide one by the other, and there’s the gold price.

$10,000 an ounce

You do have to make some assumptions, however.

For example, do you want the money supply backed 100% by gold, or is 40% sufficient? Or maybe 20%?

Those are legitimate policy issues that can be debated. I’ve done the calculations for all of them. I assumed 40% gold backing. Some economists say it should be higher, but I think 40% is reasonable.

That number is $10,000 an ounce…

In other words, the amount of money supplied, given the amount of gold if you value the gold at $10,000 an ounce, is enough to back up 40% of the money supply. That is a substantial gold backing.

But if you want to back up 100% of the money supply, that number is $50,000 an ounce. I’m not predicting $50,000 gold. But I am forecasting $10,000 gold, a significant increase from where we are today.

But again, it’s important to realise that there’s always enough gold to meet the needs of the financial system. You just need to get the price right.

Regardless, my research has led me to one conclusion — the coming financial crisis will lead to the collapse of the international monetary system.

When I say that, I specifically mean a collapse in confidence in paper currencies around the world. It’s not just the death of the US dollar, or the demise of the euro. It’s a collapse in confidence of all paper currencies.

In that case, central banks around the world could turn to gold to restore confidence in the international monetary system. No central banker would ever willingly choose to go back to a gold standard.

But in a scenario where there’s a total loss in confidence, they’ll likely have to go back to a gold standard.

Argument #2: Gold can’t support world trade and commerce

The second argument raised against gold is that it cannot support the growth of world trade and commerce because it doesn’t grow fast enough.

The world’s mining output is about 1.6% of total gold stocks.

World growth is roughly 3-4% a year. It varies, but let’s assume 3-4%.

Critics say that if world growth is about 3-4% a year and gold is only growing at 1.6%, then gold is not growing fast enough to support world trade.

A gold standard therefore gives the system a deflationary bias.

But again, that’s nonsense, because mining output has nothing to do with the ability of central banks to expand the gold supply.

The reason is that official gold — the gold owned by central banks and finance ministries — is about 35,000 tonnes.

Total gold, including privately held gold, is about 180,000 tonnes.

That’s 145,000 tonnes of private gold outside the official gold supply.

If any central bank wants to expand the money supply, all it has to do is print money and buy some of the private gold.

Central banks are not constrained by mining output. They don’t have to wait for the miners to dig up gold if they want to expand the money supply.

They simply have to buy some private gold through dealers in the marketplace.

To argue that gold supplies don’t grow enough to support trade is an argument that sounds true on a superficial level.

But when you analyse it further, you realise that’s nonsense. That’s because the gold supply added by mining is irrelevant, since central banks can just buy private gold.

Argument #3: Gold has no yield

The third argument you hear is that gold has no yield.

This is true, but gold isn’t supposed to have a yield.

Gold is money.

I was on Fox Business with Maria Bartiromo last year. We had a discussion in the live interview when the issue came up.

I said, ‘Maria, pull out a dollar bill, hold it up in front of you and look at it. Does it have a yield? No, of course it has no yield — money has no yield.

If you want yield, you have to take risk. You can put your money in the bank and get a little bit of yield — maybe half a percent.

Probably not even that. But it’s not money anymore.

When you put it in the bank, it’s not money. It’s a bank deposit. That’s an unsecured liability in an occasionally insolvent commercial bank.

You can also buy stocks, bonds, real estate, and many other things with your money.

But when you do, it’s not money anymore. It’s some other asset, and they involve varying degrees of risk.

The point is this: If you want yield, you have to take risk.

Physical gold doesn’t offer an official yield, but it doesn’t carry risk. It’s simply a way of preserving wealth.

I believe the primary way every investor should play the rise in gold is to own the physical metal directly.

At least 10% of your investment portfolio should be devoted to physical gold — bars, coins and the like.

But you can also up the risk to potentially profit from gold too. – Jim Rickards

 

Hold Physical Gold and Silver – Unprecedented Risks the World faces, call for Desperate Measures

Hold Physical Gold and Silver - Unprecedented Risks the World faces, calls for Desperate Measures

Why do we need to hold Physical Gold and Silver?

There are probabilities in markets and there are certainties. It is very probable that investors will lose a major part of their assets held in stocks, bonds and property over the next 5-7 years. It is also probable that they will lose most of their money held in banks, either by bank failure or currency debasement.

WHO BUYS A BOND THAT WILL GO TO ZERO?

What is not probable, but absolutely certain, is that investors who buy the new Austrian 100-year bond yielding 2.1% are going to lose all their money. Firstly, you wonder who actually buys these bonds. No individual investing his own money would ever buy a 100-year paper yielding 2% at a historical top of bond markets and bottom of rates.

The buyers are of course institutions who manage other people’s money. These will be the likes of pension fund managers who will be elated to achieve a 2% yield against negative short yields and not much above zero for anything else. These managers will hope to be long gone before anyone finds out the disastrous decision they have taken with pensioners’ money.

But the danger for them is that the bond will be worthless long before the 100 years are up. It could happen within five years.

There are a number of factors that will guarantee the demise of these bonds:

  • Interest rates are at a 5,000-year low and can only go up
  • Inflation will surge leading to hyperinflation
  • Sovereign states are bankrupt and will default
  • The Euro will go to zero not over 100 years but in the next 5-7

But pension fund managers will not be blamed for their catastrophic performance. No conventional investment manager could ever have forecast the events I am predicting above. (They are not that smart). Thus, they are totally protected, in spite of poor performance, since they have done what every other manager does which is to make the pensioners destitute. The average institutional fund is managed based on mediocracy. It is never worth taking a risk and do something different to your peer group. But if you do the same as everybody else you will be handsomely rewarded even if you lose most of the money.

$400 TRILLION PENSION GAP

Most people in the world don’t have a pension so they won’t be concerned. But for the ones who are covered by pensions, they won’t be much better off. Most pension funds are massively underfunded and the amount they are underfunded by is absolutely astounding. We are looking at a staggering $400 trillion gap by 2050 according to the World Economic Forum. The biggest gap is of course the US with $137 trillion. The 2015 US deficit was “only” $28 trillion which is 150% of GDP.

PENSION DEFICITS – There will be no pensions for anyone

The reasons are quite straightforward; an ageing population, inadequate savings and low expected returns. These calculations don’t take into account the coming collapse of all the assets that pension funds invest in such as stock, bonds and property. It is a virtually certain prediction that there will be no conventional pensions paid out in any country over in 5 to 10 years and longer. The consequences are clearly catastrophic. The only country with a well-funded private pension system is India. Most families in India hold gold and as gold appreciates, this will protect an important part of the Indian population.

$2.5 QUADRILLION GLOBAL DEBT

Global debt and unfunded liabilities are continuing to run out of control. With total debt at $240 trillion, pension liabilities at $400 trillion (by 2050), other liabilities such as medical care at say $250 trillion and derivatives at $1.5 quadrillion, we are looking at a total global debt including liabilities of around $2.5 quadrillion.

The US is doing its part to grow debt exponentially. With the debt ceiling lifted temporarily, US federal debt has swiftly jumped by $321 billion to $20.16 trillion. Over the last year US debt has gone up by $685 billion. Over the next few years, US debt is forecast by to increase by over $1 trillion per year. When trouble starts in financial markets in the next couple of years, we will see that debt level increase dramatically by $10s or even $100s of trillions. By 2020, the US will have run real budget deficits every single year for 60 years. That is an astounding record and will guarantee a dollar collapse.

INTEREST RATES WILL BE 15-20%

As the long-term interest chart above shows, rates are at a historical bottom and the 35-year cycle also bottomed last year. Rates are now in an uptrend and at some point, in the next year or two, will start to accelerate. Within less than 5 years, rates are likely to be in the teens or higher like in the 1970s. Bonds will collapse, including the 100-year Austrian issue, leading to major defaults. With global debt in the $100s of trillions, more and more money will need to be printed just to finance the interest costs. Still more will be printed to prop up failing banks and government deficits. And that is how hyperinflation will start. In parallel, currencies will collapse and finish their move to zero which started in 1913 when the Fed was created.

THE SWISS NATIONAL BANK – THE WORLD’S BIGGEST HEDGE FUND

The Fed is a private bank, created by private bankers for their own benefit giving them total control of money. The Swiss National Bank (SNB) is also a private bank, quoted on the Swiss stock exchange. But it is not owned by investment bankers but 45% is held by the Swiss Cantons (States) and 15% by the Cantonal Banks. The rest is held by private shareholders. The shares of the SNB have gone up 2.5x in the last 12 months.

This is the biggest hedge fund in the world with a balance sheet of CHF 775 billion ($808B). This is bigger than Swiss GDP. For comparison, the Fed’s balance sheet is 25% of US GDP. The SNB holds shares for almost CHF100 billion including $80 billion of US stocks. The rest of the SNB holdings is currency speculation with the majority in Euros and dollars. Hardly the purpose of a central bank to speculate in currencies or stocks. Their justification is that buying foreign assets keeps the Swiss Franc low. Imagine when the US stock market turns down and the Euro and dollar weaken. At that point, the chart of the SNB stock will look very different. This is likely to happen in the next few years. Swiss banking and particularly the National Bank used to be conservative, now they are as bad or even worse than the rest of the world. The problem with the Swiss banking system is also that it is too big for the country, being 5 times Swiss GDP. I wouldn’t keep any major capital in the Swiss banks, nor in any other banks for that matter. But the political system in Switzerland is by far the best in the world. Too bad that the banks are not!

