The Bullion Bank trading desks, which are routinely short thousands of metric tonnes of digital silver, are once again attempting to keep price below the 200-day moving average.
And why is this so important to The Banks? For the most basic reasons of all…greed and profit.
The only data available to measure the size of the Bank net short position in Comex silver comes from the corrupt and compromised CFTC. Though it seems useless to use CFTC-generated data, unfortunately we have no other choice. To that end, as of the most recent reporting, we find Bank positions as follows:
• As measured by the latest Commitment of Traders Report, the NET position of the “commercials” in Comex silver is 80,436 contracts short. As measured by the latest Bank Participation Report, the NET position of the 24 Banks involved in Comex silver is 69,473 contracts short. For the sake of simplicity, let’s just use the smaller BPR number and round it up t0 70,000 contracts NET SHORT for The Banks that trade on the Comex.
At 5,000 ounces of digital silver per Comex contract, 70,000 contracts is a net short position of 350,000,000 ounces or about 40% of total 2017 global mine supply. (It’s also about 150% of the total amount of silver allegedly held in the Comex vaults but we’ll save that topic for another day.)
For the purpose of this discussion, let’s just look at that 350,000,000 ounce NET short position. Consider the size of that position and then do the simple math of realizing that a $1 move in either direction means a $350MM trading gain or trading loss for these Bank desks.
Now, getting back to the title of this post and The Banks desire to keep the silver price below the 200-day moving average. Why is this so important to them? Again, it’s greed and profit.
As you can see below, on just three previous occasions in 2017, price has been able to briefly move above the critical 200-day MA. In February, the subsequent rally in price was about 60¢. In April, the move was nearly identical but in August, price moved over $1 in two weeks once the 200-day was breached.
So why defend the 200-day again now? First and foremost, The Banks (because of their massive NET short position) do NOT want a rally into year end that might prompt even more interest and speculator buying into 2018. More important though is the simple greed factor as another $1 move up in price would be a $350MM paper loss against their net short position!
Though the chart above clearly betrays The Banks collusive and manipulative trading pattern for 2017, the chart below really brings it into focus in the present. Note the capping since price was broken below the 200-day on September 21. We’ve drawn ELEVEN arrows on this chart to point you to clear instances of Bank intervention to rig price back below the 200-day MA. Note, too, how frequently a one day close above the 200-day is met with a massive red candle the next.
So, for now, the point of this is simple. While we expect US dollar weakness to prompt a decent year for silver and all metals and commodities in 2018, until Comex silver can break free of the Bank shackles at the 200-day moving average, price will remain stuck in neutral. This will have an impact on mining share prices, too, so anyone interested in the sector should be sure to watch silver’s 200-day moving average all through the month of December. – Craig Hemke
An oceanic-scale demand push from “all parts Far East” is building, as the desire to own gold and silver promises to place an increasingly solid foundation for years to come.
China, India, and Southeast Asia have historically accumulated precious metal as a savings vehicle, a hedge against political uncertainty (e.g. India’s surprise call-in last year of 80% of the country’s paper currency), and as an expression of affection. China’s newly-emerging affluent middle class alone is set to become larger than the population of the U.S. Frank Holmes collectively refers to these elements as “love and fear trades”.
China’s One Belt-One Road (OBOR) Initiative – the world’s largest-ever construction project – is designed to link 60% of the world’s population in a cooperative financial and economic matrix. Taken together, the continued migration of gold supply from West to East is baked into the cake.
For a deeper understanding of how and why China is leading the charge – and going about capturing an outsized portion of the global gold supply – see my essay from last summer, titled China’s Get the Gold Plan: Part II.
Even as the West ships much of its remaining gold eastward (largely via Swiss refineries who “repurpose” it into .9999 fine gold), countries like Germany and Turkey have stepped up to the plate, becoming noteworthy demand drivers in their own right.
Fund managers are finally realizing that gold deserves to be a permanent portfolio asset holding category. In The Morgan Report and in Riches in Resources, David Morgan has written extensively about this for both individual investors and institutional clients. Just one more “silent lever” by which a long-term, rock-solid foundation is being built under gold’s demand… and price.
Metaphorically-speaking, available data strongly suggests (with evidence mounting sharply since 2015), that over the next few years an ongoing narrowing of the global gold supply veins and arteries is leading to a series of demand seizures, climaxing in a systemic “heart attack”.
South Africa’s Witwatersrand Basin has been the source of almost 40% of all the gold ever recovered. But the government has become so obdurate that its current declining rank as the world’s 7th largest producer looks set to fall even more.
They have once again decided to “amend” the country’s mining code, demanding higher royalties and increased Black Empowerment participation, leading to a dire warning from the rating agency Moody’s. It states that “If the substantial expansionary investment required to reconfigure loss-making mining operations and make them profitable is not forthcoming, mines will either be restructured or closed.”
South Africa’s next move on the resource supply chessboard follows recent gambits against other large gold producers in Indonesia (Freeport) and Tanzania (AngloGold). Dave Forest, who keeps track of this in his letter, Pierce Points, remarks:
Mining “nationalism” has re-introduced one of the most crippling elements a mining producer – or explorer can face…unpredictability.
If there is no certainty that some sort of “rule of law” will prevail, then trying to anticipate/ predict how much gold and copper will/can be produced in a given operation flies out the window. Look how much is going on right now as gold hovers “merely” around $1,300 per ounce. What do you think that this witches’ brew of greed, corruption, power-grabbing and incompetency is going to produce when gold trades – as it will before long- at $2,000, $3,000, $5,000 or more?
Even without heavy-handed regulations, South African mining would be facing increasing costs as they go deeper to access gold and platinum. The way things are going, the last nails in the coffin appear set to be hammered into place. In the early 1970s, annual production topped out at an amazing 1,000 tons. Since 2000, gold production has literally fallen off a cliff, as it spirals downward toward a paltry 200 tons/year.
Pierre Lassonde is a giant in the mining business. In 1982, he co-founded Franco-Nevada, the first publicly-traded gold royalty company, which now has a seven billion dollar market cap. He played a critical role in the growth of Newmont Mining, the world’s second largest gold producer. When he speaks, you and I should pay attention… In a recent interview, discussing the global gold supply going forward, Lassonde said:
Production is declining and this is going to put an enormous amount of pressure on prices down the road. If you look back to the 70s, 80s, and 90s, in each of those decades the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit, and only very few 15 million ounce deposits. So where are those great big deposits we found in the past? How are they going to be replaced? We don’t know. We do not have those ore bodies in sight…
They have not put anywhere near enough money into research and development, particularly for new technologies with respect to exploration and processing… it takes around seven years for a new mine to ramp up and then come to production. So it doesn’t really matter what the gold price will do in the next few years: Production is coming off and that means the upward pressure on the gold price could be very intense.
Of the 5 formal categories estimating the amount of economically-recoverable gold a mining company has in the ground, “Reserves” ranks highest. The other 4 categories decline in estimated value and the likelihood they will ever be profitably recovered. As of this year, global gold reserves barely equal those prevailing in 2004 – the very beginning of the current metal’s bull run. This, despite gold having risen from $250 to (briefly) $1,900 the ounce, and now around $1,280.
The inescapable truth is that every ounce of mined gold that is not replaced by a new reserve places a producer just that much closer toward going out of business.
Do not be lulled into complacency by this year’s muted U.S. gold and silver sales figures.
“High grading” – mining the best ore bodies first in order to remain profitable, lack of exploration success in replacing reserves in spite of increased funding, and elevated “country risk” around the globe are placing declining gold supply on a collision course with increasing demand.
Establish and keep adding to your gold “stash” now while the price is favorable. Don’t be shut out when an unpredictable but inevitable “gold supply heart attack” takes place. – David Smith
Over the past 25 trading days, spot gold prices have held a $33 range – the smallest in that time since 2007.
Gold prices continue to oscillate in a remarkably tight trading range. In fact, with a span of little more than $33 over the last 25 days of trading, we are looking at the most complacent period of trade for the precious metal since 2007. What is truly remarkable about this restraint though is that it comes amid considerable fundamental discussion – the type of which would normally facilitate a charge to the precious metal. A downgrade in global monetary policy forecasts, talk of fading confidence in global financial markets, fears of flare ups among global powers and even a simple drop in the US Dollar have all rendered little from this universal asset.
Monetary policy speculation doesn’t just hold its sway over exchange rates. We have seen extremely accommodative central banks spill over to benefit capital markets as the abundance of cheap capital encourages investment in traditional assets like shares – or you could view it the other way around whereby extremely low yields translates into little meaningful return to be made and need to chase capital gains. Gold also sees a sensitivity through this theme as it is distinctly an asset that does not provide yield. In a world where rates seem to be on the rise, the value of gold – strictly due to price fluctuations – becomes less appealing. That said, this past week, rate expectations continued to slide. The ECB, BoE’s and BoC’s intentions were downgraded over previous weeks, and the FOMC minutes gave evidence to suggest the US central bank could slow its pace through 2018. Perhaps Fed Chair Yellen’s testimony next week and the Fed’s-favored inflation indicator (PCE deflator) will stir a little more life into the discussion.
Another significant talking point that has arisen in the usual circle for Gold is that confidence in the traditional financial system is starting to fade. That would show through in traditional assets like shares and fixed income with benefit shifting to those markets that are not perceived to depend on the sanctity of governments and corporations that are prone to excess and can readily find their correlation surge ‘to one’ in the event of heavy market movement. This talking point seems to be born out of the skepticism that has arisen through the excessive stimulus and maintenance of extremely low interest rates by the world’s largest central banks. Another lightening rod for this conversation is the persistent rise of Bitcoin and certain other cryptocurrencies. There is no denying the lift in digital currencies, but is that reason for their appreciation? If confidence were indeed faltering, we would see assets that are the direct targets (sovereign debt) and ancillary to their buying (shares) respond with at least a moderate slide. Gold would also be sympathetic to such a view as the historic, accessible and regulated alternative asset. I think the lack of relationship is due to the premise of the theme rather than a systemic change in Gold’s nature. Either way, we will see this contrast resolved in the weeks ahead.
What is perhaps the most surprising deviation between metal and theme, however, is the recent break with the Dollar. In a macro sense, gold still plays the role of ‘alternative to traditional currency’ as was clearly on display between 2008 and 2011 when the commodity charged to its record high amid the first wave of unorthodox stimulus programs. We are certainly not in the midst of such a systemic change now as we excised much of those demons. Yet, there remains a very smaller but more intense relationship between the Dollar (the world’s top reserve currency) and gold. Statistical correlations still show a very strong inverse relationship between the two; but that seems to have deviated this past week. As the Greenback has dropped back, gold has notably struggled to take advantage. Even if this were purely a pricing observation (gold is priced traditionally in dollars), the recent slip in correlation is noteworthy. Perhaps there is a consideration of intention at play where the USD is just oscillating due to lack of liquidity. If that is the case, expect its moves next week – when markets fill back up after the holiday – to revive its influence over Gold. In short, expect this precious metal to be shaken out of its dormancy by any number of fundamental cues over the near future. – John Kicklighter
The silver stocks have really languished this year, grinding sideways to lower for months on end. This vexing consolidation has fueled near-universal bearishness, leaving silver stocks deeply out of favor. But once a quarter when earnings season arrives, hard fundamentals pierce the obscuring veil of popular sentiment. The silver miners’ recently-reported Q3’17 results reveal today’s silver prices remain profitable.
Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. These are generally due by 45 days after quarter-ends in the US and Canada. They offer true and clear snapshots of what’s really going on operationally, shattering the misconceptions bred by the ever-shifting winds of sentiment. There’s no silver-miner data that is more highly anticipated than quarterlies.
Silver mining is a tough business both geologically and economically. Primary silver deposits, those with enough silver to generate over half their revenues when mined, are quite rare. Most of the world’s silver ore formed alongside base metals or gold, and their value usually well outweighs silver’s. So typically in any given year, less than a third of the global mined silver supply actually comes from primary silver mines!
The world authority on silver supply-and-demand fundamentals is the Silver Institute. Back in mid-May it released its latest annual World Silver Survey, which covered 2016. Last year only 30% of silver mined came from primary silver mines, a slight increase. The remaining 70% of silver produced was simply a byproduct. 35% of the total mined supply came from lead/zinc mines, 23% from copper, and 12% from gold.
As scarce as silver-heavy deposits supporting primary silver mines are, primary silver miners are even rarer. Since silver is so much less valuable than gold, most silver miners need multiple mines in order to generate sufficient cash flows. These often include non-primary-silver ones, usually gold. More and more traditional elite silver miners are aggressively bolstering their gold production, often at silver’s expense.
So the universe of major silver miners is pretty small, and their purity is shrinking. The definitive list of these companies to analyze comes from the most-popular investment vehicle in silver stocks, the SIL Global X Silver Miners ETF. This week its net assets are running 6.6x greater than its next-largest competitor’s, so SIL really dominates this space. With ETF investing now the norm, SIL is a boon for its component miners.
While there aren’t many silver miners to pick from, major-ETF inclusion shows silver stocks have been vetted by elite analysts. Due to fund flows into top sector ETFs, being included in SIL is one of the important considerations for picking great silver stocks. When the vast pools of fund capital seek exposure in silver stocks, their SIL inflows force it to buy shares in its underlying companies bidding their prices higher.
Back in mid-November as the major silver miners finished reporting their Q3’17 results, SIL included 29 “silver miners”. This term is used loosely, as SIL holds plenty of companies which can’t be described as primary silver miners. Most generate well under half their revenues from silver, which greatly limits their stock prices’ leverage to silver rallies. Nevertheless, SIL is today’s leading silver-stock ETF and benchmark.
The higher the percentage of sales any miner derives from silver, naturally the greater its exposure to silver-price moves. If a company only earns 20%, 30%, or even 40% of its revenues from silver, it’s not a primary silver miner and its stock price won’t be very responsive to silver itself. But as silver miners are increasingly actively diversifying into gold, there aren’t enough big primary silver miners left to build an ETF alone.
Every quarter I dig into the latest results from the major silver miners of SIL to get a better understanding of how they and this industry are faring fundamentally. I feed a bunch of data into a big spreadsheet, some of which made it into the table below. It includes key data for the top 17 SIL component companies, an arbitrary number that fits in this table. That’s a commanding sample at 92.7% of SIL’s total weighting.
While most of these top 17 SIL components had reported on Q3’17 by mid-November, not all had. Some of these major silver miners trade in the UK or Mexico, where financial results are only required in half-year increments. If a field is left blank in this table, it means that data wasn’t available by the end of Q3’s earnings season. Some of SIL’s components also report in gold-centric terms, excluding silver-specific data.
In this table the first couple columns show each SIL component’s symbol and weighting within this ETF as of mid-November. While most of these silver stocks trade in the States, not all of them do. So if you can’t find one of these symbols, it’s a listing from a company’s primary foreign stock exchange. That’s followed by each company’s Q3’17 silver production in ounces, along with its absolute year-over-year change.
After that comes this same quarter’s gold production. Pretty much every major silver miner in SIL also produces significant-if-not-large amounts of gold! While gold stabilizes and augments the silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. Naturally investors and speculators buy silver stocks and their ETFs because they want leveraged upside exposure to silver’s price, not gold’s.
So the next column reveals how pure the elite SIL silver miners are. This is mostly calculated by taking a company’s Q3 silver production, multiplying it by Q3’s average silver price, and then dividing that by the company’s total quarterly sales. If miners didn’t report Q3 revenues, I approximated them by adding the silver sales to gold sales based on their quarterly production and these metals’ average third-quarter prices.
Then comes the most-important fundamental data for silver miners, cash costs and all-in sustaining costs per ounce mined. The latter determines their profitability and hence ultimately stock prices. Those are also followed by YoY changes. Finally comes the YoY changes in cash flows generated from operations and GAAP profits. But an exception is necessary for companies with numbers that crossed zero since Q3’16.
Percentage changes aren’t relevant or meaningful if data shifted from negative to positive or vice versa. Plenty of major silver miners suffered net losses in Q3’17 after earning profits in Q3’16. So in cases where data crossed that zero line, I included the raw numbers instead. This whole dataset offers a fantastic high-level fundamental read on how the major silver miners are faring today, and it’s reasonably well.
That’s reassuring given silver’s serious underperformance relative to gold this year. As a far-smaller market, silver usually amplifies gold’s advances by at least 2x. But as of the end of Q3, silver was only up 4.6% YTD compared to 11.3% for gold. That’s horrendous 0.4x leverage! And by mid-November as Q3’s earnings season wrapped up, silver’s YTD gain of 6.6% was still way behind gold’s 11.1% for 0.6x leverage.
Production is the lifeblood of miners, and thus the best place to start fundamental analysis. In Q3’17, these top 17 SIL components collectively produced an impressive 79.0m ounces of silver. If 2016’s world-silver-mining run rate is applied to this year’s third quarter, that implies 221.5m ounces of silver mined. Thus these top SIL silver miners would account for nearly 36% of that total, they truly are major silver players.
Their collective silver production looks robust, surging 3.7% YoY and climbing 0.6% sequentially quarter-on-quarter. Unfortunately that is misleading, with huge growth in a couple mining conglomerates masking sharp-to-catastrophic YoY declines for most of the rest of these elite silver miners. Fresnillo and Industrias Peñoles enjoyed gigantic 24% and 34% YoY gains in silver production off already-massive bases!