GOLD $5,800 TO $8,500 BASED ON PREVIOUS BULL MARKETS

Gold and silver are making a temporary pause. The uptrend is clear and acceleration is likely to start this autumn. The chart below shows various projection alternatives compared to previous gold bull markets in the 1970s and in the 2000s. Whichever option we choose, they all lead to a much higher gold price from here between $5,800 and $8,500. Those targets are still well below my long-standing target of $10,000 in today’s money. But as I have stated many times, we won’t have today’s money since with hyperinflation money will become virtually worthless. The eventual dollar price of gold is likely to be multiples of $10,000, depending on how much worthless money will be printed.

Jim Rickards talks about a massive dollar devaluation against gold to solve the US debt problem. He suggests that gold would be revalued to $5,000 which is 4x from today. That is of course one possibility although I doubt the Chinese like many of us believe that the US still owns 8,000 tonnes of gold. China would probably ask the Americans for proof of their holdings and at the same time declare the amount of gold that China holds. Whoever starts first doesn’t really matter. Because any official revaluation of gold, or just major market price appreciation, will lead to the paper shorts running for cover. At that point, $5,000 will just be a short-lived stop on the way too much higher prices.

Although all this sounds very exciting for gold and silver holders, we must always remind ourselves why we hold precious metals. We are not holding gold for spectacular gains. No, gold is held as insurance for wealth preservation purposes. The risks in the world today are unprecedented in history as I outlined in last week’s article. Therefore, we are holding gold to protect against these risks which are both economic, financial and geopolitical. We are facing the dual risk of a financial crisis with a failing banking system, as well as insolvent sovereign states, leading to all currencies being debased to zero. That is why investors must hold an important amount of physical gold and silver and not worry about daily price fluctuations. – Egon von Greyerz

Gold Investment Demand Surge without a Real Stock-selloff Highlights it’s Huge Potential

Gold Investment Demand Surge without a Real Stock-selloff Highlights it's Huge Potential

 Gold Investment Demand Resumes after a Long Slump

Gold has surged dramatically to major breakouts since its usual summer-doldrums lows.  That’s naturally rekindled interest in this leading alternative investment, despite the record-high stock markets.  Investors are starting to return to gold again to prudently diversify their stock-heavy portfolios.  That’s very bullish for gold, as investment capital inflows can persist for months or even years.  This shift is most evident in GLD.

The American SPDR Gold Shares is the world’s leading and dominant gold exchange-traded fund.  Since its birth way back in November 2004, it has acted as a conduit for the vast pools of stock-market capital to migrate into and out of physical gold bullion.  The marginal gold investment demand, and sometimes supply, via GLD can be big and varies wildly.  Thus GLD-share trading is often gold’s primary short-term driver.

The definitive arbiter of global gold supply and demand is the venerable World Gold Council.  It publishes highly-anticipated quarterly reports called Gold Demand Trends.  They offer the best reads available on global gold fundamentals.  At first glance, it’s not apparent why gold-ETF demand plays such a massive role in driving gold’s price action.  But digging a little deeper makes this crucial-to-understand relationship clearer.

According to the WGC, over the past 5 years from 2012 to 2016 jewelry demand averaged about 54% of overall global gold demand.  Total gold investment demand including physical bars and coins in addition to gold ETFs averaged just 26%.  Breaking that category down further into bars and coins separate from ETFs, they weighed in at averages of 28% and -2% of world gold demand respectively over the past 5 years.

The key to ETFs’ outsized impact on gold prices is in the extreme variability of their demand.  Across that same span, total gold demand only varied 10% from the midpoint of its worst year to best year.  For jewelry that variance ran 27%, as gold’s largest demand category is relatively inelastic to gold’s price.  Variability for bar-and-coin investment was higher at 49%.  But that’s still nothing compared to ETFs’ wild swings.

Global gold-ETF demand between 2012 to 2016 varied radically from a low of -914.3 metric tons in 2013 to a high of +534.2t in 2016!  The percentages don’t work with a negative number, but that 5-year variance of 1448.6t is vast beyond belief.  Despite global gold-ETF demand averaging just -2% of total world gold demand over that span compared to 54% for jewelry, in raw-tonnage terms ETFs’ variability ran 2.2x jewelry’s!

Gold prices are set at the margin, and capital inflows and outflows via gold ETFs dwarf changes in every other gold demand category.  The extreme volatility in gold investment demand through ETFs from stock traders overpowers everything else.  When stock investors are buying gold-ETF shares faster than gold itself is being bought, gold rallies.  That investment buying fuels major uplegs and entire bull markets in gold.

The mission of gold ETFs including GLD is to mirror the gold price.  But the supply and demand of ETF shares is independent from gold’s own.  So when stock investors buy gold-ETF shares faster than gold is being bid higher, those share prices threaten to decouple to the upside.  Gold-ETF managers only have one way to prevent this tracking failure.  They issue new gold-ETF shares to offset that excess demand.

Selling new gold-ETF shares to stock investors raises capital, which is then plowed into physical gold bullion held in trust for shareholders that very day.  This process effectively shunts excess demand for gold-ETF shares into the underlying gold market, bidding gold higher.  Gold ETFs including GLD could not track the gold price if this mechanism for equalizing differential capital flows between them didn’t exist.

The opposite happens when gold-ETF shares are sold faster than gold itself is being sold.  That forces the shares to disconnect from gold to the downside.  Gold ETF managers avert that failure by stepping in to buy back those excess shares offered.  They raise the capital necessary to sop up this excess supply by selling some of the gold bullion underlying their ETF.  Gold ETFs are a capital conduit between stocks and gold!

Because of the massive size of the US stock markets, GLD capital flows are more important to gold than all of the other gold ETFs around the world combined.  GLD’s managers are very transparent, publishing its physical-gold-bullion holdings daily.  That offers a far-higher-resolution read on what’s going on in gold investment than the WGC’s quarterly fundamental reports.  GLD’s holdings are the key to gold’s fortunes.

When GLD’s holdings are rising, that means American stock-market capital is flowing into the global gold market.  When GLD’s holdings are falling, investors are pulling capital back out of gold.  There is nothing more important for gold’s overall price trends than these GLD capital flows.  From extremes gold futures speculators can overpower GLD’s influence on gold from time to time, but these eclipsing bouts don’t last long.

I’ve actively studied GLD’s dominating influence on gold prices for many years now.  The hard data on this is crystal-clear, as we’ll discuss shortly.  But unfortunately many if not most speculators and investors in gold, silver, and their miners’ stocks still don’t understand this.  You can’t really grasp what’s going on in gold, and therefore the entire precious-metals complex, if you don’t closely follow GLD’s holdings daily.

This week’s chart looks at GLD’s physical gold bullion held in trust for its shareholders superimposed over the gold price since 2015.  When American stock-market capital is flowing into gold via differential GLD-share buying, gold rallies.  When that capital heads back out, gold falls.  These gold-investment trends often take many months to play out, and a major new GLD-share buying spree is just getting underway.

Like always in the markets, understanding what’s going on today requires perspective.  If you don’t know where we’ve been and why, you’re not going to be right on where we’re going.  I broke the performances in gold and GLD’s holdings into calendar quarters here for easier analysis.  Back in late 2015, gold was pounded lower heading into the Fed’s first rate hike in nearly a decade in the terminal phase of a brutal bear.

In Q3’15, gold fell 4.8% on a 3.4% or 24.0t GLD draw.  American stock investors continued jettisoning gold via GLD shares in Q4’15.  In that bear-trough quarter, gold fell 4.9% on a 6.6% or 45.1t GLD draw driven by heavy differential selling of GLD shares.  The resulting 7.3-year secular low in GLD’s physical-gold-bullion holdings held in trust for shareholders drove gold to a parallel 6.1-year low on the very same day.

Overall between late-January 2015 and mid-December 2015, gold plunged 19.3% on a 14.9% or 110.3t GLD draw.  When American stock traders are paring their gold exposure by dumping GLD shares faster than gold itself is being sold, gold is going to head lower.  Per the WGC, total 2015 gold demand slumped just 0.8% or 35.6t year-over-year.  That was entirely due to total ETF demand falling 128.3t, led by GLD’s 66.6t drop.

But everything changed dramatically in early 2016 because the lofty US stock markets plunged sharply in their biggest correction since mid-2011.  Stock investors generally ignore gold until stock markets start to sell off materially.  Then they rush to redeploy in this ultimate alternative investment.  Gold is effectively the anti-stock trade, a rare asset that moves counter to stock markets.  So gold investment demand soars in selloffs.

After being universally despised in hyper-bearishness just a couple weeks earlier, gold investment demand started to return in January 2016.  The leading S&P 500 stock index suffered a series of dramatic down days, including separate 1.5%, 2.4%, 2.5%, 2.2%, and 1.6% losses within weeks.  So scared stock investors remembered gold, and started to flood back into GLD shares far faster than gold itself was being bid higher.

Their differential GLD-share buying single-handedly ignited a new gold bull!  In Q1’16, gold rocketed up 16.1% on an epic 27.5% or 176.9t GLD build.  According to the latest WGC Q2’17 GDT, total global gold demand in Q1’16 only rose 179.2t YoY.  That means American stock investors’ heavy GLD-share buying alone was responsible for a staggering 98.7% of global gold demand growth!  GLD’s gold-price influence is huge.

Q2’16 was similar, with gold powering another 7.4% higher on another big 16.0% or 130.8t GLD build.  The WGC reports that worldwide gold demand only grew 134.7t YoY that quarter, so the GLD holdings build driven by stock investors’ differential share buying accounted for 97.1%!  Love or hate GLD, the hard truth is gold’s new bull market never would’ve existed if stock investors hadn’t rushed into gold via that ETF.

In essentially the first half of 2016, gold had powered 29.9% higher on a stunning 55.7% or 351.1t GLD-holdings build.  That gold surge naturally fueled much more investment buying, both in physical bars and coins and other gold ETFs around the world.  But without that American stock-market capital flowing into gold through the GLD conduit, odds are little of that parallel buying would’ve happened.  GLD is the key to gold.

Gold then stalled out in Q3’16 because new record stock-market highs slammed the door on GLD capital inflows.  Stock investors generally want nothing to do with gold when stocks are soaring.  And they did in the wake of the Brexit surprise on hopes for more central-bank easing.  So gold just consolidated high that quarter, slipping 0.4% on a 0.2% or 2.1t GLD draw.  Gold’s bull halted the moment differential GLD buying did!

GLD’s dominance reasserted itself in Q4’16, but going the other way.  Opening up a direct gold conduit for the vast pools of stock-market capital is a double-edged sword.  GLD’s holdings started plummeting in the wake of Trump’s surprise election victory.  The resulting Trumphoria on hopes for big tax cuts soon fueled surging record stock markets.  So investors once again felt no need to prudently diversify with gold.

That quarter gold plunged 12.7% on a 13.3% or 125.8t GLD draw.  The WGC’s latest data shows global gold demand fell 117.3t YoY in that quarter.  So the heavy differential GLD-share selling was responsible for more than all of it!  For better or for worse, the rise of ETF investing to market dominance has made GLD the overpowering driver of gold’s fortunes.  Nothing else has wielded such huge price influence in recent years.

Unfortunately many traditional gold investors and speculators still ignore GLD’s holdings.  Many don’t like GLD because it’s paper gold, inferior to physical bars and coins held in your own immediate possession.  I certainly empathize with that.  I’ve been continuously recommending physical gold coins to all investors since May 2001 when gold was at $264.  I’ve never recommended GLD shares to our subscribers as investments.

But regardless of whether you think GLD is an anti-gold conspiracy or a great new way to entice stock-market capital into gold, this behemoth can’t be ignored.  Following GLD’s vast impact on gold prices has nothing to do with making a statement on its fitness.  To be successful traders, we have to set our own emotions and opinions aside.  All that matters is what’s driving the markets and why, not whether we approve.

Between gold’s early-July-2016 initial bull peak and its mid-December-2016 trough, gold plunged 17.3% on a 14.2% or 138.9t GLD draw.  While that was a massive correction, it technically wasn’t a bear market because it didn’t cross that -20% threshold.  This means gold has remained continuously in a young bull market since early 2016.  And that bull has reasserted itself this year just as I predicted at its post-election bottom.

In Q1’17 gold indeed powered 8.5% higher out of those deep Trumphoria lows.  But interestingly GLD capital flows weren’t a material factor, as this ETF only experienced a minor 1.2% or 10.2t build.  Asians had stepped in to buy gold aggressively, usurping the gold-driving helm from American stock investors.  It was remarkable gold climbed so much, as overall global demand fell 212.7t YoY.  Q1 was something of an anomaly.

Some of that was unwound in Q2’17, the last quarter for which comprehensive gold fundamental data is now available.  Gold slid 0.5% despite a 2.4% or 20.2t GLD build.  That compared to overall world gold demand falling 102.3t YoY.  Despite the record US stock-market highs driven by Trumphoria, American stock investors were bucking the global trend of selling gold-ETF shares.  Overall ETF demand dropped 181.4t YoY.

But despite GLD apparently exiting gold’s driver seat, the red gold-price line above continued to generally mirror GLD’s holdings.  The only reason GLD’s influence faded in the first half of this year is there wasn’t much differential buying or selling of GLD shares by American stock investors.  The major Trumphoria stock rally left them largely indifferent to gold.  That made room for other gold drivers to temporarily eclipse GLD.

Last year the absolute value of GLD’s quarterly holdings changes averaged 108.9t.  But so far in the first couple quarters of 2017, that has collapsed 86% to a mere 15.2t average!  Realize when stock investors start buying or selling GLD shares much faster than gold itself again, GLD’s dominance of gold’s price will come roaring back with a vengeance.  Its extreme volatility overwhelmingly drives gold at the margin.

And that brings us to the current quarter where things are really getting interesting.  Following that huge post-election draw, GLD’s holdings finally bottomed at 799.1 metric tons in late January.  That low held until late July, when they started falling to a new post-election low of 786.9t by early August.  That was the result of very-bearish sentiment fueled by gold’s usual summer-doldrums lows, its weakest time of the year.

Despite this summer seasonal lull being well-known, it inevitably freaks out traders.  So they succumb to their fears and sell low at exactly the wrong time, right before gold’s major autumn rally.  That started to power higher out of the early-July low right on schedule.  But stock investors didn’t take notice until gold had already surged 6.4% higher to $1290 in just 5 weeks.  Then they finally started buying GLD shares again.

GLD’s holdings initially bottomed on August 7th before stalling there for an entire week.  The day after gold challenged $1290, August 14th, stock investors started to return.  Their differential buying drove a 0.5% holdings build that day, the first in 7 weeks.  That GLD-share buying pressure really accelerated in late August and early September, where separate major build days of 1.1%, 1.8%, and 1.1% were witnessed.

By September 5th, GLD’s holdings had powered 6.8% or 53.2t higher in less than a month!  That helped drive a parallel 6.5% gold rally, catapulting it from $1257 to $1339 over that short span.  These new gold capital inflows from stock investors via GLD are very exciting.  This is the biggest and sharpest GLD build seen since well before the election, since back in Q2’16.  Something big and very bullish is afoot in gold investment demand.

American stock investors are starting to return to gold despite the stock markets remaining near or at all-time record highs.  There’s certainly been no correction or even series of major down days.  Investors are returning to gold without that typical stock-selloff catalyst.  And once swelling gold investment demand starts driving gold higher, its rally tends to become self-feeding and run for months on end before petering out.

Investors love chasing winners, nothing drives buying like higher prices.  The more investors bid up gold through differential GLD-share buying, the more its price rallies.  The more gold rallies, the more other investors want to join in to ride the momentum.  Buying begets buying.  To see this starting to happen in these euphoric stock markets is extraordinary.  The inevitable overdue major selloff will supercharge gold buying.

These lofty Fed-goosed stock markets are long overdue for a major correction or more likely a new bear market.  Once they roll over sooner or later here, gold investment demand is going to explode just like it did back in early 2016 during the last correction.  That stock selling could start soon, as next week the Fed is widely expected to unveil quantitative tightening.  That’s every bit as bearish for stocks as QE was bullish!

Resurgent gold investment demand will once again almost certainly propel gold dramatically higher, as it did in the first half of 2016.  This bull market’s latest growing upleg can be played with GLD, but that will only pace gold’s gains.  Far greater upside can be found in the gold miners’ stocks, where profits amplify gold’s gains.  The gold stocks recently enjoyed major breakouts, but remain deeply undervalued relative to gold.

The bottom line is gold investment demand is resuming after its massive post-election slump.  Differential GLD-share buying, the dominant driver of gold’s young bull, just enjoyed its biggest and fastest surge in over a year.  American stock investors are starting to prudently diversify back into gold, despite the stock markets still near record highs.  Worries are mounting that the long-delayed major stock selloff is looming.

When that fateful event inevitably arrives, gold investment demand is going to explode again just like it did in early 2016.  That will catapult gold, silver, and their miners’ stocks dramatically higher.  Seeing gold investment demand surge recently even without a stock-selloff catalyst highlights the big latent interest in gold.  Usually moving counter to stocks, it remains the ultimate portfolio diversifier every investor needs to own. – Adam Hamilton

 

The Stealth Bull Market in Gold Can Generate Triple-Digit Gains

The Stealth Bull Market in Gold Can Generate Triple-Digit Gains

Stealth Bull Market in Gold Can Generate Triple-Digit Gains

The investing public hasn’t been paying attention this year…

Most folks have been too enthralled with stories about President Trump and bitcoin to notice what’s going on. But gold has entered a “stealth” bull market.

The metal is soaring in 2017. And it’s now on pace to outperform stocks for the first time since 2011.

Our colleague Justin Brill touched on this recently in our Weekend Edition. But the biggest news here is that this could be a major turning point for gold. We could see dramatically higher prices in the coming months, if things go anything like last time.

Let me explain…

Since bottoming last December, gold prices have moved consistently higher.

Last month, it broke above $1,300 an ounce for the first time in more than a year. That breakout made the headlines… But something interesting is happening “under the hood” that could be even more important to gold going forward…

You see, folks have been ignoring gold in part because of the massive rally in U.S. stocks. The U.S. stock market is having another fantastic year… up double digits as of the end of August. It’s on pace to finish with its ninth straight winning year… a monumental feat.

This is where things get interesting…

Stocks may be having another fantastic year… But for the first time in a long time, gold is on pace to outperform stocks. The metal is up around 15% so far this year, versus around 13% for the S&P 500 Index.

This could be the first year gold outperforms stocks since 2011. Take a look…

Gold
S&P 500
2008
5.8%
-37.0%
2009
24.4%
26.5%
2010
29.5%
15.1%
2011
10.1%
2.1%
2012
7.1%
16.0%
2013
-28.0%
32.4%
2014
-1.7%
13.7%
2015
-10.4%
1.4%
2016
8.6%
12.0%
2017
14.7%
11.9%
This is big…

As you can see in the table, gold went on a five-year slump of underperformance from 2012 to 2016. It fell 26% during that period.

The metal is on pace to break that trend this year. And that alone could be a major sign that huge gains are possible from here.

You see, the last time gold broke out of a five-plus year slump versus the stock market was the late 1990s…

Gold underperformed stocks for six straight years from 1994 through 1999… And like today, it fell 26% during that slump.