Fresnillo and Industrias Peñoles have an incestuous relationship, as the former used to be wholly owned by the latter. Industrias Peñoles spun off Fresnillo back in May 2008 on the London Stock Exchange. While Fresnillo’s financial reporting is decent, Industrias Peñoles’ is murky. Neither my decades studying financial statements as a Certified Public Accountant nor my rudimentary Spanish can penetrate very deep.
So I haven’t been able to track down how much of Fresnillo that Industrias Peñoles still owns, nor whether the silver production reported by these silver-mining behemoths is actually mutually exclusive. I’m assuming it is for this analysis, but I’m skeptical. Both companies reported their huge YoY growth in silver production was the result of Fresnillo’s new San Julián silver mine coming online, which is a big one.
San Julián produced 3499k ounces of silver in Q3’17 alone, along with fairly-large gold, zinc, and lead byproducts. It’s anticipated to produce 11.6m and 63.7k ounces of silver and gold annually for 12 years. Without San Julián, which could be double-reported between Fresnillo and Industrias Peñoles, the top SIL silver miners’ production would look very different. These elite silver miners have had a challenging year.
Excluding Fresnillo and Industrias Peñoles, the rest of these top SIL components saw their collective silver production fall a sharp 9.3% YoY to 45.9m ounces! It’s been quite ugly out there in silver-land, for both industry-wide and company-specific reasons. Between Q3’16 and Q3’17, the average silver price dropped 13.9% YoY to just $16.84. That was far worse than gold’s 4.2% YoY decline, testing silver’s economics.
With silver prices so weak, sentiment so bearish, and silver-stock prices so darned low, silver miners are both starved of capital for expansions and reluctant to invest heavily in the silver side of their businesses. Mining gold is far more profitable at today’s precious metals’ prices, so they continue to allocate scarce resources to growing their gold production. That certainly isn’t helping the purity of the major silver miners.
A couple long-time favorites of American investors saw silver production plummet over this past year. Tahoe Resources was originally spun off by Goldcorp to develop the incredible high-grade Escobal silver mine in Guatemala. Over the past year that country’s corrupt government shut this mine down after a frivolous and baseless lawsuit by anti-mining activists. They sued the government regulator, not Tahoe itself!
That lawsuit claimed Guatemala’s Ministry of Energy and Mines did not properly consult with the Xinca indigenous people before granting Escobal’s permits! That shouldn’t even be Tahoe’s problem if the government bureaucrats didn’t hold enough meetings, yet Escobal’s mining license was still temporarily suspended. It has since been reinstated, but the government is not breaking up an illegal roadblock to the mine.
This whole situation is ludicrous, highlighting why third-world countries stay that way. The government of Guatemala isn’t respecting the rule of law, which will greatly hurt future investment. It’s allowing violent anti-mine militants to physically attack trucks and their drivers heading to Escobal. They should be arrested and the blockade cleared. Thus Tahoe’s silver production collapsed 100% YoY from 5000k ozs in Q3’16!
SSR Mining saw a similar sharp 62% YoY plummet in silver production to just 1156k ounces in Q3’17. It had nothing to do with geopolitics like Tahoe’s mess, but is simply due to the forecast depletion of its old Pirquitas silver mine. SSR Mining, which used to be called Silver Standard Resources, is exploring in the area trying to extend the life of this mine. But most of its financial resources are being poured into its gold mines.
That gold focus among these top silver miners is common across SIL’s component companies. As the silver-percentage column above shows, most of these elite silver miners are actually primary gold miners by revenue! Only 6 of these 17 earned more than half of their Q3’17 sales from mining silver, and they are highlighted in blue. 8 of SIL’s top 17 component stocks are also included in the leading GDX gold miners’ ETF.
While they only comprised 10.0% of GDX’s total weighting in mid-November, this highlights how difficult it is to find primary silver miners. SIL’s managers have an impossible job these days with the major silver miners increasingly shifting to gold. They are really scraping the bottom of the barrel to find more silver miners. In Q3’17 they added Korea Zinc, making it SIL’s 4th-largest holding at 9.0% of this ETF’s total weighting.
That was intriguing, as I’d never heard of this company after decades of intensely studying and actively trading silver stocks. So I looked into Korea Zinc and found it was merely a smelter, not even a miner. The latest financial data I could find in English was 2015’s. That year Korea Zinc “produced” an incredible 63.3m ounces of silver! But it also smelted large amounts of zinc, lead, copper, and gold that same year.
I ran the numbers for the heck of it, and silver was implied as 32% of Korea Zinc’s 2015 revenues. The fact SIL’s managers included a company like this that doesn’t even mine silver as a top SIL component shows how rare major silver miners have become. The economics of silver mining at today’s prices are inferior to gold mining. Thus the average silver-purity percentage of revenues of these SIL miners is only 40.1%.
That’s right in line with the trend over this past year, with Q3’16, Q4’16, Q1’17, and Q2’17 seeing SIL’s top-component silver purity averaging 42.8%, 40.6%, 38.5%, and 37.6%. Silver mining is as capital-intensive as gold mining, requiring similar large expenses for planning, permitting, and constructing mines and mills. It needs similar heavy excavators and haul trucks to dig and move the silver-bearing ore.
But silver generates much lower cash flows due to its lower price. Consider hypothetical mid-sized silver and gold miners, which might produce 10m and 300k ounces annually. At last quarter’s average metals prices, these silver and gold mines would yield $168m and $384m of yearly sales. It’s far easier to pay the bills mining gold than silver, which is unfortunate. But until silver surges again, that’s the way things are.
While I understand this, as a long-time investor in silver stocks it saddens me primary silver miners have apparently become a dying breed. When silver starts powering higher in one of its gigantic uplegs and way outperforms gold again, this industry’s silver-purity percentage will rise. But unless silver not only shoots far ahead but stays there while gold lags, it’s hard to see major-silver-mining purity significantly reversing.
Unfortunately SIL’s mid-November composition was such that there wasn’t a lot of Q3 cost data reported by its top component miners. 4 of its top 5 companies trade in the UK, South Korea, and Mexico, where reporting only comes in half-year increments. Lower down the list there are more half-year reporters, an explorer with no production, and primary gold miners that don’t report silver costs. So silver cost data was scarce.
Nevertheless, it’s always useful to look at the data we have. Industrywide silver-mining costs are one of the most-critical fundamental data points for investors in silver stocks. As long as the miners can produce silver for well under prevailing silver prices, they remain fundamentally sound. Cost knowledge helps traders weather this sector’s fear-driven plunges without succumbing to selling low like the rest of the herd.
There are two major ways to measure silver-mining costs, classic cash costs per ounce and the superior all-in sustaining costs. Both are useful metrics. Cash costs are the acid test of silver-miner survivability in lower-silver-price environments, revealing the worst-case silver levels necessary to keep the mines running. All-in sustaining costs show where silver needs to trade to maintain current mining tempos indefinitely.
Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q3’17, these top 17 SIL-component silver miners that reported cash costs averaged $4.86 per ounce. That plunged a whopping 13.6% YoY, making it look like silver miners are far more efficient.
But that too is misleading. This past quarter SIL’s 17th-largest component was Silvercorp Metals, which enjoys big lead and zinc byproducts at its China silver mines. These base metals are sold and used to offset the costs of silver mining. That forced SVM’s cash costs down to negative $5.16 per ounce, which dragged down SIL’s overall average. A year ago in Q3’16, SVM ranked 18th in SIL and missed the top-17 cutoff.
Still even ex-SVM, these top SIL silver miners reporting cash costs last quarter averaged just $6.54 per ounce. As long as silver prices stay above those extreme levels, the silver miners can keep the lights on. And there’s no way silver is going to plummet down under $7 in any conceivable scenario. So even at 2017’s vexingly-low gold-lagging silver prices, the major silver miners face no existential threats today.
Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain a silver mine as an ongoing concern. AISC include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current silver-production levels.
These additional expenses include exploration for new silver to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee silver mines. All-in sustaining costs are the most-important silver-mining cost metric by far for investors, revealing silver miners’ true operating profitability.
In Q3’17, these top 17 SIL components reporting AISC averaged just $9.73 per ounce. That was down 3.9% YoY, and far below last quarter’s average silver price of $16.84. Again SVM’s incredible byproduct production dragged down the average though. Ex-Silvercorp, these top SIL silver miners’ AISC ran at an average of $10.98 in Q3. That’s still well below prevailing silver prices, generating nice operating profits.
All-in sustaining costs and production are inversely related. Lower silver production, which many of SIL’s top components suffered last quarter, leaves fewer ounces to spread the big fixed costs of mining across. Thus AISC surged at Pan American Silver, First Majestic Silver, and SSR Mining. PAAS discontinued mining at an older mine, while other mines processed lower-grade ore that was on the way to better rock later.
AG’s lower production was due to land-access issues and mine inspections necessary following Mexico’s big earthquakes in mid-September. And of course SSRM is winding down its lone primary silver mine. Yet even with lower production driving higher per-ounce costs, the major silver miners still enjoyed solid operating profits. That’s certainly not apparent based on silver miners’ super-low stock prices mired in bearishness.
At $9.73 AISC, the major silver miners still earned big profits in the third quarter. Once again silver averaged $16.84, implying fat profit margins of $7.11 per ounce or 42%! Most industries would kill for such margins, yet investors in silver stocks are always worried silver prices are too low for miners to thrive. That’s why it’s so important to study fundamentals, because technical price action fuels misleading sentiment!
Today’s silver price remains really low relative to prevailing gold levels, which portends huge upside as it mean reverts higher. The long-term average Silver/Gold Ratio runs around 56, which means it takes 56 ounces of silver to equal the value of one ounce of gold. Silver is really underperforming gold so far in 2017, with the SGR averaging just 73.5 YTD as of mid-November. So silver is overdue to catch up with gold.
At a 56 SGR and $1300 gold, silver is easily heading near $23.25. That’s 38% above its Q3 average. Assuming the major silver miners’ all-in sustaining costs hold, that implies profits per ounce soaring 90% higher! Plug in a higher gold price or the usual mean-reversion overshoot after an SGR extreme, and the silver-mining profits upside is far greater. Silver miners’ inherent profits leverage to rising silver is incredible.
While all-in sustaining costs are the single-most-important fundamental measure that investors need to keep an eye on, other metrics offer peripheral reads on the major silver miners’ fundamental health. The more important ones include cash flows generated from operations, actual accounting profits, revenues, and cash on hand. They generally corroborated AISC in Q3’17, proving silver miners are weathering low prices.
The collective operating cash flows of these top 17 SIL silver miners slumped 14.4% YoY to $1350m. That’s really impressive considering the 13.9% YoY drop in average silver prices, so these miners are holding their own despite silver really lagging gold this year. GAAP accounting profits looked far worse though, plunging 77% to just $88m. Many of these top SIL silver miners suffered net losses in Q3’17.
That was generally just the result of lower silver prices. There were two outliers, Tahoe Resources and Coeur Mining. With its silver mine temporarily shuttered by Guatemala, TAHO’s profits swung massively from +$63m in Q3’16 to -$8m in Q3’17. That $71m drop alone was responsible for 24% of the YoY drop in these top SIL silver miners’ GAAP profits. CDE simply had higher costs as it worked on expanding mines.
So its profits plunged from +$68m in Q3’16 to -$17m in Q3’17, for an $85m total drop. That accounted for another 29% of the total slide in collective top SIL miners’ profits. Other than that, the YoY declines were reasonable based on the lower silver prices. Interestingly these top 17 SIL miners’ collective sales surged 15.2% YoY to $3003m, driven by their aggregate silver and gold production rising 3.7% and 2.4% YoY.
And despite the weak silver prices, serious operational challenges, and ongoing expansions especially on the gold side of their businesses, these elite SIL miners’ total cash balances only edged 0.1% lower YOY to $2682m. So overall the silver miners’ operating results were pretty good in Q3’17 considering all the big trials they faced. Based on the individual miners’ travails, I was steeling myself for much worse.
Silver miners’ earnings power and thus stock-price upside potential will only grow as silver mean reverts higher. In mining, costs are largely fixed during the mine-planning stages. That’s when engineers decide which ore bodies to mine, how to dig to them, and how to process that ore. Quarter after quarter, the same numbers of employees, haul trucks, excavators, and mills are generally used regardless of silver prices.
So as silver powers higher in coming quarters, silver mining profits will really leverage its advance. And that will fundamentally support far-higher prices for silver stocks. The investors who will make out like bandits on this are the early contrarians willing to buy in low, before everyone else realizes what is coming. By the time silver surges higher with gold so silver stocks regain favor again, the big gains will have already been won.
While investors and speculators alike can certainly play the silver miners’ ongoing mean-reversion bull with this leading SIL ETF, individual silver stocks with superior fundamentals will enjoy the best gains by far. Their upside will trounce the ETFs, which are burdened by companies that don’t generate enough of their sales from silver. A handpicked portfolio of purer elite silver miners will yield much-greater wealth creation.
The bottom line is the major silver miners fared fine in Q3 despite some real challenges. A combination of silver continuing to seriously lag gold, along with anomalous company-specific problems, weighed on miners’ collective results. Yet they continued to produce silver at all-in sustaining costs way below Q3’s low prevailing silver prices. And their accelerating gold-production growth leaves them financially stronger.
With sentiment in silver stocks remaining excessively bearish, this sector is primed to soar as silver itself resumes mean reverting higher to catch up with gold’s current upleg. The silver miners’ profits leverage to rising silver prices remains outstanding. After fleeing silver stocks so aggressively this year, investors and speculators alike will have to do big buying to reestablish silver-mining positions. That will fuel major upside. – Adam Hamilton
Americans prepare to sit down, feast and give thanks this weekend for what they have, who they have and the good blessing that they have enjoyed over the past year.
This comes amidst a time period when their email boxes are being flooded with Black Friday specials for trinkets, bobbles and cosmetic goods that will provide a temporary reprieve from the more realistic situation that the vast majority are experiencing: growing debt levels and increased uncertainty.
The fact is, the stock market continues to tick higher, though not to the benefit of the mass majority of individuals who have simply not been able to partake in the “recovery” after the decimation they experienced via the 2008 crisis – a crisis that I contend has simply been papered over and one that will eventually once again rear its ugly head.
At the same time as new record highs in the stock market, we see that debt levels are also at all time highs, breaking new records and reaffirming my previously mentioned belief that the rot within our system continues to persist, silently behind the scenes. It appears that as a mass, we have learned nothing.
I am not trying to be pessimistic, but the fact is, people are rushing out to buy goods this weekend that they don’t need, can’t afford and ultimately that won’t make them any happier.
The only saving grace is the fact that a growing trend continues to manifest. This trend is one that cannot be ignored at this point and one that has central Banksters privately meeting and discussing what they are going to do about it.
This is the flood of fiat money that continues to flow out of the economy and into what people perceive is a more viable, safe place to park their funds. This can be witnessed via the monumental amount of money that continues to move into bitcoin and other alternative cryptocurrencies. This is a trend that has amazed many as the charts continue to go parabolic.
Perhaps these people are misguided, perhaps they are wrong and bitcoin will crash overnight; perhaps they are correct and we are going through a once in a lifetime change. Who knows – I certainty don’t.
What I do know however is that bitcoin is not alone in this trend. Art, collectibles, and other items that people perceive to have value continue to tick higher, setting new records as they reach new heights. The fact is, people can feel it in their bones – they know something is wrong with the system and they are attempting to park their money in items that cannot be simply printed out of thin air.
Yet, gold and silver continue to stagnate, floundering as money continues to be diverted away from this sector and into cryptocurrencies or whatever the latest, hottest trend is.
Still, I strongly believe that this is not going to last. I have followed the cryptocurrency community long before it was considered mainstream or trendy. The unknown truth is that there is a strong affinity for gold and silver within that class of investors. They constantly compare bitcoin to gold and Litecoin to silver. They respect gold and silver, dispute whether they believe it is better or worse than their cherished asset.
Any hiccup, any crash, any disturbance within the crypto space that causes this trend to reverse is going to cause a massive amount of funds to move back into the precious metals space, as people take a portion of their phenomenal gains and park it in an asset class that they believe to be a safe space, i.e. gold and silver.
Yet, cryptos do not need to crash for this to happen (although I believe it would cause greater results) – not at all. People are finicky creatures and even though bitcoin is incredibly divisible, therefore making the current price irrelevant, this is simply not how people think.
Many will begin to believe that they have “missed the boat” or that the price is “simply too high now”. This is exactly why stocks split when the nominal price becomes too high.
This leads to a golden scenario. I believe that the potential for gold and silver to sharply increase throughout 2018 is incredibly high. I believe that this will be remembered as a turning point within the precious metals markets and thus one of the greatest opportunities of our modern times. – Nathan McDonald
I’ve written a lot about how the US dollar is the fulcrum of the global financial system.
Commodities are priced in dollars. Global trade is done in dollars. And the majority of international funding is in USD.
The dollar is important. Dollar trends impact markets and assets around the world in various ways. Hence why the dollar is the fulcrum.
But if the dollar is the fulcrum then gold is the foundation on which that fulcrum sits.
I should make clear, I’m no gold bug and have no special affinity for the yellow metal.
But when it comes to analyzing assets and markets we run into a measurement problem. That measurement problem is due to the fact that things that are priced in US dollars, or any currency, fluctuate according to the price of the currency in addition to the good’s underlying supply and demand fundamentals (ie, the price of oil is impacted by the relative price of a US dollar).
And the price of dollars can fluctuate a lot.
You can see how this makes things difficult. When you analyze goods priced in USD you have to also assess the US dollar as well.
Gold is a useful tool helping with this measurement issue.
Perhaps due to gold’s long history as a store of value, it has a special place in the market’s psyche. Since gold is priced in USD but has little intrinsic value (ie, little productive use and no cash flows) it acts as a good barometer to gauge the changing relative value of $1 USD of account or the price of 1 unit of USD liquidity (USD assets).
When international demand for USD liquidity exceeds supply, gold tends to perform poorly. And vice-versa when USD liquidity exceeds global demand for that USD liquidity.
Because of this, when I’m trying to discern the probabilities of where the dollar is headed next, I always start with gold. Even though gold is priced in dollars, it often leads to major turning points because the fundamentals are similar for both assets but for whatever reason, those fundamentals often show themselves in gold first.
Of course, this isn’t always the case (there’s no such thing as a perfect indicator). But even in the cases when it doesn’t lead it still serves as a good confirming or disconfirming signal for the dollar.
Below are some charts. They’re a little messy but I think they get my point across and show how useful gold can be a leading and/or confirming signal for the dollar and hence the dollar-priced commodities.
This chart shows gold inverted (black bars) and the US dollar (red line) on a monthly basis.
Notice how gold failed to confirm the dollar’s bear move from 94’-96’ when the dollar sold off but gold traded sideways in a range. This is a disconfirming signal for the dollar which suggested the move was a corrective one and not the start of a new trend.
But then in 96’ both the dollar and gold (inverted) began trending upwards together. This signaled that this was the start of a new trend. The macro fundamentals also supported the case. The world was hungry for US dollar liquidity (assets) and demand outstripped supply which was bearish for gold but bullish for the dollar.
Then go to 01’ where inverted gold peaked and began making lower lows and lower highs. While at the same time, the dollar made one more new high. Gold gave a leading signal that the bull market in the dollar was over.
Now check out this chart.
Here’s the current dollar bull market (red line) on the weekly. The dollar made lower new highs and coiled into a tight range from 13’-14’. At the same time, inverted gold trended higher, not confirming the lower move in the dollar which suggested building pressure in USD demand.
And then again from 16’ to 17’ inverted gold moved lower while the dollar made a new cycle high that gold did not confirm. This gave a sell signal on the dollar and USD shortly turned over thereafter.
Of course, there are instances where the indicator gives false signals and using it is as much an art as it is a science. It alone shouldn’t be used as a reason to go long or short the dollar but rather as a key input into one’s macro decision-making process.
Now let’s quickly look at where gold and hence the dollar may be headed in the near future. Many of the charts are suggesting a coming explosive move in one direction or another.
Below is the gold futures on the monthly timeframe showing a coiling pattern. This type of price action typically precedes large moves.
And I’ve been pointing out over the last month how numerous dollar pairs are at large critical junctures and a coming significant move is likely.
Below are AUDUSD, GBPUSD, and EURUSD on a monthly basis.
Now let’s take a closer look at gold and see if it’s telling us anything.
In this chart, gold (inverted) and marked by the black line failed to confirm the dollars most recent new pivot low. But the disparity isn’t that great so this doesn’t give us much confidence.
Another thing I like to do is to look at the momentum structure of gold to see if momentum is building in one direction or another.
The chart below shows gold (black line) and gold’s momentum relative to its 3-year mean. It signaled the end of the bull market in gold well beforehand. But right now, it’s not tipping the scales in one direction or another. It’s slightly positive to neutral.
So, unfortunately, it’s tough to get a good read at the moment. My bias is that US stocks are about to start outperforming the rest of the world soon. And this is going to help reverse capital flows which will put a bid back under the dollar and start a new leg higher in the greenback.
There are other macro dynamics such as changing international trade rules, raising of the debt ceiling, and US tax and monetary policy which are supportive of this hypothesis.
And I believe that gold is setting up to signal one way or another soon so I’ll be keeping a close eye on it.
In a future piece, I’ll lay out a fundamental macro model I use that shows one way of looking at the big picture USD liquidity supply and demand picture. This is a useful tool for seeing where the attractors are for gold on a cyclic level. – Alex Barrow
For the second week in a row, hedge funds waded slowly back into the gold and silver market, according to the latest trade data from the Commodity Futures Trading Commission.
The disaggregated Commitments of Traders report for the week ending Nov. 14 showed money managers increased their speculative gross long positions in Comex gold futures by 2,875 contracts to 190,657. At the same time, short bets declined by 2,511 contracts to 14,559. Gold’s net length increased to 176,098 contracts.
Commodity analysts at Commerzbank noted that gold’s net length is at a modest six-week high. The trade data included the price action from Nov. 10, as markets and traders were caught by surprise after 4 million ounces in future contracts were sold in a matter of minutes.
In a recent interview with Kitco News, George Milling-Stanley, head of gold investments at State Street Global Advisors, said that gold’s recent resilience is a sign that investors and fund managers are slowly accumulating gold, developing defensive positions as equity markets continue to look overvalued.
Ole Hansen, head of commodity strategy at Saxo Bank, said that gold benefited from safe-haven demand as uncertainty started to build around proposed U.S. tax reform legislation. While the House of Representatives passed a tax-reform bill last week, the Senate has just started to push its own version forward.
The renewed interest in gold last week was not enough to push prices out of its current range. During the survey period, gold prices rose 0.56%. The gold market has been stuck been stuck in a tight range since mid-September.
Many analysts note that gold will only be able to attract significant investor interest when prices push above the October highs at $1,306 an ounce.
Investor interest in silver also grew last week. The disaggregated report showed money-managed speculative gross long positions in Comex silver futures increased by 1,092 contracts to 78,464. At the same time, short positions fell by 1,342 contracts to 10,274. Silver’s net length now stands at 68,190 contracts.
Silver’s net length increased almost 4% from the previous week; however, prices only saw a modest rise of 0.79% during the survey period.
Commerzbank analysts noted that silver’s net length is at a nine-week high. – Neils Christensen
The top priority for the next decade should be how to protect one’s own wealth, according to chief economist at ABC Bullion, who reviewed gold, the US dollar, and bitcoin to see which asset acts as the best hedge against risk.
“If history is to repeat, or even just rhyme, then investors and savers should be on the lookout for a major change to our monetary system in the coming years. More importantly, they should do their best to ensure their portfolios are sufficiently robust to weather that change, and take necessary action if required,” Jordan Eliseo said in a report published Monday.
For Eliseo, the best way to approach this is balance, which is tilted towards the precious metals.
“Precious metals are likely the best and, just as importantly, simplest means of protecting my family’s wealth through the difficult market environment we all face in the years ahead,” Eliseo said. “Physical gold has no peer when it comes to protecting purchasing power over long time periods, and why it has been humankind’s preferred choice of money for millennia.”
But, using all three means in various degrees is not wrong, he added.
“Crucially, this need not mean investors and savers have to choose just one monetary basket, and put all their wealth into precious metals, fiat currency or cryptocurrencies,” Eliseo said.
The chief economist admits that his own approach involves keeping a substantial “portion of [his] own wealth in fiat currency” and “a significant holding in physical gold (and silver).”
He also says that a small investment into bitcoin is understandable, but questionable at current prices, cautioning traders of a possible crash in the short-term.
“Maybe the explosive gains will continue for years to come, but [the] kind of advertising, and the other factors at play suggest BTC [bitcoin] and the CCM [cryptocurrency movement] is a bubble price-wise today, with a significant chance of a major collapse in the coming months.”
The most important thing to ask when choosing is “whether or not Bitcoin, the US Dollar or physical gold will remain money.”
When analyzing each asset, Eliseo lists seven characteristics: durability, portability, divisibility, consistency, instant recognition, acceptability and intrinsic value; as well as three functions: unit of account, medium of exchange, and store of value.
Gold clearly meets the first five characteristics of money as well as the last one: “In that it is “intrinsically valuable – both as an ostentatious display of wealth (think jewelry) and in some industrial applications.”
The yellow metal also meets one of the functions of money since it has an exceptional store of value over the long run. “Today, it is not really used as a medium of exchange or a unit of account, which affects its acceptability in daily commerce.”
When it comes to the US dollar, the first six characteristics of money and the first two functions are easily “satisfied,” wrote the chief economist.
The biggest problem in case of the US dollar for Eliseo is the store of value. “The USD, and indeed all fiat currencies, does a horrible job, with the USD having lost the better part of 95% of its purchasing power in the last 100 years, according to data from the St Louis Federal Reserve.”
Looking at bitcoin, Eliseo said it is durable, portable, divisible, and instantly recognizable. But, “the jury is still out as to its consistency” and acceptability is largely a “no.”
“As for whether or not BTC is intrinsically valuable, one could argue either side of this – but for me, just as I see some intrinsic value in the USD, so too do I see an inherent value in BTC,” he said. “When it comes to the functions of money, BTC is not used as a unit of account, and it is not a widely used medium of exchange.”
On top of that, it is too early to tell whether bitcoin will have a store of value since it has not even been around for ten years. – Anna Golubova
There is a new trend by individuals in the alternative media community who are now selling out of precious metals and buying into Bitcoin and cryptocurrencies. While this may seem like a good idea, especially when Bitcoin and the cryptocurrencies reach new all-time highs, it is likely a big mistake. Now, I am not saying that individuals shouldn’t invest in cryptocurrencies. Rather, it’s a lousy idea to sell all of one’s precious metals holdings and put it all into Bitcoin and cryptocurrencies.
Recently, Sean at SGTReport published a short video in which part of the headlined was titled as “SILVER BULL CAPITULATES.” In the video, Sean explains how past frequent guest and precious metal analyst, Andy Hoffman, has sold out of all his silver and is now only in Bitcoin and gold. Andy explains in his interview on Crush The Street that he sold all of his silver this summer as he really has no interest in it. He goes on to say, “Because, in a digital age, I just don’t believe people are going to store thousands of pounds of silver hoping that the gold-silver ratio is going to come down.”
I have to tell you, not only do I find this sort of thinking, utterly preposterous, I also find it quite troubling that analysts who have been promoting precious metals for the past decade are now implying that gold and silver are no longer high-quality stores of value. I disagree entirely with this faulty and superficial analysis.
There are several reasons why I believe it is essential to hold most of one’s wealth in precious metals than in Bitcoin and cryptocurrencies. However, the most important factor has to do with the fragile nature of a highly technical complex system that allows Bitcoin and cryptocurrencies to function. It takes a tremendous amount of energy to maintain and power the internet, servers and computer systems that give life to Bitcoin and cryptocurrencies.
Unfortunately, the majority of the alternative and mainstream media analysts believe in the ENERGY TOOTH FAIRY ( a term coined by Louis Arnoux). What do I mean by the ENERGY TOOTH FAIRY? It is the belief by a significant portion of the public and analyst community that the advanced world economies and markets will continue to prosper and grow forever. Moreover, some analysts, such as Harry Dent, believe that if we got rid of the corrupt bankers and politicians and allow people to have a lot more babies, then economic growth will continue indefinitely.
For some odd reason, Harry Dent totally omits the impact of energy in his demographic analysis of the markets. Does ole Harry not realize that the exponential increase in global oil production has coincided with the exponential growth in human population??? Of course not. If he did, he would stop focusing on demographics and place his attention on what is happening in the global energy industry.
Regardless, selling out of one’s precious metals holdings might be unwise if we consider that the price of gold and silver are closer to their lows, and Bitcoin and the cryptos are reaching new highs.
For example, the current gold price at $1,280 is only 10% above its annual average low of $1,160 set in 2015, while silver at $17 is only 8% higher than its average yearly low of $15.68 during the same year. However, if we look at Bitcoin, the price is near its current high of $8,200:
Here we can see that Bitcoin has increased more than ten times from $800 at the beginning of 2017 to over $8,000 currently. While Bitcoin traders and speculators with Dollar signs in their eyes are betting on much higher prices, let me show you another chart. This is the first Bitcoin price spike that skyrocketed to over $1,000 in 2013:
As we can see in the chart, Bitcoin’s price surged ten times from $115 in October 2013 to $1,150 at the end of December. If we went back to this exact time, it looked like Bitcoin’s price was going to continue higher. However, if we see what happened after Bitcoin spiked to $1,000, there was a huge consolidation period:
One year after Bitcoin hit $1,150, it was trading at $250. It took nearly three more years before Bitcoin surpassed its previous high. Will this happen to Bitcoin again? Who knows? It is almost impossible to gauge the value of Bitcoin and the cryptocurrencies. Yes, we could see Bitcoin continue towards $10,000. However, we must realize that most people are not getting into Bitcoin because they understand the potential benefits of blockchain technology, but rather because the price is surging higher and higher. There’s nothing like a skyrocketing price to bring in the speculators in huge numbers.
Recently, Mike Maloney of GoldSilver.com stated in a video that he took some Bitcoin profits and purchased silver. He believed that it was smart to take profits from Bitcoin as it looked like it was potentially overvalued and buy silver as it was undervalued. I agree.
As I stated at the beginning of the article, individuals who believe in a new high-tech world with Bitcoin and cryptocurrencies running the monetary system must have forgotten about our dire energy predicament we are facing. This baffles me. The U.S. infrastructure is falling apart while North American suffers from over 250,000 water main breaks a year, and we are going to transition into a new high-tech world of robots and cyborgs? Who are we fricken kidding?
Has anyone taken a good look at what happened to the Great Egyptian, Mayan and Roman Empires??? They PEAKED and DECLINED… LOL. And it was all based on their Falling EROI – Energy Returned On Investment. The more advanced and complex a society becomes, the more energy it takes to run and maintain it. Folks, we have run out of our CHEAP, ABUNDANT ENERGY.
I have provided many clues in previous articles, but I believe it’s a good idea to present a few charts once again. The Global Oil Industry is cannibalizing itself just to stay alive. We know this is happening by looking at the massive increase in long-term debt:
The global major oil companies long-term debt had quadrupled from $84 billion in 2007 to nearly $380 billion last year. Why did their long-term debt increase when they were enjoying $100 a barrel of oil from 2011-2014?? The problem is that Falling EROI is now pushing costs higher as the net energy in a barrel of oil declines. Thus, we have a double-edged sword.
For example, these top seven major global oil companies enjoyed a combined net income profit of $100 billion in 2004 when the price of oil was $38 a barrel. However, even though the price was higher at $44 last year, their combined net income fell nearly 90% to $10.5 billion:
So, the BIG PROBLEM now is that the world market can’t really afford high oil prices and the oil companies can’t produce oil at a lower cost. If we take at this last chart, we can see just how bad the situation has become for the world’s major oil companies:
In 2004, these top seven global oil companies enjoyed a Return On Capital Employed (ROCE) between 20-40%. We must remember, that year the price of oil was $38. However, when the oil price was higher at $44 last year, these companies ROCE fell to the low single digits. Thus, they return on capital employed collapsed.
These three charts paint a very grim future for the global oil industry. Without the burning of oil, our economy grinds to a halt. I would like to remind those who believe WIND, SOLAR, and ELECTRIC VEHICLES are going to save us… they are nothing more than fossil fuel derivatives. The world needs to burn a lot of oil, natural gas and coal to produce the so-called renewable green technologies.
So, when oil and natural gas supply declines, so will the delusion of renewable energy. Now, I am not saying it isn’t wise to own solar panels on one’s home or to have an electric car. Instead, it’s unwise to believe solar, wind, electric vehicles, and a new high-tech world is our future.
I believe we are going to experience one hell of a market crash and deflation. Not only will the oil price drop like a rock, but so will the value of most STOCKS, BONDS, and REAL ESTATE. If you have sold your precious metals for cryptos at this time, you may find out that was a big mistake. – SRSroccoreport
Sound money advocates who love the concept of cryptocurrencies but don’t want to abandon precious metals have been trying to clarify their thoughts of late. Risk Hedge just helped, with a comprehensive statement of the pro-gold position. The following is an excerpt. Read the full article here.
All the Reasons Cryptocurrencies Will Never Replace Gold as Your Financial Hedge
Despite what the crypto-evangelists will tell you, digital tokens will never and can never replace gold as your financial hedge. Here are six reasons why.
#1: Cryptocurrencies Are More Similar to a Fiat Money System Than You Think.
The definition of “fiat money” is a currency that is legal tender but not backed by a physical commodity.
It’s clear that cryptocurrencies partially fit the definition of fiat money. They may not be legal tender yet, but they’re also not backed by any sort of physical commodity. And while total supply is artificially constrained, that constraint is just… well, artificial.
You can’t compare that to the physical constraint on gold’s supply.
Some countries are also exploring the idea of introducing government-backed cryptocurrencies, which would take them one step closer toward fiat-currency status.
As Russia, India, and Estonia are considering their own digital money, Dubai has already taken it one step further. In September, the kingdom announced that it has signed a deal to launch its own blockchain-based currency known as emCash.
So ask yourself, how can you effectively hedge against a fiat money system with another type of fiat money?
#2: Gold Has Always Had and Will Always Have an Accessible Liquid Market.
An asset is only valuable if other people are willing to trade it in return for goods, services, or other assets.
Gold is one of the most liquid assets in existence. You can convert it into cash on the spot, and its value is not bound by national borders. Gold is gold—anywhere you travel in the world, you can exchange gold for whatever the local currency is.
The same cannot be said about cryptocurrencies. While they’re being accepted in more and more places, broad, mainstream acceptance is still a long way off.
What makes gold so liquid is the immense size of its market. The larger the market for an asset, the more liquid it is. According to the World Gold Council, the total value of all gold ever mined is about $7.8 trillion.