Gold’s massive bull market didn’t start immediately after that… The metal still lost money in 2000.

But, in 2001, it started a 12-year streak of positive returns. Take a look…

Stealth Bull Market in Gold Can Generate Triple-Digit Gains

Overall, the price of gold rose more than 500% from 2001 to 2012. (The S&P 500 increased just 36% over the same 12-year stretch.)

Today, gold is on the verge of outperforming stocks for the first time in six years. The last time we saw a similar losing streak end was the early 2000s… And that happened before a massive bull market started in gold.

We can’t know if that’s what’s happening now… But gold hasn’t looked this good in years. The metal has entered a solid uptrend. And this outperformance could be the turning point for big gains going forward. – Steve Sjuggerud

Cracks Forming in Stock Markets Suggest of Looming High Powered Volatility

Cracks Forming in Stock Markets Suggest of Looming High Powered Volatility

Cracks Forming in Stock Markets Suggest of Looming High Powered Volatility

  • Cracks are forming in an equity bull market that’s been devoid of major price swings for months – and you might miss them if you don’t know where to look.
  • While a 30-day measure of volatility is subdued, a 3-month gauge is spiking in comparison.

Don’t be lulled to sleep by near-record low stock market price swings. Before you know it, shares will be getting whipsawed around, just like the good ol’ days.

At least that’s what official measures of volatility are suggesting.

The CBOE 3-Month Volatility Index (VXV) is trading close to the highest in five years versus its 30-day counterpart, known as the VIX – the ultra-popular and widely-followed instrument frequently referred to as the equity market “fear gauge.”

In other words, traders are bracing for equity turbulence sometime in the one- to three-month range, just not before then.

And wouldn’t you know it – the three-month horizon perfectly captures both third-quarter earnings season and, perhaps most crucially, the government’s debt ceiling deadline. Both events carry considerable event risk that could inject the market with some long-awaited volatility.

vix ratio (1)

Business Insider / Andy Kiersz, data from Bloomberg

If those price swings do come, it would mean a spike for the VIX, which might translate to a downturn for an S&P 500 that has hit a series of record highs. After all, the two gauges trade inversely to one another roughly 80% of the time.

And if that stock weakness does materialize, it wouldn’t be for a lack of warning. Wall Street experts have been crying foul about low volatility for months. Just last week, a group of Societe Generale strategists sounded the alarm, comparing the current environment to the one immediately preceding the last financial crisis.

We’re “now entering dangerous volatility regimes,” said the strategists, led by Alain Bokobza, the firm’s head of global asset allocation. “For most asset classes the current level of volatility is near the lower end of its long-term range. Volatility has a strong mean-reverting tendency.”

JPMorgan’s global head of quantitative and derivatives strategy Marko Kolanovic made an even more stark comparison in late July, saying the strategies suppressing price swings reminded him of the conditions leading up to the 1987 stock market crash. He’s since doubled down on the warning on multiple occasions.

While some look into the horizon and see price swings spelling certain doom for stocks, others see a way to make some money. Christopher Cole, a trader who runs an Austin-based hedge fund that makes wagers on volatility spikes, is part of the latter camp, according to a New York Times article written by Landon Thomas Jr. that was published last week.

Cole has noticed the disconnect between long-dated volatility and the 30-day VIX. To him, the easy profits made recently through the shorting of volatility has given investors “a false peace,” according to the article.

It’s clear the battle lines have been drawn. There are some – like hedge funds and other large speculators – that are betting big that the VIX will remain subdued. They’re positioned close to the most short on record, roughly triple their average bearish VIX position over the eight-year bull market.

Others, like Cole and the aforementioned heavyweight strategists, think the current situation is untenable, and bound to end in tears.

Overall, the massive divergence in opinion only serves to confuse the average investor. So while the temptation to profit from either side can be enticing, the real best advice here is probably the least interesting: tread carefully, and brace for the worst – just in case. – Joe Ciolli

 

The GOLD Investment Thesis rests on the Gross Over-Issuance of DEBT

The GOLD Investment Thesis rests on the Gross Over-Issuance of DEBT

GOLD Investment Thesis rests on the Gross Over-Issuance of DEBT

There is big debate over the exact amount of global debt. Global debt is growing faster than global GDP. We are borrowing money faster than we are creating wealth. US government debt is about 100% of GDP, or $20 trillion, and growing around $1 trillion a year. Forget what they say when they talk about budget deficits. They lie, because they don’t want to admit what the true deficit is.

It’s Just the Debt Stupid!

Trey Reik: The investment climate of 2017 has been characterized by thematic crosscurrents.  Communication from global central bankers has at times appeared more hawkish, yet global rates of QE have only accelerated.  Optimism for the Trump agenda initially levitated sentiment measures, but hard economic statistics failed to follow.   Despite almost continuous upheaval in global geopolitics, volatility measures and credit spreads have remained unfazed near historic lows.  Since economic fundamentals can never compete with the intoxication of fresh weekly highs for the S&P 500, investor consensus now routinely ignores troubling imbalances in the global financial system.  Indeed, investors and asset allocators with the temerity to have employed risk-mitigation and hedging strategies have only succeeded in impairing portfolio performance and career prospects.  In an investment world now dominated by monthly inflows into ETF’s and index funds, unconstrained by rational analysis of portfolio components, it has become somewhat passé to fret over underlying fundamentals.

Amid such fervor for U.S. financial assets, gold’s solid year-to-date gains have been somewhat counter-intuitive.  After trading in a tight $100-range for seven months, spot gold broke upwards through resistance at $1,300 in late August and touched an intraday high of $1,357.64 on 9/8/17 (up 17.8% year-to-date).  Most investors are unaware that gold’s performance during this span exceeded the total-return of the S&P 500 (+11.51%) by some 55%!  Conventional wisdom attributes gold’s recent strength to North Korean provocation and Mother Nature’s wrath, but this narrative ignores the fact that gold broke through $1,300 (on its third attempt in five months) before Chairman Kim’s 8/28 Hokkaido missile launch.  We believe the unheralded performance in gold prices for 2017 carries an important signal for investors.  Much to the Fed’s chagrin, economic and financial imbalances are bubbling to the surface (once again), placing consensus expectations for further FOMC tightening in jeopardy.

As precious-metal investors, we frequently encounter the refrain that global economic conditions, while somewhat lackluster, are a far cry from the negative extremes of the financial crisis.  The funny thing about this nearly ubiquitous view is how precisely misinformed it actually is—virtually every measure of domestic and global debt is significantly worse today than at its financial-crisis peak.  In this note, we seek to disabuse the popular notion of economic and balance sheet repair, through dispassionate review of relevant statistics.  We recognize rehashing structural debt issues is a tiresome exercise for equity bulls, but we believe that the recent breakout in the price of gold may be foreshadowing an imminent uptick in financial stress.  If we are correct in our analysis, reigning positioning in prominent asset classes is likely to be recalibrated to gold’s tangible benefit. 

Perhaps the greatest misconception among contemporary investors is the belief that the US economy has been deleveraging since the financial crisis.  Nothing could be further from the truth.  The Fed’s quarterly Z.1 report discloses that domestic nonfinancial credit (including households, business, federal, state and local) has actually increased over 40% since Q1 2009, rising from $33.9 trillion to $47.5 trillion by Q1 2017.  Of course, this aggregate measure does not capture growth in the Fed’s own balance sheet, which has expanded from $930 billion in August 2008 to its current level around $4.5 trillion.  Because we have always viewed the Fed’s QE programs as tacit admission that the Fed feels compelled to provide a liquidity bridge whenever U.S. nonfinancial credit growth is insufficient to stabilize the U.S. debt pyramid (now $66.5 trillion including financial debt), we find it highly implausible that the Fed can now reduce the size of its balance sheet meaningfully without straining liquidity conditions in the U.S. commercial banking system.

Our gold investment thesis rests on the gross over-issuance of paper claims (debt) against comparatively modest levels of productive output (GDP).  Total U.S. credit market debt of $66.5 trillion cannot be functionally serviced by a $19 trillion economy without annual creation of copious amounts of fresh nonfinancial credit to help amortize existing debt obligations.  Gold serves as a productive portfolio asset amid such “forced” credit growth for two important reasons.  First, the only options for rebalancing unsustainable debt levels back towards underlying productive output are default or debasement, and gold is an asset immune to both.  Second, gold is an effective protector of portfolio purchasing power during inevitable episodes of official policy response.

In Figure 1, below, we plot a simplistic illustration of how burdensome U.S. debt levels have become.  During the past four quarters, net economy-wide interest payments approximated $641 billion, or over 90% of coincident GDP growth of $708 billion.  This certainly does not leave much economic fuel to power capital formation!

fig1.png

Figure 1:  U.S. Annual Aggregate Net Interest Payments (1985-2017) [MacroMavens; BEA; U.S. Treasury]

Drilling down in the consumer segment of total U.S. debt, historically high debt levels are frequently discounted by the observation that debt-service ratios remain manageable in the context of today’s near-ZIRP environment.  We view debt-service ratios as a classic tool of cognitive dissonance.  While these ratios calibrate aggregate disposable income to aggregate debt service, they ignore the reality that the disposable income and the debt obligations are largely concentrated in different sub-sectors of the U.S. population, so netting them out is a pyrrhic exercise.  Further, in the current environment of soaring healthcare and housing costs, traditional disposable income statistics have become far less instructive in gauging consumer financial health than discretionary income measures (after basic needs are paid for).  Reflecting growing consumer stress, delinquencies are beginning to spike (from low levels) on a wide range of revolving and installment credits, from JP Morgan’s credit card portfolio to subprime auto loans, to everything in between.  Rapidly declining fundamentals in important industries such as retail, automobiles and restaurants only serve to reinforce the message of tapped and retrenching consumers.