By comparison, the total size of the cryptocurrency market stands at about $161 billion as of this writing—and that market cap is split among 1,170 different cryptocurrencies.
That’s a long shot from becoming as liquid and widely accepted as gold.
#3: The Majority of Cryptocurrencies Will Be Wiped Out.
Many Wall Street veterans compare the current rise of cryptocurrencies to the Internet in the early 1990s.
Most stocks that had risen in the first wave of the Internet craze were wiped out after the burst of the dot-com bubble in 2000. The crash, in turn, gave rise to more sustainable Internet companies like Google and Amazon, which thrive to this day.
The same will probably happen with cryptocurrencies. Most of them will get wiped out in the first serious correction. Only a few will become the standard, and nobody knows which ones at this point.
And if major countries like the US jump in and create their own digital currency, they will likely make competing “private” currencies illegal. This is no different from how privately issued banknotes are illegal (although they were legal during the Free Banking Era of 1837–1863).
So while it’s likely that cryptocurrencies will still be around years from now, the question is, which ones? There is no need for such guesswork when it comes to gold.
#4: Lack of Security Undermines Cryptocurrencies’ Effectiveness.
Security is a major drawback facing the cryptocurrency community. It seems that every other month, there is some news of a major hack involving a Bitcoin exchange.
In the past few months, the relatively new cryptocurrency Ether has been a target for hackers. The combined total amount stolen has almost reached $82 million.
Bitcoin, of course, has been the largest target. Based on current prices, just one robbery that took place in 2011 resulted in the hackers taking hold of over $3.7 billion worth of bitcoin—a staggering figure. With security issues surrounding cryptocurrencies still not fully rectified, their capability as an effective hedge is compromised.
When was the last time you heard of a gold depository being robbed? Not to mention the fact that most depositories have full insurance coverage.
The gold vs bitcoin debate has a long way to run. But if the outcome is a world in which money is what the market — rather than the government — says it is, then hopefully there will be room for both. – John Rubino
The last 3 days have been ‘nosiy’ in precious metals markets with gold prices swinging from the best day in 5 months to the worst day in 4 months and now to another high volume surge, breaking the barbarous relic back its 100-day moving-average…
It sems the 100DMA is a key level with heavy volume being used to push gold futures around it.
Gold longs rebuild while shorts continue to hesitate
Gold prices are holding reasonably well near the highs of the range established in the past couple of months. A few macro factors have been supportive of late: the pullback in the dollar, a pause in the rise in US nominal and real rates particularly on the long end, consolidation in equities, and political and fiscal uncertainty in the US. Latest political headlines out of Europe are probably helping at the margins, although currency moves could complicate the impact. Stepping back from near-term developments, it’s worth noting that the gold market’s correction and subsequent consolidation has generally been orderly. The relatively measured unwinding of positions on Comex from the year’s highs reached in September is a reflection of this. Latest CFTC data shows that gold net long positions have been tentatively rebuilding over the past couple of weeks; at 22.33moz, market net length looks relatively lean around 60% of the all-time high, albeit still higher than the 12-month average around 17 moz. The recent build in net positioning was mainly due to gains in gross longs. Although gold shorts increased for the first time in four weeks as of November 14, volumes were very modest.
Gold resilience helps position the market for a rebound up ahead
A combination of resilient longs and hesitant shorts has helped gold prices form a decent base and enabled prices to climb above some support levels, improving the overall technical picture. As we have previously noted, we think gold’s resilience is in large part due to lingering uncertainty; although macro risks in general are perceived to be lower, there is an acknowledgment that known unknowns and unknown unknowns continue to lurk. Additionally, some seasonal demand is likely also keep gold prices supported. Bits and pieces of interest are evident out of China, although there seems to be no urgency to stock up for the Lunar New Year holidays which will occur later in February this time around. Market participants have also indicated a preference to hold off until after the FOMC December meeting is out of the way. We think gold’s performance of late and the prospect for further seasonal demand to kick in – albeit with unexceptional volumes –should put gold prices in a reasonably healthy position for a rebound above $1300 towards the year-end through to early 2018. – Zerohedge
Conventional wisdom holds that an interest rate hike in December will be bad for gold prices.
But will it?
There is actually evidence the opposite could be true.
Higher interest rates generally boost the dollar. This puts downward pressure on the price of gold. So, one would expect a rate hike to cause gold prices to tank. But over the last two years, the opposite has happened. In fact, we have seen double-digit increases in the price of gold after rate hikes.
So what gives?
The biggest factor is that we generally know the Federal Reserve is going to raise rates long before it actually acts. We’ve heard talk of a December rate hike since July. In fact, analysts say the likelihood of a quarter point December hike stands at 97%.
So, with several months to anticipate a hike, it is generally already baked into gold prices by the time it happens. The market has been factoring it in all along. The Economic Times of India provides a succinct explanation of what has happened over the last two years.
The much-anticipated rate hike is viewed as bearish and so gold prices already face continuous selling pressure. So after the rate hike, investors go for short covering or unwinding their bets and that is where we see the bounce even if the news is negative for gold prices. The rate hike from FOMC is predictable and so any upcoming highly anticipated Fed meeting comes, the deep-pocketed speculators go long on the US dollar and short gold futures. When the rate hike happens, it closes out their trades by buying gold future and selling the US dollar. This prompts the rally in gold prices. This can be seen from the weekly chart when Fed chair Janet Yellen hiked rates in December 2015 and December 2016. In March 2017, the same thing happened.
The question then becomes: Can the market sustain the rally?
That all depends on what investors think the Fed will do next. If Yellen and Company project a hawkish tone, and people think another hike is on the horizon, the “relief rally” will fizzle out pretty quickly. But if the Federal Reserve seems more dovish, and it looks like the Fed will slow the “normalization” process, the rally could extend, leading to more double-digit gains for gold.
The Economic Times article views the Fed as relatively dovish and looks for gold to track upward again after the December rate hike.
The last US economic outlook given by the Fed was positive but Fed was also appearing towards caution and so we expect Fed to remain behind the curve. This gives opportunity for yellow metal to appreciate. So in fact, we expect gold prices to remain under pressure till Fed meeting but after that we expect gold prices to touch $1,330-$1,350.”
TD Securities also expects fewer rate hikes and a weakening dollar on the horizon.
Based on the recent Fed trend of continually dropping its dot plot estimates and ongoing concerns that their models may be mis-specifying inflation, there is a good chance that the world will get less than the four cited rate increases over the next twelve months. This could in turn lead gold traders to speculate that the FOMC may lower its terminal rate projections down from the current 2.75 percent, as low inflation would require low real interest rates.”
There is also the issue of the overheated stock market.
As we reported earlier this week, 46% of investors now acknowledge the stock market is overvalued. TD Securities analysts see the potential for gold and silver to shine due to this fragility in the stock markets.
With equities in record territory and pricing in both low rates and earnings perfection, there will be a growing constituency who believe that there is more downside than upside risk. This historically has meant that investors beef up gold and precious metals exposure as a hedge.”
The bottom line is, the Fed’s next move might not bring about the doom and gloom some investors think. In fact, this might be a good time to buy. – Peter Schiff
The physical fundamentals are stronger than ever for gold. Russia and China continue to be huge buyers. China bans export of its 450 tons per year of physical production.
Gold refiners are working around the clock and cannot meet demand. Gold refiners are also having difficulty finding gold to refine as mining output, official bullion sales and scrap inflows all remain weak.
Private bullion continues to migrate from bank vaults at UBS and Credit Suisse into nonbank vaults at Brinks and Loomis, thus reducing the floating supply available for bank unallocated gold sales.
In other words, the physical supply situation has been tight as a drum.
The problem, of course, is unlimited selling in “paper” gold markets such as the Comex gold futures and similar instruments.
One of the flash crashes this year was precipitated by the instantaneous sale of gold futures contracts equal in underlying amount to 60 tons of physical gold. The largest bullion banks in the world could not source 60 tons of physical gold if they had months to do it.
There’s just not that much gold available. But in the paper gold market, there’s no limit on size, so anything goes.
There’s no sense complaining about this situation. It is what it is, and it won’t be broken up anytime soon. The main source of comfort is knowing that fundamentals always win in the long run even if there are temporary reversals. What you need to do is be patient, stay the course and buy strategically when the drawdowns emerge.
Where do we go from here?
There are many compelling reasons why gold should outperform over the coming months.
Deteriorating relations between the U.S. and Russia will only accelerate Russia’s efforts to diversify its reserves away from dollar assets (which can be frozen by the U.S. on a moment’s notice) to gold assets, which are immune to asset freezes and seizures.
The countdown to war with North Korea is underway, as I’ve explained repeatedly in these pages. A U.S. attack on the North Korean nuclear and missile weapons programs is likely by mid-2018.
Finally, we have to deal with our friends at the Fed. Good jobs numbers have given life to the view that the Fed will raise interest rates next month. The standard answer is that rate hikes make the dollar stronger and are a head wind for the dollar price of gold.
But I remain skeptical about a December hike. As I explained above, the market is looking in the wrong places for clues to Fed policy. Jobs reports are irrelevant; that was “mission accomplished” for the Fed years ago.
The key data are disinflation numbers. That’s what has the Fed concerned, and that’s why the Fed might pause again in December as it did last September.
We’ll have a better idea when PCE core inflation comes out Nov. 30.
Of course, the Fed’s main inflation metric has been moving in the wrong direction since January. The readings on the core PCE deflator year over year (the Fed’s preferred metric) were:
July 2017: 1.4%
August 2017: 1.3%
September 2017: 1.3%
Again, the October data will not be available until Nov. 30.
The Fed’s target rate for this metric is 2%. It will take a sustained increase over several months for the Fed to conclude that inflation is back on track to meet the Fed’s goal.
There’s obviously no chance of this happening before the Fed’s December meeting.
A weak dollar is the Fed’s only chance for more inflation. The way to get a weak dollar is to delay rate hikes indefinitely, and that’s what I believe the Fed will do.
And a weak dollar means a higher dollar price for gold.
Current levels look like the last stop before $1,300 per ounce. After that, a price surge is likely as buyers jump on the bandwagon, and then it’s up, up and away.
Why do I say that?
There’s an old saying that “a picture is worth a thousand words.” This chart is a good example of why that’s true:
Gold analyst Eddie Van Der Walt produced this 10-year chart for the dollar price of gold showing that gold prices have been converging into a narrow tunnel between two price trends — one trending higher and one lower — for the past six years.
This pattern has been especially pronounced since 2015. You can see gold has traded up and down in a range between $1,050 and $1,380 per ounce. The upper trend line and the lower trend line converge into a funnel.
Since gold prices will not remain in that funnel much longer (because it converges to a fixed price) gold will likely “break out” to the upside or downside, typically with a huge move that disrupts the pattern.
At the extreme, this could imply a gold price on its way to $1,800 or $800 per ounce. Which will it be?
The evidence overwhelmingly supports the thesis that gold will break out to the upside. Central banks are determined to get more inflation and will flip to easing policies if that’s what it takes.
Geopolitical risks are piling up from North Korea, to Saudi Arabia, to the South China Sea and beyond.
The failure of the Trump agenda has put the stock market on edge and a substantial market correction may be in the cards. Acute shortages of physical gold have also set the stage for a delivery failure or a short squeeze.
Any one of these developments is enough to send gold prices soaring in response to a panic or as part of a flight to quality. The only force that could take gold prices lower is deflation, and that is the one thing central banks will never allow. The above chart is one of the most powerful bullish indicators I’ve ever seen.
Get ready for an explosion to the upside in the dollar price of gold. Make sure you have your physical gold and gold mining shares before the breakout begins. – Jim Rickards
Gold prices are likely to be buoyed by the “new normal” of elevated geopolitical tensions over the coming years, Citi analysts said Monday.
The geopolitical case for gold investment has been emboldened in recent months and it seems as strong today than at any point over the last four decades, Citi analysts said. As a result, gold prices were forecast to “push north of $1,400 per ounce for sustained periods” through to 2020.
Elections and political votes, military attacks and macroeconomic crises were recognized by Citi as some of the key geopolitical events likely to influence investment into gold. And while analysts said there was not a consistent pattern for gold price performance amid such times of global uncertainty, prices were seen to have rallied more frequently during these periods.
Investors tend to move into safe-haven assets such as gold, the Swiss franc and the Japanese yen in times of geopolitical turmoil as traditional assets such as stocks and bonds are often perceived as a more volatile investment.
“Event-driven bids for gold seem to be occurring more frequently and may be the new normal… In short, even as the rates and forex channel dominate the outlook for gold pricing, the yellow metal is increasingly being used by investors as a policy and tail risk hedge,” Citi said.
Citi projected gold prices are on track to notch levels of $1,270 per ounce by the end of 2018, before climbing to around $1,350 per ounce and $1,370 per ounce over the next two calendar years.
“Philosophically everyone wants gold, it should always be safe but there is huge downside risk,” Nandini Ramakrishnan, global markets strategist at JPMorgan, told CNBC Monday.
Ramakrishnan said gold prices had witnessed “massive moves akin to the equity market,” before adding that investors should treat the commodity with caution.
Gold is highly sensitive to U.S. interest rate hikes, as such moves increase the opportunity cost of holding non-yielding bullion, while supporting the dollar — in which the commodity is priced.
Spot gold prices edged 0.2 percent lower to $1,290 per ounce on Monday morning. The yellow metal is up 12 percent since the start of the year. – Sam Meredith
Gold opened last week at $1,270 per ounce and finished the week at $1,276, about where it is now.
There were some spills and thrills along the way. Gold rallied to $1,287 per ounce last Thursday before hitting one of those “paper gold” air pockets we’re all too familiar with and falling $10.00 per ounce within minutes last Friday.
Still, in all, not much change.
The reason for this is that the market is waiting for Godot, or more precisely the Fed FOMC meeting on Dec. 13.
Starting last Sept. 20, immediately after the Fed’s “pause” on rate hikes, the market began to price in a Fed rate hike for December. Asset classes adjusted in line with those expectations.
Treasuries, gold, euros and yen all fell. Bond yields and the dollar both rose. Tight money was on the way.
The problem is that the markets have now priced in a 100% chance of a Fed rate hike in December. You can’t get any more sure of yourself than that. This means that Treasuries, euros, gold and yen have all found a bottom.
They’re just waiting for confirmation from the Fed in a few weeks. As I said, markets are waiting for Godot.
This sets up one of my favorite trading situations. I call it the “asymmetric trade.”
When something is fully priced, the happening of the event does not move prices. But if the event does not happen, prices move violently to reprice for the unexpected outcome.
This means you have a “Heads I win, tails I don’t lose” situation.
If you take a long position in gold today and the Fed raises rates, nothing happens to the price because the rate hike is already priced in.
If the Fed does not raise rates, gold prices will spike suddenly and dramatically. The spike could then catch the shorts off guard and lead to short covering that will drive the price even higher.
Heads I win, tails I don’t lose.
Of course, there’s no sense doing this trade if the rate hike really is as certain as markets suggest. Even when a trade is set up asymmetrically around a key event, there’s always the possibility of an exogenous event that could skew the result and cause unexpected gains or losses.
But a rate hike is not nearly a certainty.
In fact, there’s a high probability the Fed will not hike rates. That’s why I like the downside protection of the market consensus leaning the other way.
Why would I fade the consensus?
Because the market is looking in the wrong places for clues to Fed policy. Jobs reports are irrelevant; that was “mission accomplished” for the Fed years ago. The key data are disinflation numbers. That’s what has the Fed concerned, and that’s why the Fed might pause again in December as it did last September.
This week we got PPI and CPI inflation information. While important, they’re not the Fed’s preferred metric. The Fed focuses on PCE core inflation measured on a year-over year basis. That comes out Nov. 30.
Here’s the way to play it…
Buy gold today and then wait to see what the PCE core number is on Nov. 30. If it’s hot (1.6% or higher), the Fed will hike rates. You should be able to unwind the gold trade if you like with little or no harm done.
If it’s weak (1.3% or lower), which I expect, the market will start to reprice for a “pause” and gold will be off to the races.
Of course, I’m not a day trader; I like gold and gold miners for the long run. But sometimes these asymmetric trades are just too good to ignore.
Below, I show you some of the catalysts pushing gold higher, plus one of the most bullish charts I’ve ever seen for gold. Read on. – Jim Rickards
For anyone that has followed my writing for some period of time, you will remember the series that I wrote, which broke down India’s war on gold and how it was going to fail in its goal – and fail spectacularly it did.
This series went on and through time, my initial estimations were proven correct – the officially reported number of gold imports did indeed crash, but this was simply because the black market exploded. Smuggling of gold into India increased dramatically and all kinds of innovative ways of getting the metal into the country at reduced costs were created. The free market exerted its will and as always, won the day.
Undoubtedly, there was some reduction in imports, but not as much as the government of India was hoping for. Yet, there was one other predication that was made during this time period, of which has also been proven correct through time. The demand for silver was going to explode.
India in the past has had a history of being the largest importer of the yellow metal, which it has only recently been dethroned from. Their appetite for gold is insatiable and therefore it was only logical to assume that a large percentage of the funds intended to flow into gold, were going to go to the next best thing: silver.
This has and continues to prove to be the case. As reported, imports of silver in September exploded higher, increasing by a whopping 152% year over year! This is coming on the back of an already significant surge seen in the month of August.
566.778 tons of silver were imported throughout the month of September, up from 225 tons in September 2016. This is a massive and huge increase, indicating that India’s appetite for gold and silver not only remains strong, but is increasing, despite the government’s best efforts to clamp down on it. In fact, this was the highest level seen since 2009.
Meanwhile, in the West, precious metals continue to be scorned and ridiculed, cast aside and forgotten as the latest and greatest thing continues to siphon funds out of this market. Cryptocurrencies, led by Bitcoin, continue to drain funds that would otherwise have gone into the precious metals space.
This is not entirely a bad thing, unless you are fully committed to the precious metals space. As many of you know, I have been a long time supporter of Bitcoin, writing about its value from its infancy. But, still, as I have always stated, it is no replacement for gold and silver, which have stood the test of time for over 10,000 years and will continue to do so for the foreseeable future. They are two different assets and play two different roles in the protection of your portfolio.
I expect 2018 to be the year of gold and silver’s resurgence after the monumental explosion seen throughout this year in the price of Bitcoin. A price increase that has made many feel like they have “missed the boat”, which will cause them to search for other opportunities.
I expect the West to once again wake from its slumber and take cues from countries such as Russia, China and India, who continue to take prudent steps and diversify into hard assets. – Nathan McDonald
When the Fed raised interest rates last December, many believed gold would plunge. But it didn’t happen.
Gold bottomed the day after the rate hike, but then started moving higher again.
Incidentally, the same thing happened after the Fed tightened in December 2015. Gold had one of its best quarters in 20 years in the first quarter of 2016. So it was very interesting to see gold going up despite headwinds from the Fed.
Meanwhile, gold has more than held its own this year.
Normally when rates go up, the dollar strengthens and gold weakens. They usually move in opposite directions. So how could gold have gone up when the Fed was tightening and the dollar was strong?
That tells me that there’s more to the story, that there’s more going on behind the scenes that’s been driving the gold price higher.
It means you can’t just look at the dollar. The dollar’s an important driver of the gold price, no doubt. But so are basic fundamentals like supply and demand in the physical gold market.
I travel constantly, and I was in Shanghai meeting with the largest gold dealers in China. I was also in Switzerland not too long ago, meeting with gold refiners and gold dealers.
I’ve heard the same stories from Switzerland to Shanghai and everywhere in between, that there are physical gold shortages popping up, and that refiners are having trouble sourcing gold. Refiners have waiting lists of buyers, and they can’t find the gold they need to maintain their refining operations.
And new gold discoveries are few and far between, so demand is outstripping supply. That’s why some of the opportunities we’ve uncovered in gold miners are so attractive right now. One good find can make investors fortunes.
My point is that physical shortages have become an issue. That is an important driver of gold prices.
There’s another reason to believe that gold could be in a long-term trend right now.
To understand why, let’s first look at the long decline in gold prices from 2011 to 2015. The best explanation I’ve heard came from legendary commodities investor Jim Rogers. He personally believes that gold will end up in the $10,000 per ounce range, which I have also predicted.
But Rogers makes the point that no commodity ever goes from a secular bottom to top without a 50% retracement along the way.
Gold bottomed at $255 per ounce in August 1999. From there, it turned decisively higher and rose 650% until it peaked near $1,900 in September 2011.
So gold rose $1,643 per ounce from August 1999 to September 2011.
A 50% retracement of that rally would take $821 per ounce off the price, putting gold at $1,077 when the retracement finished. That’s almost exactly where gold ended up on Nov. 27, 2015 ($1,058 per ounce).
This means the 50% retracement is behind us and gold is set for new all-time highs in the years ahead.
Why should investors believe gold won’t just get slammed again?
The answer is that there’s an important distinction between the 2011–15 price action and what’s going on now.
The four-year decline exhibited a pattern called “lower highs and lower lows.” While gold rallied and fell back, each peak was lower than the one before and each valley was lower than the one before also.
Since December 2016, it appears that this bear market pattern has reversed. We now see “higher highs and higher lows” as part of an overall uptrend.
The Feb. 24, 2017, high of $1,256 per ounce was higher than the prior Jan. 23, 2017, high of $1,217 per ounce.
The May 10 low of $1,218 per ounce was higher than the prior March 14 low of $1,198 per ounce.
The Sept. 7 high of $1,353 was higher than the June 6 high of $1,296. And the Oct. 5 low of $1,271 was higher than the July 7 low of $1,212.
Of course, this new trend is less than a year old and is not deterministic. Still, it is an encouraging sign when considered alongside other bullish factors for gold.
But more importantly, gold has held its own despite higher interest rates and threats of more.
That tells me we’re seeing a flight to quality, meaning people are losing confidence in central banks all over the world. They realize the banks are out of bullets. They’ve been printing money for eight years and keeping rates close to zero or negative. But it still hasn’t worked to stimulate the economy the way they want.
So gold has been moving up in what I would consider a challenging environment of higher rates.
The question is, where does gold go from here?
The market is currently giving close to 100% odds that the Fed will raise rates next month.
I disagree. I’m skeptical of that because of the weak inflation data. There will be one more PCE core data release before the Dec. 13 meeting. That release is due out on Nov. 30.
If the number is hot, say, 1.6% or higher, that will validate Yellen’s view that the inflation weakness was “transitory” and will justify the Fed in raising rates in December.
On the other hand, if that number is weak, say, 1.3% or less, there’s a good chance the Fed will not raise rates in December. In that case, investors should expect a swift and violent reversal of recent trends.
Markets have priced a strong dollar and weaker gold and bond prices based on the expectation of a rate hike in December. If that rate hike doesn’t happen because of weak inflation data, look for sharp rallies in bonds and gold.
Now, the last time gold sold off dramatically was on election night, when Stan Druckenmiller, a famous gold investor, sold all his gold. It’s only natural that when someone dumps the amount of gold he deals in, the price will go down.
That move reflected a change in sentiment.
What Stan said at the time was very interesting. He said, “All the reasons that I own gold in the first place have gone away because Trump was elected president.”
In other words, he was buying into the story that Hillary Clinton would be bad for the economy but Donald Trump’s policies would be beneficial. If we were going to have strong economic growth with a Trump presidency, maybe you didn’t need gold for protection. So he sold his gold and bought stocks on the assumption that the economy would grow under Trump.
But earlier this year, Stan has said he’s buying gold again. What that means is that people are finally reconsidering the reflation trade. Tax reform is still a big question mark. And when’s the last time you heard a word about infrastructure spending?
Investors will once again flock into gold once reality sets in. Mix in rising geopolitical tensions in Asia and the Middle East, and gold’s future looks bright. – Jim Rickards
It has been a rough year for many primary silver miners as two-thirds have suffered declines in production. Also, many high ranking silver producing countries are also experiencing a pronounced reduction in their domestic silver mine supply. According to the data put out by World Metal Statistics, Chile’s silver production is down 20% in the first eight months of the year, while Australia is down 19%, Mexico declined 2% and Peru lower by 1%.
The Silver Institute will be releasing their 2017 Silver Interim Report shortly which will provide an update on current silver production and forecasts for the remainder of the year. However, I believe global silver production will take a big hit this year due to several factors including, falling ore grades, mine closures, and strikes at various projects.
For example, Tahoe Resources was forced to shut down its Guatemalan Escobal Mine in July due to a temporary suspension of its operating license by the country’s Supreme Court. However, even after the Guatemalan Supreme Court reinstated Tahoe Resources Escobal Mine’s license in early September, an ongoing road blockade has hampered the ability of the project to continue mining. Regardless, Tahoe’s silver production declined a stunning 6.7 million oz Q1-Q3 2017 versus the same period last year.
Now, on the other hand, silver production at Fresnillo’s operations in Mexico jumped by nearly six million oz during the first three-quarters of 2017 primarily due to the start-up of its San Julian Mine phase II expansion and a ramp-up of its phase I:
While the gain in silver production at Fresnillo’s operations helped to offset the significant decline at Tahoe’s Escobal Mine, two-thirds of the top primary silver companies in the group experienced a reduction in mine supply this year. Hecla’s silver production fell by 3.7 million oz in the first three-quarters this year due to an ongoing strike at its Lucky Friday Mine in Idaho. Moreover, output at Silver Standard’s Puna operations in Argentina fell by 3.2 million oz due to a 36% decline in ore grade at is open-pit Pirquitas Mine. Silver Standard’s Pirquitas Mine is one of the few open-pit silver operations in the world. The overwhelming majority of primary silver mines in the world are underground operations.
Overall, production at these top primary silver miners fell 9 million oz in 2017 compared to the same period last year:
Now, if Tahoe Resources Escobal Mine was not forced to shut down or if Hecla’s Lucky Friday Mine’s strike was resolved, overall production at these top primary silver miners would have likely increased by approximately one million oz this year. Unfortunately for Tahoe’s Escobal Mine and its investors, it may be quite some time before full production resumes. As I have mentioned in previous articles about the troubles plaguing the Escobal Mine by the local and indigenous peoples living by the operation, there are two very different opinions on the underlying problems.
While I have stated that the negative issues put forth by the local and indigenous peoples about the Escobal Mine are likely more valid than the pro-western stance taken by the Tahoe Management or the Mainstream financial media, time will tell how this is resolved. However, the notion put forth by Tahoe Management that the problems are stemming from “non-locals” who are supposedly radicalizing the locals around the plant, is unfounded when we understand that it is a huge ground-roots movement led by a large percentage of the inhabitants surrounding the mine.
According to the article, Tahoe Resources’ Social Licence in Guatemala Non-Existent, as Uncertainty Plagues Escobal Permits:
Tahoe CEO Ron Clayton is also wrong when he states in a recent press release that community opposition comes from “non-locals”. Lack of social license has dogged Tahoe Resources since the beginning of its project. Since 2011, tens of thousands of residents in eight municipalities around the Escobal mine have voted in municipal plebiscites demonstrating their opposition to the project, or any mining in the area, out of concern for their water supplies, health, and local agriculture. Five municipalities refuse to receive any royalty payments from Tahoe’s mine operations and are now parties to the legal proceedings over discrimination of the Xinka Indigenous population and the Ministry of Energy and Mines’ failure to consult with them.
As the article states, five municipalities refuse to receive any royalty payments from Tahoe’s mine operations and are now supporting legal proceedings. This does not sound like a small group of non-locals instigating trouble. Rather, this has been an ongoing issue ever since the Escobal Mine was initially planned, during its construction phase and ever since it produced its first ounce of silver in 2014.
Lastly, it looks like global silver production will take a big hit this year. We could see world silver mine supply fall by 40-50 million oz in 2017 if the trend continues for the remainder of the year. One country that I did not report on about silver production was China. According to the World Metals Statistics, they show Chinese silver production down by a stunning 25% in the first eight months of 2017. However, I don’t believe the decline is that high. Even though the World Gold Council stated that Chinese gold production was down 10% so far this year, I doubt their silver production fell 25% this year.
We will have to wait and see what production figures the Silver Institute will release in their 2017 Silver Interim Report when it’s published in the next few weeks. Regardless, the world’s economies are being propped up by a massive amount of debt, derivatives and money printing. When the markets finally crack, global silver production will fall considerably as for demand for base metals will drop like a rock. We must remember, 58% of world silver production is a by-product of copper, lead and zinc production. So, when base metal demand falls, so will base metal production.
Thus, as the market and economy continue to disintegrate, global silver supply will fall right at the very same time investment demand surges. – SRSroccoreport
Bitcoin’s wild volatility, as prices swing within a $2,000 range, is one of the reasons why the digital currency should not be compared to gold, according to one market analyst.
Bitcoin’s surge to nearly $8,000 in recent weeks has led some analysts to speculate that it is taking interest and capital away from gold, which has languished in a tight range between its 100-day and 200-day moving averages. However, George Milling-Stanley, head of gold investments at State Street Global Advisors, said that this theory is nothing but the latest urban myth.
“It’s a myth of epic proportions on the same level as alligators in New York sewers,” he said. “I have talked to many financial advisors and investors and no one has said that they are selling their gold to buy Bitcoin.”
Bitcoin is seeing a strong bounce after four days of selling pressure that pushed prices down by nearly $2,000 dollar. According toKitco’s aggregated charts, Bitcoin last traded at $6,539.90. At the same time, December gold futures last traded at $1,278.10 an ounce.
Milling-Stanley said that ultimately, Bitcoin is nothing but a new speculative trend that is probably going to end badly for investors. He equated investing in cryptocurrencies to going to a casino. He added that unlike gold, bitcoin will never been a store of value.
“I don’t want something in my portfolio that is 100 times more volatile than gold,” he said.
While Milling-Stanley has little love for cryptocurrencies, he said that he does see a future for the blockchain technology. This has the potential to revolutionize financial markets, he added.
“I am confident that there is a future for blockchain but I don’t believe its optimal use is for cryptocurrencies,” he said. “Bitcoin is used to pay for the most unpleasant criminal activity.”
As for gold prices, while the market is mired in a tight trading channel, Milling-Stanley said that he remains confident that it’s only a matter of time before prices break out to the upside.
He added that growing global uncertainty is starting to weigh on equity markets, which makes gold an attractive defensive investment. He added that he sees few drivers that will keep stock prices near record valuations.
“Gold continues to have a place as a solid portfolio diversify as it has no correlation with falling equity markets,” he said. “When we do see a breakout in gold I think it will be more likely to the upside and I am confident we will see prices back above $1,350 by the start of the new year.” – Neils Christensen
– Internet shutdowns (116 in two years) show physical gold is ultimate protection
– Number of internet shutdowns increased in 2017 as 30 countries hit by shutdowns
– Democratic India experienced 54 internet shutdowns in last two years; Brazil 2
– EU country Estonia, a technologically advanced nation, experienced a shutdown
– Gallup poll shows Americans more worried about cybercrime than violent crime
– Governments use terrorist threat as reason for internet kill switch powers
– Own physical coins and bars rather than digital gold on a single platform
Editor: Mark O’Byrne
UNESCO is warning that the number of internet shutdowns is increasing worldwide. According to Statista.com when reporting data provided by digital rights platform accessnow.org, “internet access has been curbed 116 times in 30 countries since January 2016.”
“Internet shutdown: An intentional disruption of Internet or electronic communications, rendering them inaccessible or effectively unusable, for a specific population or within a location, often to exert control over the flow of information.” – Access Now.
One question that so many ask when first hearing about bitcoin is ‘what if the internet stops working?’ Bitcoin and crypto proponents scoff and point out that there is no singular ‘off button’ i.e. it would be near impossible.
According to ‘father of the internet’ Tim Berners-Lee, this is true:
“The way the internet is designed is very much as a decentralised system. At the moment, because countries connect to each other in lots of different ways, there is no one off switch, there is no central place where you can turn it off.”
Try telling that to the one billion plus people in India who have experienced over 54 internet shutdowns in the last two years.
Or those in Egypt who on January 27th 2011 could no longer get online as the government shut down the internet in response to the pre-Arab Spring protests.
Even in the EU, ten years ago technologically advanced Estonia appears to have been a victim of Kremlin-sponsored cyber warfare, when Estonians found they could no longer access their bank accounts. Individuals and companies could not use their computers for the simple daily tasks that we take for granted today – such as email.
The above three examples are not rare occurrences. In the last two years alone there have been 116 situations where governments or state sponsored hackers seem to have found the ‘off button’ for the internet across 30 countries. That’s not counting all of the incidences when there have been other cyber attacks that have ‘merely’ affected vital internal systems and disrupted key infrastructure for large sections of society.
So whilst countries might be more connected than ever, that isn’t much help to the citizens who find themselves very much disconnected whether on a mass or individual scale. Internet shutdown is definitely possible and it is happening:
“There are several ways to shut down the Internet. One way is to make sure that when you type in a web address, such as dw.com/mediadev, your Internet service provider doesn’t allow you to find the underlying IP address. Another way is when an Internet service provider messes with the routing tables and removes key details so that packets of information traveling on the web aren’t allowed to travel to their final destination. Governments are using increasingly sophisticated methods to disrupt communications”
This isn’t just a disaster for those using bitcoin, this is a disaster for anyone who relies on an internet connection be it for communication or accessing their finances. Many in the West look at internet controls as something that is exclusive to developing nations or those more on the totalitarian-regime end of the political spectrum.
Sadly this is not the case. As you will see government-sanctioned internet shutdown and cyberterrorism are ever-present across many nations. The result? Individuals must protect their own freedom and safety of their assets as the authorities may have other priorities.
Internet shutdown increases government powers
As the examples of India, Estonia and Egypt show internet shutdown is very much possible. It was the Egyptian shutdown of 2011 that prompted many other governments to realise the powers they could attain:
Until then, many governments had assumed it was not possible to turn off internet access to their entire nation, due to the decentralized nature of the network. But soon after, governments across the globe educated themselves about AS numbers and internet routing, and started using their power to set up systems that would allow them to order network shutdowns.
What was originally only intended to be used in more extreme circumstances has quickly devolved into officials using their powers for all sorts of questionable – and often political – reasons.
Internet shutdowns can be either at the will of the domestic government or a form of financial or military warfare from an outside authority or organisation.
India is where we see the highest number of authorised internet blackouts. Here government policy states that whilst such action requires the highest-level official in charge of domestic security – the Ministry of Home Affairs for the whole country or a state’s Home Department official – to sign off on any shutdown a junior member can shutdown the internet for a full 24-hours should gaining permission be unfeasible.
Many in Western countries might dismiss such government behaviour as perhaps a feature of developing nations or despot-led countries. Not so. In the UK the Communications Act 2003 and the Civil Contingencies Act 2004 gives internet suspension powers to the Secretary of State for Culture, Media and Sport. This can be done either by ordering the shutdown of operations by internet service providers or by closing exchange points.