Corporate balance sheets have been deteriorating for many years.  ZIRP fostered an epic decline in capex in favor of borrowing to finance share repurchase.  In essence, corporate income statements have been consuming corporate balance sheets at an alarming clip.  State and local governments are struggling with a $4 trillion funding shortfall in public pensions, due largely to the corrosive effects of seven years of ZIRP on the complexities of pension accounting. 

The recently negotiated three-month suspension of the federaldebt ceiling paved the way for a single-day$318 billion boost in our national debt, to $20.162 trillion on 9/8/17.  Since the U.S. has not run a budget surplus in over two decades, it is no surprise that first breach of the $20-trillion-level generated scant coverage in financial press.  Quickly recognizing he now faces the awkward timing of a year-end debt ceiling standoff, President Trump once again demonstrated his trademark flexibility with respect to longstanding convention by floating the concept of abandoning the ceiling altogether (9/7/17): 

For many years, people have been talking about getting rid of debt ceiling altogether, and there are a lot of good reasons to do that….It complicates things, it’s really not necessary.

Rounding out the surreal quality of contemporary U.S. governance, Treasury Secretary Mnuchin on 9/13/17 issued veiled threats towards China which we found disturbing.  Addressing an Andrew Sorkin question as to why the U.S. has been unable to “move the needle” in convincing China to pressure North Korea to change its behavior, Secretary Mnuchin responded:

I think we have absolutely moved the needle on China.  I think what they agreed to yesterday was historic.  I’d also say I put sanctions on a major Chinese bank.  That’s the first time that’s ever been done.  And if China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system And that’s quite meaningful. [our emphasis]

As John McEnroe might protest, “You can’t be serious!”  The United States is the world’s largest debtor nation, running the world’s largest trade deficit, requiring more external capital than any other global nation.  Yet Treasury Secretary Mnuchin saw fit to threaten to deny China, both our largest creditor and our largest trading partner, access to the SWIFT interbank clearing network, which underpins the dollar-standard system and, therefore, the vast majority of global commerce.  Beyond almost inconceivable disrespect to China, Mnuchin’s comments demonstrate either ignorance of, or reckless disregard for, the critical role played by savings (domestic or foreign) in the capital formation process.  In the United States, we don’t even pretend that savings matter anymore.  It’s all about the printing press!

Amid cavalier U.S. attitudes regarding the dollar-standard system, the global trend towards de-dollarization continues apace.  In response to U.S. sanctions, Venezuela announced 9/14/17 that it will no longer accept U.S. dollars as payment for its crude oil exports.  Even more intriguing was disclosure in the Nikkei Asian Review on 9/3/17 that China is launching a crude oil futures contract denominated in yuan and fully convertible into gold on the Shanghai and Hong Kong exchanges (already beta-tested this past June and July).  Long-held global resentments over the petrodollar payment system are finally coalescing into tangible policies and products to reduce dollar hegemony.  These currency-diversification efforts only compound the dollar’s 2017 woes.  As shown in Figure 2, below, 2017-year-to-date performance of the Fed’s Broad Trade-Weighted Dollar Index has been the worst since inception of the index in 1995.        

fig2.png

Figure 2:  Annual Performances of Fed’s Broad Trade-Weighted Dollar Index by Trading Days (1995-2017) [Bespoke Investment Group; Zero Hedge]

Pulling this all together, we attribute recent dollar weakness to growing speculation that the Fed is finished with its current tightening cycle.  As we have communicated in the past, we believe outstanding U.S. debt levels absolutely preclude normalization of interest rate structures (on both the short and the long end).  While it is still too early to cite definitive proof, we suspect the Fed’s three most recent rate hikes have already begun to weigh on U.S. economic performance in manners the Fed will not countenance (such as declining growth rates in commercial-bank lending).  On 9/5/17, Minneapolis Fed President (and 2017 FOMC voter) Neel Kashkari freely acknowledged his own apprehensions over recent Fed tightening:

Maybe our rate hikes are actually doing real harm to the economy.  It’s very possible that our rate hikes over the past 18 months are leading to slower job growth, leaving more people on the side-lines, leading to lower wage growth, and leading to lower inflation and inflation expectations.

Despite the Fed’s recent rate increases and occasional outbreaks of hawkish jawboning from global central bankers during 2017, the U.S. dollar’s extended decline, together with gold’s recent breakout, signal growing market skepticism that the era of central bank stimulus is truly coming to a close.

fig3.jpg

Figure 3: Spot Gold vs. Aggregate Market Value of Global Negative-Yielding Sovereign Bonds (February 2017-September 2017) [Meridian Macro] 

Nowhere is this inflection in market expectations for central bank policy more evident than in the dramatic summer resurgence of sovereign bonds sporting negative yields.  Figure 3, above, demonstrates that the global stock of negative-yielding sovereigns exploded by 50% during the past three months, and now stands just $2.1 trillion shy of its June 2016 record-total.  Tight correlations in Figure 3 suggest gold has certainly taken notice.

 

This Explains the Current Manipulated take-down in the Price of Gold

This Explains the Current Manipulated take-down in the Price of Gold

This Explains the Current Manipulated take-down in the Price of Gold

A consultant to GATA (Gold Anti-Trust Action Committee) brought to our attention the fact that gold swaps at the BIS have soared from zero in March 2016 to almost 500 tonnes by August 2017 (GATA – BIS Gold Swaps). The outstanding balance is now higher than it was in 2011, leading up to the violent systematically manipulated take-down of the price of gold starting in September 2011 (silver was attacked starting in April 2011).

The report stimulated my curiosity because most bloggers reference the BIS or articles about the BIS gold market activity without actually perusing through BIS financial statements and the accompanying footnotes.  Gold swaps work similarly to Fed repo transactions.  When banks need cash liquidity, the Fed extends short term loans to the banks and receives Treasuries as collateral.  QE can be seen as a multi-trillion dollar Permanent Repo operation that involved outright money printing.

Similarly, if the bullion banks (HSBC, JP Morgan, Citigroup, Barclays, etc) need access to a supply of gold, the BIS will “swap” gold for cash.   This would involve BIS or BIS Central Bank member gold which is loaned out to the banks and the banks deposit cash as collateral to against the gold “loan.”   This operation is benignly called a “gold swap.”  The purpose would be to alleviate a short term scarcity of gold in London and put gold into the hands of the bullion banks that can be delivered into the eastern hemisphere countries who are importing large quantities of gold (gold swaps outstanding are referenced beginning in 2010).

I wanted dig into the BIS financials and add some evidence from the GATA consultant’s assertions because, since 2009, there has been a curious inverse correlation between the amount of outstanding gold swaps held by the BIS and the price of gold (as the amount of swaps increase, the price of gold declines).   You’ll note that in the 2009 BIS Annual Report, there is no reference to gold swaps so we must assume the amount outstanding was zero. By 2011 the amount was 409 tonnes.

The gold swaps enable the BIS to “release” physical gold into the banking system which can then be used to help the Central Banks manipulate the price of gold lower.   This explains the jump in BIS gold swaps between March 2016 and March 2017 and the drop in the price of gold from August 2016 until early July 2017.  It also explains the rise in the price of gold between July and September this year, which correlates with a decline in the outstanding gold swaps between April and July .  Finally, the hit on gold that began earlier this month coincides with a sudden jump in BIS gold swaps in the month of August. (Note: there would be a short time-lag between the gold swap operation and the amount of time it takes to “mobilize” the physical gold)

The graphic below shows the increase in gold swaps from March 2016 to March 2017:

As you can see, the total amount of the gold loans outstanding increased by 14.1 billion SDRs (note: the BIS expresses its financials in SDRs). The accompanying note explains that most of this gold loan is comprised of an increase in the BIS’ gold swap contracts outstanding.

I find it interesting that the reports of gold backwardation in London (see James Turk’s interviews on King World News) and the backwardation I have observed between the current-month (delivery month) Comex gold contract and the London gold fixings over the past several months  correlates well with the sudden jump in gold swap activity at the BIS.

Backwardation in any commodity market indicates that the demand for delivery of the underlying commodity is greater than the near-term supply of that commodity.  It’s hard to ignore that the backwardation observed on the LBMA and with Comex gold delivery-month contracts has been accompanied by soaring gold demand from India, as reported by the Economic Times of India (article link):  Gold Imports Jump Three-Fold in April-August.

Furthermore, it appears as if the BIS gold swap activity continued to increase between March 2017 and August 2017, as the BIS’s August Account Statement  shows another 2.2 billion SDR increase in amount of outstanding gold loans (a BIS monthly account statement only reports the balance sheet with no accompanying disclosure). These loans primarily are swaps,  per the disclosure in the 2017 Annual Report.

However, this jump in gold swaps between March and August is somewhat misleading. The outstanding amount of loans declined from 27.2 billion SDRs at the end of March to 24.6 billion SDRs at the end of July.   The price of gold rose over 11% between July and early September.   By the end of August, the BIS balance sheet shows 29.3 billion SDRs.  A jump of 4.7 billion SDRs worth of gold swaps.

It was around April that the World Gold Council began to forecast that India’s gold importation would drop to 95 tonnes per quarter starting in Q2.  As it turns out, India imported 248 tonnes of gold in Q2 2017.  This number does not include smuggled gold. Please note the curious correlation between the jump in BIS gold swap activity at the end of the summer and the unexpected surge in Indian gold imports.