When questioned about such a power a government representative said that it would have to be a very exceptional circumstance that led to the shutdown of the internet. However, those circumstances have not been specified and therefore cannot be challenged. Who is to say from one government to the next or one perceived threat to the next what an ‘exceptional circumstance’ is?
One person’s exceptional circumstances differ to another’s. For example, it’s interesting that in India the majority of shutdowns happen in Kashmir, the region which is heavily involved in a political border dispute. The same goes for Turkey which since 2016 has allowed authorities to implement an internet ‘kill switch’ to “partially or entirely” suspend internet access when deemed necessary.
In most countries government-sanctioned internet shutdown is now part and parcel of policy. More often than not they are justified by their use in protecting citizens. However, as Deji Bryce Olukotun, Senior Global Advocacy Manager at Access Now explains:
There is no evidence that shutting down the Internet helps prevent terrorist attacks or stops them while they’re occurring.
Internet access: a human right
There are 3.5 billion internet users around the world, approximately 50% of the global population. It is therefore unsurprising that internet use is increasingly considered to be a human right by many.
“As the Internet is a key enabler of many fundamental rights, including freedom of speech and expression, such frequent disruptions have been a cause for concern,” states InternetShutdowns.in.
“They threaten the democratic working of nations, and also point to the gradual normalization of the mindset that permits such blanket restriction on Internet access.”
Where there is internet access managing your day and business online is just an accepted fact of life, particularly in developed countries. When indicators such as the political, economic and social impact of the web, connectivity and use are considered the UK and US are ranked in the top three for web use by citizens.
The Internet helps us realize our human rights, including freedom of expression and privacy. When governments shut off the Internet, people can’t communicate with loved ones, run their businesses or even visit their doctors during an emergency. – Deji Bryce Olukotun
One would also assume therefore that our governments understand the importance of internet security and have several measures in place to prevent the likes of military-level cyber attacks or DDOS attacks from terrorist organisations.
Not so, the most progress that has been made by Western governments in recent years has been in regard to how much control they have over the internet as shown by the aforementioned policies.
Do companies and governments even care?
Ten years ago Estonia experienced what appears to have been a state-sponsored cyberattack of unimaginable proportions. Citizens found they were unable to access bank accounts, websites, social media and infrastructure began to fall apart such as traffic lights no longer working.
This was not down to an internal failure. It was quickly clear that there had been an attack from outside the country. It was a Distributed Denial of Service Attack — an orchestrated swarm of internet traffic that swamps servers and shuts down websites for hours or even days.
The result for Estonians citizens was that cash machines and online banking services were sporadically out of action; government employees were unable to communicate with each other on email; and newspapers and broadcasters suddenly found they couldn’t deliver the news.
The Estonian government reacted in a manner that other governments should have been proud to follow. They used it as a step to up foreign policy and gain immense understanding and training on all matters of cybersecurity.
The attack on Estonia may have been Russia telling the rest of the world that it had the capabilities to bring a country to its knees should they be displeased.
Internet shutdowns are serious. A cyberattack or a government-sanctioned internet shutdowns due to a perceived threat could have dire financial consequences:
The wheels of finance and banking also could grind to a halt if an event compelled all U.S. Internet Service Providers to cut off all Internet access. A shutdown of the stock markets, where billions of dollars are exchanged daily, might prove especially crippling.
But this isn’t just about disaster at a government and national level. Consider businesses and the impact on their operations. How many organisations assume internet access is a given? How many base their business offering on the existence of customers being online?
Dangers of Digital Gold
Consider companies that offer digital gold an an investment or store of value. These electronic platforms offer investors access to pooled gold in large gold bar format. Investors do not know which part of a particular gold bar they own. Sometimes such investments are mis-labelled as allocated gold.
Not only this, but these platforms are “closed loop systems”. This means liquidity and pricing are dependent on a single platform, website and company. The investor is in effect “captive” as they would be to a bank account or having to deal with one single stockbroker. Should the company be acquired by a bank, venture capitalists or other institution, the spread between buy and sell and overall costs could rise. The client would have no choice but to accept the increased charges.
How would this work in the event of a cyber attack and or internet shutdowns? Your digital gold would be about as much use as the cash in the bank account you can’t access, as ATMs would also be down and online banking is not online.
We are in no way casting aspersions as to the good name of BullionVault.com or other digital gold platforms. We have a lot of respect for them and what they have achieved. However, we view them as a great way for people to speculate on gold, silver and platinum, rather than as providers of financial insurance and safe haven long term investments.
The point we are making is that investors concerned about systemic risk, including cyber risk, should consider the cyber and electronic threats to their investments – with whatever provider they may be with.
Higher rate of victimisation: don’t be a statistic
67% of Americans are more worried about cyberattacks than physical theft and attacks. Why is this? Most likely because few know where to turn in order to protect themselves. It is not an irrational fear.
Even if you live in a country that was not victim to an internet shutdown, consider the following relevant information:
– According to a study by Incapsula 30.5% of non-human web traffic is compromised of ‘bad bots’. These bots are responsible for stealing data and distributing malware.
– Symantec’s 2017 Internet Security Threat Report reported that more than $3 billion has been stolen from businesses in the past three years.
– The United States’ Computer Crime and Intellectual Property Section (CCIPS) report that more than 4,000 ransomware attacks have occurred every day since the beginning of 2016. A 300% increase over 2015, where 1,000 ransomware attacks were seen per day.
– This is a major financial problem. The Brookings Institution found that the global economy lost at least 2.25 billion euro ($2.4 billion) from Internet shutdowns over a one year period from 2015-2016.
Individuals must take their own precautions, both at a computer security level but also in terms of personal assets.
More and more people need the Internet to connect and make a living, and cannot afford to lose access on a routine basis. The worst thing we can do is sit and do nothing. – Deji Bryce Olukotun
Internet shutdowns and cybersecurity attacks compromise our democratic freedoms. The shutdown of the internet by governments should only be allowed in the most extreme of cases. Sadly as we see in the likes of India it is often used as a first response.
When our democratic freedoms are threatened it means our financial ones are also at risk. Many savers and investors consider these threats and choose to diversify their portfolios. They spread the risk and hedge their bets against such events.
This is a sensible first step, however it can be rendered pointless if your management of your assets is reliant on internet access. Gold has been bought by millions all over the world because of its role in protecting investors during times of war, financial hardship and economic disasters. It is only recently that the idea of cyber warfare and the misuse of this power by governments has become a point of consideration.
Gold is as relevant here as it always has been. But it is specifically allocated, segregated physical gold which must be considered.
Owning gold coins and bars either in one’s possession or in allocated and segregated storage will protect people and will be accessible and liquid should an internet shutdown be triggered in your country tomorrow. – Goldcore
Bitcoin plummeted, extending its drop to 29 percent from a record high, on speculation some traders were buying its offshoot amid a struggle over the digital currency’s future.
Bitcoin dropped to as low as $5,605 on Monday, from a record high $7,882 reached on Wednesday, data compiled by Bloomberg show. Bitcoin cash rose to $2,426 on Sunday, before plunging to $1,379 as of 9:32 a.m. in Hong Kong, according to Coinmarketcap.com.
Bitcoin has slumped since the cancellation of a technology upgrade to increase its block size, amid speculation supporters of the proposal bid up bitcoin cash to undermine the original bitcoin.
At the heart of the debate is how bitcoin’s underlying technology can accommodate rising transactions as its popularity booms. While increasing its block size would help, opponents argue it would only concentrate mining power, undermining the decentralized nature of bitcoin.
Virtual currency’s threat to the human environment has been hitting the headlines recently. The race to mine new Bitcoins, exacerbated by rules that make the process use more computer power as time goes on, threatens one day to consume as much power as the whole of Japan, according to Citi. Already, Bitcoin mines stacked high with customized machines whir away in Inner Mongolia, hinting at the crypto-currency’s “Mad Max” problem, as ING’s Teunis Brosens puts it.
But this is a problem only as long as people are desperate for new Bitcoin, and only as long as its rules remain fixed. The dramatic events over the past three days have shown us that neither is guaranteed. The tumble in value of the granddaddy of crypto-currencies, from about $7,300 to just more than $5,600, is testament to its biggest sustainability problem: An inability to evolve as a piece of code without tearing itself apart.
The root cause of the recent price drop is a long-running conflict over Bitcoin’s failure to fix its most obvious flaws.
Although Bitcoin was designed to be a functional payments network, it has failed to live up to those expectations. A boom in transaction activity, worsened by the crypto-currency’s speculative price bubble, has led to intense network congestion.
Each entry in the Bitcoin payments ledger—or, in crypto-parlance, each block in the blockchain—is capped in size, and transactions are slow to process. Transaction fees have blown past $10. Given the obstacles to spending Bitcoin like a currency, the incentive has been to hoard it like a commodity.
If this were Microsoft Corp. or Apple Inc., it would only take a nod from the CEO to deliver a system upgrade or patch to improve the network. But this is crypto-land. An issue as trivial as increasing capacity ended up kicking off a civil war among developers, miners and evangelists that has raged for several years. Those who want to keep transaction batch sizes small are accused of being nostalgic cyber-idealists, while those who want to ramp them up are accused of wanting to centralize power among wealthy vested interests.
In protest, a new crypto-currency with bigger block sizes, Bitcoin Cash, was launched in August. As for Bitcoin, a compromise solution intended to launch last week failed to get off the ground. Bitcoin remains Bitcoin.
These events have triggered a step-change in how markets view Bitcoin—just as Wall Street was starting to get comfortable with trading it. Bitcoin’s price is falling while that of Bitcoin Cash is gaining. The computing power of the miners is switching away from Bitcoin to its would-be successor in search of more dependable profits. If this continues, Bitcoin’s already clunky network will suffer as transactions are delayed and fees rise. Assuming this isn’t just a temporary power grab, optimists reckon Bitcoin Cash has a shot at becoming the new Bitcoin—one that’s actually a bit better at the whole payments thing.
Regardless of which side has more merit, investors will no doubt be scratching their heads at a far more fundamental question. If every developmental fork in the road for Bitcoin leads to a new currency branching off, how sustainable can its price boom be?
True believers who think it to be as rare and precious as a digital version of gold may soon face the grim reality that it’s just one flawed crypto-currency among many. A commoditized technology, in other words, rather than a technological commodity. – Lionel Laurent
As gold continues to wallow below the $1,300 per ounce mark, bitcoin made a fresh record high this week. Considering bitcoin and gold share some similar attributes, why is gold’s performance so lacklustre as bitcoin continues to march higher?
The question now is, is Bitcoin a better store of value than gold? To answer this we need to know what is driving the lacklustre performance in gold and if the factors weighing on the yellow metal will last.
But this doesn’t explain why Bitcoin, which shares some attributes with gold, continues to embark on its ferocious march higher. Here are some of the attributes shared by gold and bitcoin:
But, the crucial differences between gold and bitcoin include:
Overall, you could argue that the story behind bitcoin is stronger than it is for gold right now and that is the chief reason why gold is lagging behind Bitcoin. The potential for Bitcoin and crypto in general to overtake the fiat currency system in the coming years is also a powerful driver of demand, and is something that gold cannot compete with.
The case for gold:
We would caution against writing gold off completely for a few reasons:
To conclude, although gold and bitcoin share many attributes, the bitcoin story has grabbed the trading and investing world’s attention like nothing else, hence the huge rise in its price this year. Gold cannot keep up with this and it is natural that we see some drift away from gold and into bitcoin in the coming months. In the short-term this may continue to weigh on the gold price, however, if we get a period of market stress then it could be time for the gold bugs to step up a gear as no one knows how bitcoin will react to a market panic. – Kathleen Brooks
Source: City Index and Bloomberg
If the ownership of bitcoin is as concentrated as some estimate, then the liquidity issue distills down to the actions of the top tier of owners.
Whenever I raise the topic of bitcoin and cryptocurrencies, I feel like an agnostic in the 30 Years War between Catholics and Protestants. There is precious little neutral ground in the crypto-is-a-bubble battle; one side is absolutely confident that bitcoin and the other cryptocurrencies are in a tulip-bulb type bubble, while the other camp is equally confident that we ain’t seen nuthin’ yet in terms of bitcoin’s future valuation.
I’ve stated here more than once that in my view the real value of bitcoin will only be revealed in a financial/market crisis/crash like 2008-09. Longtime correspondent Mark G. recently proposed three tests that illuminate some of the dynamics that might come into play in the next financial/market crash/crisis.
(CHS NOTE: gold fell from a peak around $1,100 per ounce in March 2008 to $830 in October 2008. It then bounced back to $1,100 in February 2008. The standard explanation for the sharp decline was that gold was sold off to meet margin calls and other obligations arising from the Global Financial Meltdown of late 2008. That gold was perceived as a reliable store of value may have increased its attractiveness as an asset to sell in the mad scramble to raise cash.)
Here is Mark’s commentary:
I propose that the performance of gold in 2008-2009 offers an indicator into how bitcoin is likely to behave.
I propose three practical tests for bitcoin.
Test 1. Is it possible to meet any sort of ‘margin call’ using bitcoin directly? Is it possible to do so on a large enough scale to affect market liquidity in any particular market? i.e. are any margin loans or the functional equivalent thereof denominated in bitcoin? In 2008 as “margin calls” flowed in from everywhere, all speculative assets experienced the same selling pressure to raise cash to meet obligations denominated in “money”.
Test 2. Can the physical necessities of daily life be commonly paid for directly and locally using bitcoin? I mean things like food, fuel, medicine, clothing and local debts for utilities, taxes, rents and mortgages. Or is it necessary to first exchange one’s bitcoin for ‘legal tender’ to conduct these transactions?
Test 3. Can bitcoin even be used to financially sustain bitcoin’s minimum physical infrastructure of servers, brokers and trading desks? Can it pay leases, electric bills and purchase the servers required for this?
Are there any lenders of “last resort” ready, willing and able to sustain bitcoin banks, traders and speculators? If not, and precisely because there is a limited supply of bitcoin, it seems a certainty that the financial failures previously seen in the decades prior to the Federal Reserve Act are likely to recur in the bitcoin infrastructure for precisely the same reason: liquidity crunches appearing.
These are precisely the tests that gold and silver failed in 2008/2009. And until bitcoin is ready to pass these tests I think it too will collapse in any future Global Financial Crisis.
Thank you, Mark. Liquidity is an issue in any financial crisis, as sellers may be unable to find buyers at any price. Bitcoin has two liquidity issues:
1. Will sellers of bitcoin find a bid from buyers if a flood of bitcoins hit the market as speculators sell assets to raise cash to meet margin calls (or simply book profits in volatile markets)?
2. Since bitcoin must generally be converted to local currencies to buy the supplies and pay the bills Mark listed above, liquidity must also include the convertibility of bitcoin to USD, euros, yen and yuan, that is, the willingness of traders to exchange USD, euros, yen and yuan for bitcoin.
A liquidity crunch has the potential to unleash a positive feedback loop (i.e. self-reinforcing feedback loop) in which the absence of liquidity triggers panic that then sparks more selling which then worsens the liquidity crunch which then increases panic selling, and so on.
Another potential factor is the ownership of bitcoin. The topic is complicated because one individual can own a number of exchange accounts, wallets and coins in cold storage. On the other hand, one address might represent more than one owner.
To further complicate matters, an unknown number of bitcoins have been lost, i.e. the keys have been lost in hard drive crashes and the like. There is no way to know the number of zombie bitcoins with any precision.
For this reason, charts of bitcoin distribution refer to addresses, not individuals.
The acronym HODL pops up a lot in the crypto space: hold on for dear life, meaning hold on to your bitcoin, Ether, etc. through thick and thin rather than trade or sell it.
If the ownership of bitcoin is as concentrated as some estimate, then the liquidity issue distills down to the actions of the top tier of owners: if some substantial percentage of major owners are forced to liquidate their bitcoin to cover massive margin calls elsewhere in their financial holdings, the sale of big blocks could overwhelm buyers, creating a liquidity crunch.
If most of the major owners have eschewed debt and margin in favor of cash, bitcoin, gold, etc., then they might be in a position to provide liquidity as speculators dump bitcoin to raise cash or lock in gains.
Given the limited number of bitcoin available to trade, liquidity could dry up very quickly if major blocks are dumped on the market.
Given the strong views bitcoin arouses, it may come down to how many major owners will HODL in a panic-soaked financial crisis, how many will avoid being forced to liquidate their bitcoin holdings to meet margin calls or other obligations, and how many will have the wherewithal and the courage of their convictions to be buyers when volatility soars.
Put another way, beliefs and confidence can generate behaviors and decisions that may well appear irrational to speculators.
I don’t know how the market for bitcoin will react in a 2008-type crisis, but the small float of available coins practically guarantees high volatility. How it all shakes out a year after the crisis is another question that’s unanswerable.
One thing we can anticipate with some certainty is that one camp will be right and the other camp will be wrong. – Charles Hugh Smith
Gold has largely been drifting sideways for the better part of a couple months now, sapping enthusiasm. Gold investment demand has stalled due to extreme stock-market euphoria. Investors aren’t interested in alternative investments led by gold when stocks seemingly do nothing but rally indefinitely. But once stock-market volatility inevitably returns, so will gold investment demand which fuels major gold uplegs.
Like nearly everything else in the global markets, gold prices are heavily dependent on investment capital flows. When investors are buying gold in a meaningful way, demand exceeds supply which drives gold’s price higher. When they’re materially selling, supply trumps demand thus gold’s price naturally retreats. The past couple months have been stuck in the middle, with gold investment flows neutral on balance.
The World Gold Council is the leading authority on global gold supply and demand, publishing quarterly Gold Demand Trends reports that offer the best fundamental reads available on the gold markets. The latest Q3’17 GDT was just released early yesterday morning. While it doesn’t cover the ongoing Q4 where gold is drifting, it does offer great insights into what’s happening with gold investment demand.
Overall world gold demand was quite weak in Q3, dropping 8.6% YoY to 915.0 metric tons. That made for an 86.1t absolute drop. Investment demand, though it only accounted for just over a quarter of the total, was responsible for this entire demand decline. Gold investment demand plunged 27.9% YoY in Q3, or 93.4t! The WGC further breaks down that category into bar-and-coin demand and ETF demand.
The traditional physical-bar-and-coin gold demand was actually quite strong in Q3, surging 16.9% YoY to 222.3t. That’s up a healthy 32.1t YoY. But the stock-market gold demand via exchange-traded funds far more than offset this, plummeting an astounding 86.9% YoY or 125.4t! If ETF demand had been stable in Q3, overall global gold demand would’ve climbed a healthy 3.9% YoY. Gold has stalled because of ETFs.
Gold exchange-traded funds act as conduits enabling vast amounts of stock-market capital to slosh into and out of physical gold bullion. These big changes in collective buying or selling really move gold. Since the gold ETFs seek to mirror the underlying gold price, they have to shunt excess ETF-share supply or demand directly into actual gold bars. There’s no other way for gold ETFs to successfully track their metal.
The world’s leading and dominant gold ETF is the venerable American GLD SPDR Gold Shares. Every quarter the World Gold Council also ranks the world’s top-ten gold ETFs. At the end of Q3, GLD alone accounted for a whopping 36.9% of their total gold-bullion holdings! GLD was 3.8x larger than its next biggest competitor, which is the American IAU iShares Gold Trust. GLD is the behemoth of the gold-ETF world.
The supply and demand of GLD shares, and all gold ETFs, are totally independent from underlying gold’s own supply and demand. So when stock investors buy GLD shares faster than gold is being bought, the GLD share price starts decoupling from gold to the upside. That is unacceptable, as GLD would fail its mission to track gold. So GLD’s managers must vent this differential buying pressure directly into gold.
They do this by issuing sufficient new GLD shares to meet the excess demand. All the money raised by these GLD-share sales is then plowed into physical gold bars that very day. This mechanism enables stock-market capital to flow into physical gold. Of course this is a double-edged sword, as excess GLD-share selling pressure forces this ETF to sell real gold bars to raise the capital to buy back its share oversupply.
What American stock investors are doing with GLD shares is the primary driver of gold’s trends! GLD has grown massive since its launch 13 years ago this month, and acts as a direct pipeline into gold for the immense pools of stock-market capital. So nothing is more important for gold prices now than GLD inflows and outflows. These are very transparent, as GLD reports its physical-gold-bullion holdings daily in great detail.
I call stock-market capital inflows into GLD as evidenced by rising holdings builds, and outflows as seen by falling holdings draws. In recent years there have been plenty of quarters where GLD builds and draws accounted for the entire global change in gold demand! That wasn’t the case in Q3 though. While the world gold-ETF demand fell 125.4t YoY, GLD’s holdings were actually up 12.1t in Q3. So gold edged up 1.4%.
But if American stock investors had been buying or selling GLD shares aggressively, gold certainly would’ve risen or fallen accordingly. Gold has been drifting in recent months because GLD’s holdings are flat, with stock investors neither buying nor selling GLD shares at differential rates relative to gold. That’s why gold investment demand has stalled. GLD has grown into the tail that wags the global-gold-price dog!
Amazingly many if not most investors still don’t grasp GLD’s critical role in gold price trends. They attempt to understand today’s gold’s price action in historical pre-gold-ETF-era terms. But for better or for worse, the gold world is radically different now. GLD, and to a lesser extent the other large gold ETFs trading in foreign stock markets, changed everything. Gold investors ignoring GLD’s holdings are flying blind.
This chart drives home this critical point. It superimposes GLD’s daily physical-gold-bullion holdings in blue over the gold price in red. Carved into calendar quarters, gold’s performance in each one is noted above GLD’s quarterly holdings changes in both percentage and absolute terms. The correlation between GLD’s physical-gold-bullion holdings and gold prices is very strong. GLD capital flows explain much for gold.
Rising GLD holdings reveal stock-market capital is flowing into gold bullion via GLD, due to differential GLD-share demand. Conversely falling GLD holdings show stock-market capital coming back out of gold, thanks to differential GLD-share selling. When American stock investors are either buying or selling GLD shares at much-faster rates than gold is moving, their collective capital flows greatly impact its price.
This is readily evident in strategic and tactical terms. GLD’s holdings are highly correlated with gold price levels. American stock investors sold down GLD’s holdings in 2015, and gold fell in lockstep. But that all reversed sharply in early 2016, when stock investors flooded back into GLD which catapulted gold into a new bull. Gold kept surging as long as differential GLD-share demand persisted, then stalled when it abated.
After Trump’s surprise election win a year ago, stock investors dumped GLD shares at dizzying rates and gold plunged. Then since GLD’s holdings have largely drifted sideways on balance this year, so has gold. GLD capital flows and gold prices are joined at the hip. So what American stock investors are doing and likely to do with GLD shares collectively is absolutely critical for gaming where gold is likely heading next.
Thus the key question for gold investors is what motivates American stock investors to buy or sell GLD shares en masse? The answer is simple, stock-market fortunes. Gold is effectively the anti-stock trade since it tends to move counter to stock markets. So gold investment demand via GLD shares surges as stock markets suffer major selloffs, and withers when stock markets rally to lofty euphoria-generating highs.
The entire reason gold investment demand has stalled out in recent months, which has left gold drifting, is the extreme euphoria in US stock markets. Wall Street constantly claims there’s no euphoria, but that’s not true. The words “euphoria” and “mania” are often confused. Mania means “an excessively intense enthusiasm, interest, or desire”. In the stock markets, manias are associated with bubbles at bull-market tops.
Euphoria is a milder term meaning “a strong feeling of happiness, confidence, or well-being”. While the stock markets haven’t rocketed vertical in a mania, there’s no doubt euphoria is extreme. Investors feel happy and confident about stocks after this past year’s incredible Trumphoria rally. Polls now universally show investors are the most confident stocks will keep rallying over the next year since 2000, a bubble peak!
Following gold’s usual summer doldrums, gold investment demand as evidenced by rising GLD holdings was robust until late September. Differential GLD-share demand started petering out as the flagship S&P 500 stock index (SPX) started powering to seemingly-endless new record highs with no meaningful selloffs in between. Gold peaked at $1348 in early September right before the first SPX record close in 5 weeks.
The 43 trading days since then have seen a mind-boggling 23 record stock-market closes! The worst SPX down day in that entire surreal span was merely -0.5%, trivial. The SPX’s VIX implied-volatility fear gauge has averaged just 10.1 since then, exceedingly-low levels betraying extreme complacency. The stock investors as a herd don’t have a care in the world. They are totally convinced stocks can rally indefinitely.
So why bother with gold? Why prudently diversify stock-heavy portfolios with counter-moving gold if the perceived risk of a major stock-market selloff is nil? Investors have little interest in gold when the stock markets are trading near record highs after an exceedingly-long and exceptionally-massive bull. Gold investment demand has always had a strong negative correlation with stock-market fortunes, they are opposed.
That new Q3 GDT from the World Gold Council said overall global gold demand last quarter was actually the weakest since Q3’09. In Q3’17 the SPX powered 4.0% higher, seeing 15 new all-time record closes. Back in Q3’09, the stock markets were also exciting. Coming out of a once-in-a-century stock-panic low, the SPX rocketed 15.0% higher in that single quarter! Exciting stock markets really retard gold demand.
Conversely one of gold’s best global-demand quarters was Q1’16, when stock markets were weak. The SPX suffered two corrections in a row leading into early 2016, after going a near-record 3.6 years without a single one. The first 10 trading days of January that year ignited much fear. In that short span the SPX suffered serious down days of 1.5%, 1.3%, 2.4%, 1.1%, 2.5%, and 2.2%! So gold investment demand exploded.
Gold had been deeply out of favor before that, suffering a 6.1-year secular low in mid-December 2015 just after the Fed’s first rate hike of this cycle. GLD’s holdings slumped to a 7.3-year low of their own that same day. Yet once the stock markets started rolling over, investors were quick to remember gold’s role as the ultimate portfolio diversifier. Total global gold demand rocketed up 17.1% YoY or 185.8t in Q1’16!
American stock investors were overwhelmingly responsible, as GLD’s colossal 176.9t quarterly holdings build accounted for 95.2% of that total jump in world gold demand per the latest WGC data! Gold was catapulted into a new bull market on a mere couple of stock-market corrections. Q2’16 saw this major GLD-share buying momentum continue, with GLD’s 130.8t build alone driving gold’s entire 120.2t world demand growth.
Make no mistake, gold investment demand will explode again and drive gold sharply higher when today’s lofty hyper-complacent bubble-valued stock markets inevitably roll over again. Leading into Q1’16 the SPX corrections were only 12.4% and 13.3%, not serious. Corrections can grow as big as 20% before they become new bear markets. Imagine what an SPX selloff around 20% would do for gold investment demand.
And that’s coming far sooner than most think. Investors as a herd are always wrong at major market turning points. Major bull-market toppings are always marked with extreme euphoria just like today’s. Countless sentiment indicators are showing investors are now the most complacent or most bullish since late 2007 or early 2000. Those were the last bull-market toppings before brutal 49.1% and 56.8% SPX bears!
Stock-market bulls fail once valuations grow excessive. Over the past century and a quarter, the stock markets have averaged a 14x trailing-twelve-month price-to-earnings ratio which is fair value. Twice that at 28x is formally bubble territory, exceedingly dangerous. As October ended, the simple-average TTM P/E of all 500 SPX companies was a terrifying 30.1x! Stock markets can’t trade at bubble valuations for long.
But these super-bearish sentiment and fundamentals pale in comparison to what’s coming from the Fed and European Central Bank in 2018 and 2019. This stock bull grew so monstrous because major central banks were injecting hundreds of billions of dollars a year into markets via quantitative easing, which is a euphemism for money printing. Next year this QE stock-market rocket fuel will slam to a screeching halt.
A couple weeks ago I explained what’s coming in depth in an essay on the Fed and ECB strangling this stock bull. Because of the Fed’s new quantitative tightening reversing its QE, and the ECB just starting to taper its own QE bond buying, 2018 will see these dominant central banks effectively tighten by $950b compared to 2017! Then again in 2019 that will expand to another $1450b of tightening compared to this year.
The QE era that helped levitate stock markets is over, with $2.4t of central-bank liquidity that exists this year vanishing over the next couple years. There’s nothing more ominous for QE-inflated stock markets than the Fed starting to reverse QE through QT and the ECB greatly slowing its own QE. There’s simply no way possible that won’t eventually fuel a major stock-market selloff, a large correction or more likely a new bear.
When these stock markets roll over materially, when investors face a couple weeks of big down days like in January 2016, gold investment demand will explode again. Investors will stampede back to counter-moving gold to stabilize their bleeding stock-heavy portfolios. GLD’s holdings will soar again like they did in the first half of 2016, which catapulted gold 29.9% higher igniting a major new bull. Gold stocks fared far better.
The leading HUI gold-stock index skyrocketed 182.2% higher in essentially the first half of 2016 on that gold rally! When American stock investors aggressively buy GLD shares in response to stock-market selloffs reintroducing fear, gold surges and gold stocks soar. This well-worn pattern will play out again in the next major stock-market selloff. Once differential GLD-share buying resumes, gold is off to the races.
So if you want to understand why gold is doing what it’s doing and where it’s likely heading next, it’s imperative to follow GLD’s holdings. Stock investors’ capital flows into and out of gold via that key ETF conduit have utterly dominated recent years’ gold trends. Quite literally, gold is hostage to stocks! The higher the stock markets, the less gold investment demand. The more they sell off, the more gold demand surges.
With stock euphoria so extreme today after this past year’s incredible Trumphoria rally, gold investors need to focus on the stock markets. As long as stocks remain high which stalls gold investment demand, gold will likely continue to drift on balance. But once stocks sell off long and deep enough to rekindle sufficient fear, gold investment demand will explode again. Big GLD-share buying will catapult gold sharply higher.
Gold and especially its miners’ stocks remain deeply undervalued today due to the extreme stock-market euphoria. But that never lasts. Gold’s bull market will resume with a vengeance once American stock investors get interested in GLD shares again. That should coincide with the coming months’ major winter rally, the strongest seasonal span for gold and its miners’ stocks. Gold miners have enormous upside potential.
The bottom line is gold investment demand has stalled out in recent months, condemning gold to drift sideways. American stock investors in particular aren’t doing any differential GLD-share buying, which is essential to fuel gold uplegs. Mesmerized by the extreme stock-market euphoria, they no longer fear any material stock-market selloff. Thus they feel no need to diversify their portfolios with counter-moving gold.
But this anomaly can’t and won’t last for long. Sooner or later the hard bearish realities of bubble-valued stock markets and looming epic central-bank tightening will shatter today’s hyper-complacency. Then once again vast amounts of stock-market capital will migrate back into gold, catapulting it dramatically higher. As always the prudent contrarians who invest before the herd arrives will reap massive gains. – Adam Hamilton
Gold was once a common form of payment around the developed world, but after World War II the precious metal’s influence began to wane. In 1971, when the United States finally put an end to the gold standard, the role of the yellow metal changed for good. But that doesn’t mean gold is just an antiquated relic or a bad investment; you need to get past such myths about gold to understand its place in the world, and, perhaps, your portfolio. Here are five myths about gold debunked.
There’s no point in trying to prove that gold is money, or that it isn’t. Because, in many ways, the answer is yes — to both. Roughly 9% of the demand for gold in 2016 came from central banks and other financial institutions. Gold bars and gold coins, meanwhile, accounted for another 24% or so of total demand. So roughly a third of gold demand in 2016 came from consumers looking at money-like uses for gold. American Eagles, interestingly enough, are stamped with “face values” that range from $5 to $50.
That said, around 47% of gold demand in 2016 came from jewelry. That’s a huge percentage, and clearly not related to money in any way. Buying a fancy gold necklace might be a way to show how wealthy you are, but you certainly aren’t doing it with the intention of using the necklace as a form of currency. The rest of the demand for gold comes from things like dentistry and technology, which are even further estranged from money.
The real answer here, however, is that it doesn’t matter. You clearly can’t walk into your local grocery store and plunk down gold bullion to pay your bill, or at least I don’t recommend it. Even though American Eagles have a “face value,” they are considered collectibles and are worth far more than the dollar figure stamped on them. At the same time, you can easily exchange gold for dollars. Even a gold necklace can be sold fairly quickly (for the value of the gold at least, if not the full value you paid for it). So gold is more than a collectible, but maybe a little less than a currency.
If gold is only kind of money, why bother owning physical gold at all? The truth is, owning gold can be a real pain in the neck. For example, if you buy a gold coin you’ll likely pay a markup over the value of the metal contained in the coin. If you buy direct from the U.S. Mint the markup helps to pay for the stamping of the coin. If you buy from a dealer, the markup is the dealer’s commission.
Once you have the gold, meanwhile, you have to do something with it. You could stuff it in a drawer, but that seems like a bad call for something that could be worth hundred or thousands of dollars. That might mean you buy a safe or put the coin in a bank safe deposit box. Either way, you are now paying for the privilege of owning the gold you bought. So far, owning physical gold sounds like a bad proposition — unless, of course, something really bad happens.
No, I’m not suggesting the zombie apocalypse, though recent research suggests that around 5% of Americans do actually fear such a thing. But it’s not unrealistic to suggest that a war or other event could materially disrupt the world’s financial systems. War, for instance, is feared by nearly 50% of Americans, while a financial collapse worries about 45% of us. In either case, if fiat currencies like the dollar became worthless, your gold coin would suddenly have a lot more functional value — anywhere in the world.
It doesn’t make sense to have all of your wealth in gold, but it’s probably not a bad idea to consider owning some physical gold or silver. Just in case.
Gold bugs love it (I wonder how many gold bugs believe in zombies?), and others hate it. The problem with gold as an investment, of course, is that it’s a commodity subject to often volatile and extreme price swings. But there’s a limited supply of the metal, and, as noted above, it can be easily exchanged for cash. That makes it a physical store of wealth with a price driven by investor sentiment. Many people attempt to time the ups and downs of gold. Only in this case, fear will usually drive the price of this precious metal higher.
Last time I checked, market timing was hard to do successfully on a consistent basis. And if that’s what you’re looking at gold for, I’d argue it is likely to be an awful investment. But here’s the thing: fear tends to drive people toward safe haven investments that will retain value in a worst-case scenario. That’s gold, in a nutshell. And, thus, gold tends to do well when other assets (like stocks) are doing poorly.
To put a number on that, during the 2007 to 2009 recession, gold ended the period up around 20%. The S&P 500 Index, meanwhile, was lower by about 40%. Clearly, that was a good time to own gold! And for those who don’t recall, there was a real fear at the time that the global financial system was on the verge of collapse.