In my view, there is a direct correlation between this sudden leap in the amount of gold swaps conducted by the BIS between July and August and the price attack on gold that began two weeks ago.   The gold swaps provide bullion bar “liquidity” to the bullion banks who can use them to deliver into the rising demand for deliveries from India, China, Turkey, et al.  This in turn relieves the strength and size of “bid” on the LBMA for physical gold which in turn makes it easier for the same bullion banks to attack the price of gold on the Comex using paper gold.  This explains the current manipulated take-down in the price of gold despite the rising seasonal demand from India and China.  – Investment Research Dynamics

Despite High Global Uncertainty, U.S. Citizens Remain Under-Invested in Gold

Despite High Global Uncertainty, U.S. Citizens Remain Under Invested in Gold

Despite High Global Uncertainty, U.S. Citizens Remain Under-Invested in Gold

Gold remains extremely under-owned by investors despite having a solid track record as a currency of last resort in times of uncertainty, and despite the current global environment being arguably more uncertain than any point since the second world war.

Current gold ETF holdings as a percentage of global ETF assets are tiny. An ETF (short for exchange-traded fund) is a security that tracks an index.

However, “Market complacency could bolster the case for gold” and the positive investment cycle in the asset class potentially has many years to run.

What do we mean by under-owned?

As the chart below shows, in 2012 gold was relatively well-owned, with gold ETFs over 10% of all ETF assets (including equities, bonds, etc).

Since then ETFs have expanded across asset classes and we have seen strong bull markets in bonds and equities. At the same time, and partly as a result, gold ETF holdings have fallen from over 85 million ounces in 2012 to around 68 million ounces (in August). Gold ETFs as a percentage of all ETF assets are now closer to 2%.

For gold, in a world still awash in liquidity and with financial asset values very high, this is positive.

We are not suggesting that ETF holdings in gold are not increasing. We have already seen total ETF holdings of gold increase by 32% in 2016 and by a further 8% year-to-date 2017.

What we are saying is that around $15 trillion of liquidity has been injected into global financial markets from central banks since 2008. So, when investors start meaningfully allocating to gold again, gold ETF holdings have the potential to grow at significantly higher rates than we saw during the 2004 to 2012 period.

Gold equities

Now, if we look at gold equities, we see a similar picture (see chart 2). The current weighting of North American gold equities in the S&P 500 and Toronto’s TSX has fallen to just 0.6% after reaching a peak of over 2% in 2012.

To put this low weighting in perspective, the entire North American (US & Canadian) gold producers have a combined market cap of less than $150bn.

This is tiny and highlights the scarcity value of gold equities if a bull market in gold gets going. Essentially, this extremely low weighting reflects investors’ current low positioning around gold and gold equities, as well as the very high valuations of other more mainstream sub-sectors.

This relatively low weighting surprises us given increasing geopolitical risk, increasing risk of inflation and therefore negative real rates. It is also surprising given that the majority of the companies we invest in have improving fundamentals and are trading at the lower end of their historical valuation range.

Relative to gold, we believe gold equities still look cheap and we would stress that our equity holdings are currently discounting gold prices of less than $1,200/oz, at a time when the actual gold price is $1,327 (as at 12 September). – Schroders

 

World’s Biggest Hedge Fund Manager: Bitcoin Is A Bubble, Gold Is Money

World's Biggest Hedge Fund Manager: Bitcoin Is A Bubble, Gold Is Money

Bitcoin Is A Bubble, Gold Is Money

Bridgewater Associates founder Ray Dalio, the 68-year-old founder of the world’s largest hedge fund, said bitcoin is “in a bubble” during an interview on CNBC Tuesday morning, arguing that the so-called currency is too difficult to spend, and too volatile to be a useful store of value.

During the interview, Dalio argued that most investors who buy the digital currency do so with the hope of making a quick speculative profit, undermining bitcoin’s functionality as a currency.

“There are two things that are required for a currency. The first thing is that you can transact in it, it’s a medium of exchange. The second thing is it’s a store of value. Bitcoin today…you can’t spend it very easily.

In terms of a storehold of wealth, it’s not an effective storehold of wealth because it has volatility to it. Unlike gold, let’s say, which reflects the value of money, its more stable than the value of money, bitcoin is a highly speculative market.”

Dalio added that he doubts that governments will allow bitcoin transactions to remain anonymous in perpetuity. The IRS has sued Coinbase, a popular US bitcoin exchange, demanding records on client transactions – a decision that many in the community saw as the beginning of the US government’s effort to unmask the currency’s users. Aleady, using sophisticated blockchain analysis techniques, US authorities have been able to trace bitcoins back to their respective owners, making it more difficult for tax cheats and money launderers to use the digital currency to facilitate their crimes.

“The idea that it will be private in terms of transaction…in other words people won’t know what you’re doing and it will be a private currency…is really questionable.”

Based on the amount of speculation alone – the price of a single coin has risen by more than 300% since the beginning of the year – Dalio argues that the only logical conclusion is that bitcoin is in a bubble.

“We take these criteria, and we define a bubble based on those criteria, bitcoin is a bubble. It’s a shame – it could be a currency, it could work conceptionally, but the amount of speculation that’s going on and the lack of transaction, the idea that it will be private in terms of transaction…is really questionable if you look at what’s gone on in terms of governments to examine it.”

Bitcoin also faces competition from other digital currencies like Ethereum, which compounds the problem of investing in digital currencies, in Dalio’s view.

“And then there are other cryptocurrencies. Bitcoin might lose competition to other cryptocurrencies. So is it a bitcoin bet that we’re making or a cryptocurrency bet. It’s very much speculative people thinking can I sell it at a higher price…and so it’s a bubble.”

Bridgewater founder Ray Dalio: Bitcoin is a bubble from CNBC.

Bitcoin reached an all-time high just shy of $5,000 on Sept. 1. But the digital currency pulled back earlier this month amid reports that Chinese regulators were forcing local bitcoin exchanges to shut down as part of a crackdown on ICOs. It’s decline accelerated – briefly sending the digital currency below $3,000 a coin, its weakest level since mid-July – after JP Morgan CEO Jamie Dimon proclaimed that bitcoin is “a fraud” and that he’d fire any JPM trader caught buying it. Of course, his remarks were followed almost immediately be reports that JPM had  beeen one of the biggest buyers of a bitcoin-linked exchange-traded note traded on Nasdaq Stockholm, one of the only bitcoin-focused securities to trade on a public exchange in any market, raising important questions about whether the bank was violating its fiduciary duty by assisting clients to transact in an asset that the bank’s CEO believes to be fraudulent.

However, over the past two years, bitcoin has ripped the face off of every bear who has spoken out against It. Over the summer, billionaire investor Howard Marks was forced to recant his bearish view in an investor letter, issuing a now-famous mea culpa. Unlike its response to Dimon’s remarks, bitcoin barely moved after Dalio’s interview aired, and has remained almost unchanged on the day.

How long before Dalio and Dimon are forced to do the same?

Zerohedge

 

Inflation in 15 Minutes & Solution to U.S. Debt Crisis – Raise the Dollar Price of Gold

Inflation in 15 Minutes & Solution to Debt Crisis - Raise the Dollar Price of Gold

Inflation in 15 Minutes & Solution to U.S. Debt Crisis – Raise the Dollar Price of Gold

Right now, the United States is officially $20 trillion in debt. Over half of that $20 trillion was added over the past decade.

And it looks like annual deficits will be at the trillion dollar level sooner than later when projected spending is factored in.

Basically, the United States is going broke.

I don’t say that to be hyperbolic. I’m not looking to scare people or attract attention to myself. It’s just an honest assessment, based on the numbers.

Now, a $20 trillion debt would be fine if we had a $50 trillion economy.

The debt-to-GDP ratio in that example would be 40%. But we don’t have a $50 trillion economy. We have about a $19 trillion economy, which means our debt is bigger than our economy.

When is the debt-to-GDP ratio too high? When does a country reach the point that it either turns things around or ends up like Greece?

Economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt.

They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, they found, a turning point arrives…

At that point, a dollar of debt yields less than a dollar of output. Debt becomes an actual drag on growth.

What is the current U.S. debt-to-GDP ratio?

105%.

We are deep into the red zone, that is. And we’re only going deeper.

The U.S. has a 105% debt to GDP ratio, trillion dollar deficits on the way, more spending on the way.

We’re getting more and more like Greece. We’re heading for a sovereign debt crisis. That’s not an opinion; it’s based on the numbers.

How do we get out of it?

For elites, there is really only one way out at this point is, and that’s inflation.

And they’re right on one point. Tax cuts won’t do it, structural changes to the economy wouldn’t do it. Both would help if done properly, but the problem is simply far too large.

There’s only one solution left, inflation.

Now, the Fed printed about $4 trillion over the past several years and we barely have had any inflation at all.

But most of the new money was given by the Fed to the banks, who turned around and parked it on deposit at the Fed to gain interest. The money never made it out into the economy, where it would produce inflation.

The bottom line is that not even money printing has worked to get inflation moving.

Is there anything left in the bag of tricks?

There is actually. The Fed could actually cause inflation in about 15 minutes if it used it.

How?

The Fed can call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce.

They could make that new price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct “open market operations” in gold.

They will be a buyer if the price hits $4,950 per ounce or less and a seller if the price hits $5,050 per ounce or higher. They will print money when they buy and reduce the money supply when they sell via the banks.

The Fed would target the gold price rather than interest rates.

The point is to cause a generalized increase in the price level. A rise in the price of gold from $1,350 per ounce to $5,000 per ounce is a massive devaluation of the dollar when measured in the quantity of gold that one dollar can buy.