So, perhaps, the real question isn’t whether or not gold is a good investment, but why you are buying gold in the first place. If you are looking for diversification, or a safe haven, then gold can play a vital role in your portfolio. You should, however, keep the percentage relatively small. On the other hand, if you are trying to time gold’s price swings you’re probably making a mistake.
This is a tough one and, like point number one above, the answer can go either way. If you want to own gold in preparation for a worst case scenario (there go those zombies again), then owning gold will be much better than owning stock in a gold miner. And if all you desire is a safe haven investment, then direct purchases of gold are the purest way to achieve that end.
That said, buying a gold exchange traded fund like iShares Gold Trust (NYSEMKT:IAU) would achieve a similar end. This fund’s portfolio consists of gold bars held in London, New York, and Toronto. Thus the fund’s performance generally tracks gold and allows you to avoid the problems of owning physical gold while still getting most of the benefits.
Owning gold miners, however, is a little different. In this case you own a company, such as industry giants Barrick Gold, Goldcorp, and Newmont Mining. Since what these companies do is mine for, process, and sell gold, their performance tends to track along with the price of the precious metal. And, along the way, each of these companies pays you a dividend. The yields today are modest, all under 1%, but that’s much better than what you’ll get with physical gold or iShares Gold Trust.
The problem here is that you are subject to the inherent risks of miners. Rising costs can reduce earnings and push down financial results. Meanwhile, aging mines can lead to falling production over time, and new mine developments can prove to be expensive mistakes. There are other problems that might arise, too, but you get the idea. When you buy a gold miner you own a company, and companies can make mistakes.
On the flip side, the shares of gold miners can sometimes move more dramatically than the precious metal itself. That’s particularly true for smaller miners and marginal miners that need high prices to turn a profit. Sometimes a mining stock can double and triple in value when gold goes up much less. Of course, what goes up can also go down, so there are risks here, too. But if you are looking to leverage yourself to gold, then miners are a good bet.
So owning gold versus owning gold miners is, once again, really a question about your goals.
Please don’t make the mistake of stopping your search for a gold investment at physical gold (or gold ETFs) and gold miners. There’s one more option you should get to know before you decide how you want to own gold: streaming companies. Some of the biggest names here are Franco-Nevada Corp (NYSE:FNV), Wheaton Precious Metals Corp (NYSE:WPM), and Royal Gold, Inc (NASDAQ:RGLD).
Streaming companies provide cash up front to miners in exchange for the right to buy precious metals in the future at contractually reduced rates. To give you an idea of what that means, Wheaton Precious Metals’ average price for gold is around $400 an ounce — well below current spot prices. The business model affords these companies wide margins even when precious metals prices are low and miners are struggling. In fact, during commodity downturns streaming companies can take advantage of miners in need of cash to ink advantageous streaming deals.
All three pay dividends, with current yields between 1% and 2%. Wheaton’s dividend is tied to the company’s performance, so it will go up and down over time. Royal Gold and Franco-Nevada, however, both have long histories of regular annual dividend increases.
It’s also important to note that these companies aren’t reliant on one or two big mines (like a miner might be); they have investments in a collection of different assets, including operating mines and mines in some phase of development. Franco-Nevada, for example, has its fingers in over 300 assets. So streaming companies are probably best looked at as specialty finance companies with diverse mine investment portfolios.
In many ways, they are a better long-term option than miners. However, they don’t tend to have as much leverage to gold prices. But if you are looking for a gold investment for diversification, they might end up being the best combination of gold exposure, dividends, liquidity, and ease of use. If you are looking at gold, you should take some time to get to know streaming companies like Franco-Nevada, Wheaton Precious Metals, and Royal Gold.
In the end, how you own gold is up to you and related to your personal goals. But once you get past these five myths, you’ll be able to make more informed decisions about the precious metal and its place in your life and, perhaps, in your portfolio. – Reuben Gregg Brewer
While it is widely believed that commodities are one of the few “undervalued” sectors, sustained rallies have been hard to find over the past few years. Could all that be finally beginning to change?
The key to any commodity rally is weakness in the US dollar. Most commodities trade in dollar terms so a rising dollar generally puts pressure on the sector. In contrast, a falling dollar is usually good for the sector. As you can see in the chart below, the general trend since 2015 has been a flat to falling US dollar as measures by the Dollar Index:
It could be argued that the two most globally-important commodities are copper and crude oil. Let’s start with copper where, for the past year or so, we’ve been following a growing bottom and breakout on the chart. Does this look to you like a bear market or a reversal and switch to a new bull market, instead?
And now look at WTI crude oil. Note the similar chart pattern to copper. Could a move into the $60s be construed as a breakout and renewed bull market after a three-year bottoming process?
With dynamic rallies already underway in other commodities such as zinc and palladium, the question becomes…Are we in the early stages of a renewed bull market for commodities, in general? On the chart below of the the Continuous Commodity Index, you can see the possible beginnings of a turnaround.
What might this mean for silver which, despite its long history as a monetary metal, is now currently perceived primarily as an industrial metal and considered a “commodity”? If we view Comex silver through the same five-year lens, we note a reverse head-and-shoulder bottom, similar to those seen on the charts of copper and crude. However, we also note that unlike copper and crude, silver has yet to begin a rally of any consequence.
What to make of all this? Actually, it seems rather simple. Should the commodity rally continue, it will begin to take on a life of its own, with global money managers and asset allocators recognizing the new bull market and creating a virtuous cycle of higher prices through their inflows of cash to the “undervalued” sector. In this case, copper will move higher and toward $4.00 while crude oil breaks through $60 and heads toward $80.
If this happens, we could imply a price of silver that easily reaches the mid-to-upper $20s sometime in 2018. Is this possible or would/will The Banks be able to keep their collective thumbs on the price? Your answer to that question will depend upon the size and scale of the cash flow into the sector.
So again, it may be rather simple. Resolution of this will be a function of the dollar, copper and crude. Forecast those three for 2018 and you’ll likely be able to correctly forecast the price of silver, too. – Craig Hemke
ElliottWave-Forecast: Commodities have been in an All-time correction since they peaked in 2011 and they can be showing the next good Long-term Trading or an Investing opportunity across the Market. Commodities like Silver and Gold have always represented value and we cannot expect that value to disappear all of a sudden. Silver is a very interesting instrument because together with Oil, they have shown the biggest devaluation against the US Dollar and consequently will represent the biggest opportunity. The Following chart represent the all time cycle in Silver and also the stage within the correction which is showing the extreme area and off course the Invalidation level in the Yearly cycle. As we can see the Instrument has dropped back almost to the 76.4% of the all time rally and has entered a buying area.
The whole group has declined since the peak in 2011 but what makes Silver the best opportunity is the degree and how deep the decline has been, chart below shows Gold chart from all time lows, we can see the decline in Gold has not been so deep, making Silver a better long term investment opportunity.
There are many Fundamental reasons to justify the decline but the production numbers is the simplest way to understand a deep decline. The higher the production of Silver, there will be higher stockpiles in the Market and consequently the price will drop. According to the Silver Institute the Silver Production slowed down in 2016 and consequently the Instrument is creating a base in price.
The following charts show the break down in production and the breakdown by county
The $SPX Index has reached the Blue Box which highlights an extreme area from the all time low, but many other World Indices have still not reached the same degree area. The idea is that $SPX is at levels at which Silver was in 2011 extreme and while it stays below 3196, a multi-year correction could unfold. Above 3196 would suggest the next big pull back would only correct the cycle from 2009 low before another leg higher. Even then a multi-year correction should be seen before the next leg higher in the Index.
Silver will be sideways and even when it can make a new marginal low in the Weekly chart, it has already reached the target within the pull back. The reason why the Instrument can be sideways is due to the fact that most of the World Indices have not yet ended the all time cycles and they seem to have more upside. We believe in the idea that when the World Indices end the cycle from all time lows, they will enter in a multi year correction similar to the one that happened from 2000 through 2009 and that will be the moment when Silver and all commodities will enter a multi year cycle higher which will have scope to drive Silver prices above the $60.00 level. Buying the Instrument this low represents a great long term opportunities not only to buy commodities, but also a chance to pick the top in World Indices. The following chart represents the overlay of Silver and $SPX and we can see what happened between the year 2000-2009 and how since the peak in 2011 $SPX has been trading higher and Silver lower.
Sometimes trades need to understand the Market acts as a whole and this previous chart shows a smart way to pick the top in World Indices instead of trying to sell any new high. Our advice is to trade smart and understand the concept of one Market and be able to catch the Big Short in Indices without actually selling the Indices.
The online search phrase “buy bitcoin” is now more popular than “buy gold,” according to the latest data from Google Trends.
The tide began to change in favor of bitcoin only in the spring of this year, with “buy gold” search phrase completely dominating the field prior to that.
On average, gold still wins out in 2017, but this might not be for long, as shown on the Google Trends chart.
Gold prices have had a good year so far, up about 11%. The month of September was the main highlight, with the yellow metal reaching a one-year high, but then retreating below $1,300. December Comex gold was last seen trading at $1,277.20, up 0.11% on the day.
Kitco’s senior technical analyst, Jim Wyckoff, points to higher U.S. dollar as one of the main elements keeping gold prices restrained. On Tuesday, the U.S. dollar index touched a 5.5-month high and then declined to $94.81.
“Gold bulls’ next upside near-term price breakout objective is to produce a close above solid technical resistance at $1,300.00. Bears’ next near-term downside price breakout objective is pushing prices below solid technical support at the October low of $1,262.80,” Wyckoff said in his PM Roundup.
Gold will need some sort of additional geopolitical risk in order to break out of its current range, said Peter Hug, global trading director of Kitco Metals.
“Unless President’s Trump visit to South Korea today creates some geopolitical noise or a reversal of fortune hits the equity markets, there is very little in the way of catalysts to push gold above the $1,282 level,” Hug said.
Bitcoin, on the other hand, surged more than sevenfold in 2017, breaking all imaginable records, including the $5,000, $6,000 and even $7,000 levels for the very first time.
Over the weekend, the popular digital currency hit a new all-time high of $7,598, but was not able to hold onto gains and dropped down to $7089.20 on Tuesday.
Some analysts worry that this kind of price moves cannot be sustained for too long, warning of a bubble and cautioning investors not to buy bitcoin if it jumps above $8,000.
In a note published on Sunday, Goldman Sachs said that even though bitcoin could potentially hit the $8,000 level, it could be its last high, at least for a while.
“The market has shown evidence of an impulsive rally since breaking above [$]6,044,” Sheba Jafari, Goldman’s technical analyst, said in a note. “Next in focus [$]7,941. Might consolidate there before continuing higher.” – Anna Golubova
With investors searching far and wide for positive market gains, one portfolio manager is “puzzled,” as to why gold continues to be ignored and shunned.
Trey Reik, senior portfolio manager at Sprott Asset Management, noted that gold has had an impressive run since 2001, significantly outperforming the S&P 500.
“Gold has generated positive annual returns in 14 of the past 17 years. What is even more impressive is gold’s performance compared to the S&P 500 Index…,” he said in a report Tuesday. “Gold’s compound annual growth rate (CAGR) for the 16.75 years (2001 to 9/30/17) stands at 9.68% versus 6.01% for the S&P 500 Index (dividends reinvested).”
With equity valuations stretched near record levels, Reik said that the argument to include gold in a balanced portfolio is stronger than ever. He added that during the dotcom crash between 2000 and 2002 and the financial crisis from 2007 and 2008, the S&P corrected more than 50%, and gold provided “unrivaled protection” for investors.
“We are aware of no reasoning to suggest gold’s portfolio-protection benefits will prove any less potent during the next correction in U.S. equities,” he said. “Gold has done a masterful job of insulating portfolio capital from sharp declines in U.S. equities during the past three decades of financial crises.”
One of the reasons why gold has been a safe-haven during turbulent times is the fact that it has a low correlation with other traditional asset classes, said Reik. He added that the precious metal also holds its own against high-profile alternative indexes.
The question now remains: how does an investor incorporate gold in their portfolio. Reik said that through their research, the recommended allocation is between 2% and 9%.
“Broadly speaking, the higher the risk in the portfolio, whether in terms of volatility, illiquidity or concentration, the larger will be the modeled gold allocation to offset that risk,” he said.
Reik’s comments come as gold struggled to break out of a two-week trading channel as prices hovered below the key psychological level at $1,300 an ounce. December gold futures last traded at $1,276.20 an ounce, down 0.43% on the day. – Neils Christensen
Why have stock prices risen so dramatically since the last financial crisis? There are certainly many factors involved, but the primary one is the fact that the Federal Reserve has been creating trillions of dollars out of thin air and has been injecting all of that hot money into the financial markets. But now the Federal Reserve is starting to reverse course, and this has got to be the greatest sell signal for financial markets in modern American history. Without the artificial support of the Federal Reserve and other global central banks, there is no possible way that the massively inflated asset prices that we are witnessing right now can continue.
The chart below comes from Sven Henrich, and it does a great job of demonstrating the relationship between the Fed’s quantitative easing program and the rise in stock prices. During the last financial crisis the Fed began to dramatically increase the size of our money supply, and they kept on doing it all the way through the end of October 2017…
Unfortunately for stock market traders, the Federal Reserve has now decided to change course, and that means that the process that has created these ridiculous stock prices is beginning to go in reverse. In fact, according to Wolf Richter this reversal just started to go into motion within the past few days…
On October 31, $8.5 billion of Treasuries that the Fed had been holding matured. If the Fed stuck to its announcement, it would have reinvested $2.5 billion and let $6 billion (the cap for the month of October) “roll off.” The amount of Treasuries on the balance sheet should then have decreased by $6 billion.
And that’s what happened. This chart of the Fed’s Treasury holdings shows that the balance dropped by $5.9 billion, from an all-time record 2,465.7 billion on October 25 to $2,459.8 billion on November 1, the lowest since April 15, 2015
Does anyone out there actually believe that the immensely bloated balance sheet that the Fed has accumulated can be unwound without having an enormous negative impact on Wall Street?
And even more frightening is the fact that central banks all over the planet appear to be acting in coordinated fashion. I really like how Brandon Smith made this point…
An observant person, however, might have noticed that central banks around the world seem to be acting in a coordinated fashion to remove stimulus support from markets and raise interest rates, cutting off supply lines of easy money that have long been a crutch for our crippled economy. The Bank of England raised rates this past week, as the Federal Reserve indicated yet another rate hike in December. The Europeans Central Bank continues to prep the public for coming rate hikes, while the Bank of Japan has assured the public that “inflation” expectations have been met and no new stimulus is necessary. If all of this appears coordinated, that is because it is.
When interest rates are low and central banks are injecting money directly into the financial system, that tends to promote economic activity.
But when they raise interest rates and pull money out of the financial system, the exact opposite is true.
At this point Americans are more optimistic about the stock market than they have ever been before, and it is at this exact moment that the Fed is pulling the financial markets off of life support.
And it isn’t as if the “real economy” ever recovered in any meaningful way. Most American families are still living paycheck to paycheck, and a new economic crisis would push millions more out of the middle class.
For a long time I have been warning that the only reason why stock prices ever got this high was because of the central banks, and I have also been warning that they could crash the markets if they wanted to do so.
Hopefully there is nothing nefarious going on, but I do find it very strange that all of the major global central banks are moving toward tightening at the exact same time.
If things go south for the global economy in the months ahead, we will know exactly where to point the blame… – Michael Snyder
John Hussman: Market valuations, on these measures, presently approach or exceed the 1929 and 2000 extremes, placing U.S. equity market valuations at the most offensive levels in history.
Indeed, with median valuations on these measures now more than 2.7 times their historical norms, there is strong reason to expect a market loss on the order of -63% over the completion of the current market cycle; a decline that would not even bring valuations below their historical norms (which we’ve typically seen by the completion of nearly every market cycle outside of the 2002 low).
“…unlike the 2000 valuation extreme, which was largely focused on a subset of extremely overvalued technology stocks, the current market extreme is the broadest episode of extreme equity market overvaluation in history. The chart below shows the median price/revenue ratio of S&P 500 component stocks, which set yet another record high in the week ended November 3, 2017, and now stands more than 50% above the 2000 extreme.”
The following chart below shows our Margin-Adjusted CAPE as of November 3, 2017.
On this measure, market valuations are now more extreme than at any point in history, including the 1929 and 2000 market highs.
Finally Hussman reminds the complacent majority of how this well end:
The final chart is a reminder of how these speculative episodes end.
In 2000, most deciles experienced losses on the order of 30-50%, with the exception of the hypervalued top decile represented, at the time, by technology stocks.
In March 2000, I wrote: “Over time, price/revenue ratios come back in line. Currently, that would require an 83% plunge in tech stocks (recall the 1969-70 tech massacre). If you understand values and market history, you know we’re not joking.”
While it feels like it at the moment, trees can’t grow to the sky, but as Hussman concludes, it’s clear from market internals that investors again have the speculative bit in their teeth.
What’s important, however, is to distinguish near-term speculative outcomes from longer-term investment outcomes.
If history is any guide, the first leg down from the current speculative blowoff is likely to be abrupt and rather vertical.Investors will be tempted to buy into that decline, and may very well be rewarded for it over the shorter-run. The problem is that while investors are reluctant to sell into strength here, they may also have no tolerance for selling into a market loss once internals break down. Instead, they will likely pass up their opportunity to reduce exposure to market losses even after market internals deteriorate clearly.
After that, the intermittent hope from fast, furious (but ultimately failing) rallies will likely encourage them to hold on all the way into a deep market collapse. That’s how severe market declines unfold.