There it is — massive inflation in 15 minutes: the time it takes to vote on the new policy.

Don’t think this is possible? It’s happened in the U.S. twice in the past 80 years.

The first time was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67 per ounce to $35.00 per ounce, nearly a 75% rise in the dollar price of gold.

He did this to break the deflation of the Great Depression, and it worked. The economy grew strongly from 1934-36.

The second time was in the 1970s when Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it.

Gold went from $35 per ounce to $800 per ounce in less than nine years, a 2,200% increase. U.S. dollar inflation was over 50% from 1977-1981. The value of the dollar was cut in half in those five years.

History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time.

But what people don’t realize is that there’s a way gold can be used to work around a debt ceiling crisis if an agreement isn’t reached in the months ahead.

I call it the weird gold trick, and it’s never seen discussed anywhere outside of some very technical academic circles.

It may sound weird, but it actually works. Here’s how…

When the Treasury took control of all the nation’s gold during the Depression under the Gold Reserve Act of 1934, it also took control of the Federal Reserve’s gold.

But we have a Fifth Amendment in this country which says the government can’t seize private property without just compensation. And despite its name, the Federal Reserve is not technically a government institution.

So the Treasury gave the Federal Reserve a gold certificate as compensation under the Fifth Amendment (to this day, that gold certificate is still on the Fed’s balance sheet).

Now come forward to 1953.

The Eisenhower administration actually had the same debt ceiling problem we have today. And Congress didn’t raise the debt ceiling in time. Eisenhower and his Treasury secretary realized they couldn’t pay the bills.

What happened?

They turned to the weird gold trick to get the money. It turned out that the gold certificate the Treasury gave the Fed in 1934 did not account for all the gold the Treasury had. It did not account for all the gold in the Treasury’s possession.

The Treasury calculated the difference, sent the Fed a new certificate for the difference and said, “Fed, give me the money.” It did. So the government got the money it needed from the Treasury gold until Congress increased the debt ceiling.

That ability exists today. In fact, it is exists in much a much larger form, and here’s why…

Right now, the Fed’s gold certificate values gold at $42.22 an ounce. That’s not anywhere near the market price of gold, which is about $1,330 an ounce.

Now, the Treasury could issue the Fed a new gold certificate valuing the 8,000 tons of Treasury gold at $1,330 an ounce. They could take today’s market price of $1,330, subtract the official $42.22 price, and multiply the difference by 8,000 tons.

I’ve done the math, and that number comes fairly close to $400 billion.

In other words, tomorrow morning the Treasury could issue the Fed a gold certificate for the 8,000 tons in Fort Knox at $1,330 an ounce and tell the Fed, “Give us the difference over $42 an ounce.”

The Treasury would have close to $400 billion out of thin air with no debt. It would not add to the debt because the Treasury already has the gold. It’s just taking an asset and marking it to market.

If the debt ceiling isn’t raised, this gold certificate trick could finance the government for almost an entire year, because we have about a $400 billion deficit.

It’s not a fantasy. It was done twice. It was done in 1934 and it was done again in 1953 by the Eisenhower administration. It could be done again. It doesn’t require legislation.

Is the government working on this gold trick I just described? I don’t know.

But it’s suspicious that Treasury Secretary Mnuchin recently went to inspect the Fort Knox gold. He was only the third Treasury secretary in history to visit Fort Knox, and the first since 1948. The visit was highly, highly unusual.

I’ll be keeping an eye on this space, but the real message is that the solutions to current debt levels are inflationary.

They involve a dollar reset, or a dollar reboot. That means revaluing the dollar either through a higher gold price or marking the gold to market and giving the government money.

There’s a lot of moving parts here, but they all point in one direction, which is higher inflation. It’s the only way to keep America from going broke. Unfortunately, it will also make your money worth less. – Jim Rickards

 

Are You Still Worried if Gold is in a Real Bull Market or Not? Let Me Show You

Are You Still Worried if Gold is in a Real Bull Market or Not? Let Me Show You

Are You Still Worried if Gold is in a Real Bull Market or Not?

After climbing 9% in 2016, from $1050 to $1150 and another 10% gain during the first half of this year, in July and again in early August, gold prices dropped down to $1210, before rallying back up both times to $1290 and $1350 per ounce respectively. This back and forth price action has some investors worried if this is a real bull market in gold or yet another flash in the pan for the coveted yellow metal?

To get a clearer picture, one has to closely examine how a typical bull market acts during its movements through various stages.

Although the definition of a bull market is sustained gains in value of a certain asset class year after year over a 5-8 year period, the beginning, middle and the end of this cycle vary in performance. Let me explain what this means to you as an investor.

Typically after the conclusion of a bear market in an asset class which pushes the value of the assets down over a 2-4 years period, it begins a new bull market that goes through the following phases:

Phase I (Hope)

In the early stages of this new bull cycle, a great majority of investors are still skeptical, sitting on the sideline and periodically glancing at it from a distance to see if the market is continuing to stay depressed or if it has concluded its bear market and has begun to climb, entering a new bull market.

This stage is known as the “Hope” phase, which lasts 1-2 years, during which the price movements to the upside is usually painstakingly slow as institutional investors such as major banks and nations see the opportunity and jump in stockpiling gold at discounted depressed prices while the rest of the population remains on the sideline.

During this phase it is not unusual to see periodic short term pullbacks followed by modest rebounds. Yet, during this phase, the market shows some signs of life as it makes modest annual gains. From January of 2016 till now, gold has moved up from $1050 to $1331 (26.6%) with silver up from $13.80 to $17.81 (28.8%) in a little over 20 months. This is the phase gold and silver just concluded and are about to move into the next phase. The main thing to remember during this phase, is how each rebound is greater than the last one, as has been the case in the current gold and silver markets.

Phase II (Relief & Optimism)

Gold and silver are in the beginning of these two phases known as “Relief & Optimism” which lasts another 2-3 years as the market begins to hit higher highs with sustain gains for longer periods of time and with fewer and shorter term pullbacks as investors begin to gain confidence and more people start to jump in, most of whom are usually professional investors such as hedge funds and money managers while the general public continues to ignore it.

Phase III (Excitement & Thrill)

The next step is the “excitement” phase which is quickly followed by “Thrill” phase as the prices start moving up fairly rapidly with even fewer short term pullbacks.

This is also the phase where the mainstream media begins to take notice of the bull market and starts to talk about the market virtually daily, enticing the general public to jump in while the professional investors begin to slowly cash in and jump out of the market with fistful of dollars as the unsuspecting general public is finally getting in, long after the bargain-basement prices have past.

This is also where the late-comers are mostly susceptible to great losses as the aged bull market is quickly winding down and approaching its final stage …

The Final Phase (Euphoria)

The “Euphoria” phase which typically lasts 6-12 months, turns the market into chaos and pandemonium. This is where you will see asset values move up in leaps and bounds with hardly any pullbacks at all.

For example, if you go back and look at how gold prices moved in the last 12 months of its last bull market, you will see from August 2010 through September 2011 it went from $1227 per ounce to $1924, a whopping 57% jump in just one single year. This is what a Euphoria Phase looks like. The stock market is currently in the midst of this phase. As we are witnessing today, regardless of how negative the fundamentals, the economic data or how dangerous the geopolitical risks around the world, the stock market keeps hitting new record highs month after month. Former Federal Reserve chairman’s coined phrase “Irrational Exuberance” is hard at play in today’s stock market.

But unfortunately this is also when a massive crash occurs as investors watch their entire life savings get wiped out as the markets sink back into a new cyclical bear market for the following 2-4 years.

As clearly demonstrated, once again the early bird always gets the worm and the late ones get the shaft. The key in making money in any market is to go into a bull market in its early stages and not wait till it is too late to benefit you. Since early 2016, we have been seeing banks such as JP Morgan and others have been getting into this new bull market in precious metals. “Follow the smart money,” was one of my father’s favorite sayings.

Although hindsight is always 20/20, to see this point clearly, you won’t have to go further than the last bull market in gold and silver which lasted from 2001 through 2011. Those who got into the market in 2001- 2003 in the early phase of that bull market when gold prices averaged at $345, made the most profit in 2011 when the prices had topped out at $1924. In contrast, those who waited till the late stages of the bull market around 2010 when gold had already gone over $1200 per ounce, made the least amount of profit, if not burned to ashes after the market dropped a year later.

For those of you who missed the last bull market in its early stages, here is your second chance. It is 2002 all over again, only 20 months into this new young bull market. Are you going to be the early bird who catches the worm, or wait till it is too late before pulling the trigger?

You decide! – Peter Ginelli

Gold Analog Charts Signal Early Stages Of Cyclical Bull

We started employing analog charts during the latter stages of the seemingly forever bear market in precious metals. Comparing current to past trends by using price data is not considered technical analysis but it is extremely valuable because history tends to repeat itself. It also helps us identify extremes as well as opportunities. For example, in 2015 it was clear the epic bear market in gold stocks was due for a major reversal. Today, precious metals appear to be in the early innings of a cyclical bull market and the analogs suggest there is plenty of room to run to the upside.

The first chart compares the current recovery in gold to past recoveries. In recent quarters we had anticipated a similar, explosive rebound like in 2008 and 1976. However, with 18 months of evidence we can now say the current rebound most resembles the rebounds that started in 1985 and 2001. Both of those rebounds imply gold could reach $1700/oz by Q4 of 2018. However, if gold cannot take out the resistance around $1375 then it could end up following the path of the 1993 rebound.

Gold Bull Analog

Next we look at the large cap gold stocks. The data is from the Barron’s gold Mining Index (BGMI) which is one of the few indices with a multi-decade history. If one were to look at the HUI or GDM(parent index of the VanEck Vectors gold Miners ETF (NYSE:GDX)) it would show the gold stocks are currently behind the rebound that began in the fourth quarters of 2000 and 2008.

Data from the BGMI implies the rebound in gold stocks is ahead of schedule. In a broader sense, the BGMI certainly has plenty of room to run as many of its bull markets have achieved 7-fold returns.

Gold Stocks Bull Markets

Next is an analog constructed from data from my custom junior gold indices. The juniors are currently right at the point where the 2001-2007 bull made a massive move higher over the next 12 months. The two bulls for comparison are a very long cycle (+6 years and less than 3 years). At worst, I’d expect this bull to last somewhere in between. If gold makes a clean break above $1375/oz then I’d expect this bull to advance to the 14x peak the other bulls achieved before 2019.

TDJ Junior Gold Index Bull Analog

Finally, here is the TSX Venture Index. The three previous bulls averaged close to a 250% gain. The current bull is up roughly 60%. The gains for the overall index are muted as the index contains a large amount of worthless companies. Nevertheless, the bull market has plenty of room to run in terms of time and price.

TSX Venture Bull Analog

The analogs show that the current bull market in gold, gold stocks and juniors is obviously in the early innings in both time and price. Interestingly, the analog for gold and the junior gold stocks suggests there is the possibility of strong upside potential over the next 12 months.

If gold breaks above major resistance around $1375/oz, then the juniors and large gold stocks could realize that upside potential over the next 18 months. Although the fledgling correction in precious metals could continue and expand, the broader risk to reward is skewed to the upside. Therefore, we want to accumulate the best opportunities in the juniors on weakness. – Jordan Roy-Byrne

 

Global Oil Market Equation looks Bullish for Oil Prices

Global Oil Market Equation looks Bullish for Oil Prices

Global Oil Market Equation looks Bullish for Oil Prices

We had posted an article on 6th Sept 2017, which may seem relevant now since oil prices have shot up despite most of the world holding on to strong views on further weakness in the oil market. Here is the report for your reference:

A Rebound in Oil Prices may not be Short-Lived this Time

———–

Despite the huge uncertainties related to the two massive hurricanes that hit the U.S., the global oil market looks tighter than it has in a long time, according to a new report from the International Energy Agency.

Global oil supply fell in August for the first time in four months, the IEA said, a result of a dip in OPEC’s oil production, combined with refinery maintenance and sizable outages from Hurricane Harvey. World oil supply fell by 720,000 barrels per day (bpd) in August compared to July, a significant decline that will aid in the market’s progress towards rebalancing.

Multiple outages contributed to the decline in global output. Hurricane Harvey resulted in U.S. oil production falling by 200,000 bpd in August—outages that occurred mostly in the Eagle Ford shale and offshore in the Gulf of Mexico. But OPEC also saw its collective output fall by 210,000 bpd in August, mainly from disruptions in Libya.

The supply outages will go a long way toward adding some momentum to the rebalancing effort, even if some of them are only transitory.

Another notable issue, the IEA said, was that U.S. oil supply is quite a bit lower at this point than it expected, and not just because of Harvey. The agency singled out the fact that U.S. oil production actually declined in June from a month earlier, an unexpected development. That meant that the Harvey disruptions resulted in output declines from a lower-than-anticipated base.

The demand side of the equation also looked bullish. The IEA revised up its forecast for oil demand growth this year, upping it to 1.6 million barrels per day (mb/d) from its July estimate of just 1.5 mb/d. The second quarter stood out, with quarterly growth of 2.3 mb/d year-on-year—the highest in two years. The Paris-based energy agency said that demand in OECD countries (i.e., rich industrialized countries that tend to have weak demand growth rates) “continues to be stronger than expected, particularly in Europe and the U.S.”

The stronger forecast is notable not just because it puts oil demand growth at its hottest in a long time, but also because the IEA essentially shrugged off any lingering effects from the storms in the U.S., concluding that the “impact on global oil market is likely to be relatively short-lived.”

The IEA did point out that the U.S. Gulf Coast is more strategically important to the global oil market than ever. Texas and Louisiana exports some 4 mb/d of refined products along with 0.8 mb/d of crude oil. Crude oil exports are also set to rise further, so in a global context, the U.S. Gulf Coast has emerged as one of the most vital energy hubs, meaning that “in some respects, it can be compared to the Strait of Hormuz in that normal operations are too important to fail,” the IEA cautioned.

But the oil market appears to be handling the outages without too much trouble, certainly aided by the fact that inventories have been “comfortable.” That doesn’t mean that there aren’t significant atypical market conditions in Texas, Florida and the U.S. as a whole (there certainly are), but only that at the global level, the oil market won’t change all that much.

As for inventories, OECD stocks held steady in July from a month earlier, which is actually a bullish sign given that they typically rise at this point in the year. Crucially, refined products stocks in the OECD are only 35 million barrels above the five-year average. “Depending on the pace of recovery for the U.S. refining industry post-Harvey, very soon OECD product stocks could fall to, or even below, the five-year level.”

This point is significant. The oil market has been drowning in too much supply for three years, but at least for products (gasoline, diesel), inventories are getting close to average levels. OPEC’s goal is to bring crude oil inventories back to average levels, not just products. But if product inventories get back to normal, refineries will have to work harder to ensure that there is enough gasoline and diesel to meet consumer demand. That ultimately means a greater drawdown in crude stocks could be forthcoming. In other words, this is a sign that the market is rebalancing.

To be sure, at this point, few expect huge price spikes. In fact, some analysts warned everyone not to get too excited, not least because oil supply is still expected to grow by quite a bit through next year.

“The IEA sees strong demand growth and declining OECD inventories at the moment. But it also sees an increasing challenge for OPEC in 2018,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “Thus if OPEC wants to see further reductions in OECD inventories in 2018 they need to maintain cuts all through 2018 in order to push OECD inventories yet lower. If not, they will instead rise again.”

There are a lot of question marks about 2018, but in many ways, the IEA just published one of its more bullish oil market reports in quite a while. Supply fell, demand is at its strongest in two years, and inventories are drawing down at a good pace. – Nick Cunningham

China’s Petrol-Powered Car Ban Could Cripple The Oil Market

China is joining the UK, France, and Norway in banning vehicles powered by fossil fuels.

If China, the world’s largest new vehicle market with sales of 28.03 million units last year, were to ban gasoline and diesel vehicles in the market, the impact on petroleum would be huge. But how pervasive is the fossil-fuel ban in global markets key to new vehicle sales and petroleum consumption?

During an automotive forum over the weekend in Tianjin, Xin Guobin, the vice minister of industry and information technology, said the government is working on a timetable to end production and sales of fossil-fuel powered vehicles.

The national government has been headed in this direction for a few years, issuing generous “new energy vehicle” subsidies to automakers to build electric vehicles and for consumers to buy them. The subsidies are being cut back this year and the government is expected to adopt a zero-emission vehicle mandate similar to California’s where automakers would be mandated to manufacture a set percentage of electric and fuel cell vehicles in the short term.

China is open to direction from other countries as it deals with increasingly crowded cities, booming auto sales, and air pollution in growing metro areas. The country had already committed to cap its carbon emissions by 2030.

European nations are dealing with backlash from the Volkswagen diesel emissions cheating scandal that started two years ago, with more investigation and pressure coming from nations and the European Union. Diesel-powered cars make up about half the market in Europe with consumers looking for alternatives since the scandal broke. Strict carbon emissions policies are also leading toward banning fossil-fuel powered vehicles.

German chancellor Angela Merkel has suggested that Germany may follow its European neighbors on the fossil-fuel vehicle ban. Seeking her fourth term as chancellor in the Sept. 24 election, Merkel has been facing criticism from her opponent for being too tied to German automakers to enforce strict emissions policies. The German government has become tougher, investigating several automakers since the VW scandal broke in 2015.

A new think piece by a Bloomberg columnist sees the impact of China’s expected decision to have a huge impact on the sale of new vehicles and petroleum in the future.

A chart shows that nearly 80 percent of the global auto market is pushing toward a phase-out of petroleum cars and adoption of electric vehicles. If that comes to be, demand for gasoline and diesel would drop dramatically.

However, there are few major hurdles that must be crossed before this will come anywhere near adoption on a mass scale.

One of them is that the U.S., the world’s largest economy ahead of China, may see its fuel economy and emissions targets softened soon by the federal government. Soon after taking over the White House this year, President Donald Trump announced he would be reconsidering the Obama administration’s mandates over the next year. White House comments indicate the rules will be lightened up.

Trump’s June 1 decision to leave the Paris climate accord also suggests that the federal government is backing off the plan Obama negotiated with automakers a few years ago.

Japan is another country that has yet to ban fossil fuel vehicles. The government has been taking a more cautious approach, supporting efforts by Japanese automakers to embrace hydrogen fuel cell vehicles. But sales of these vehicles have been quite small so far.

The chart shows that so far, Brazil, Canada, Russia, Mexico, and Italy have no significant plans in place toward banning fossil-fuel vehicles. These markets are dependent on oil production and overseas shipment, and may be less inclined to impact the industry through national fossil-fuel mandates.

India has tentative phase-out plans. If the government does issue a mandate, it will have a major impact on the nation that’s expected to soon surpass China in population and that has been seeing new vehicle sales grow in recent years.

For now, the odds are against governments wanting to see fossil-fuel vehicles disappear. Bloomberg New Energy Finance reports that last year, there were about 695,000 electric vehicles sold versus 84 million new vehicles sold worldwide. There are about a billion petroleum-powered vehicles owned around the world. Getting rid of them will take quite a while. – Jon LeSage

 

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