Commodity Trade Mantra
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Silver – Undoubtedly the Best Bet for the Top Performer in 2018

Silver - Undoubtedly the Best Bet for the Top Performer in 2018

Silver is Ripe for a Major Upside Breakout in 2018

The Roman Republic and the later Roman Empire had gold coins called the aureus and solidus, but they also minted a popular silver coin called the denarius. One denarius was the daily wage for unskilled labor and Roman soldiers.

Of course, in the late Empire, the aureus, solidus and denarius were all debased by mixing the gold and silver with base metals. The decline of the Roman Empire went hand in hand with the decline of sound money.

In the early ninth century AD, Charlemagne greatly expanded silver coinage to compensate for a shortage of gold. This was successful in stimulating the economy of the predecessor of the Holy Roman Empire. In a sense, Charlemagne was the inventor of quantitative easing over 1,000 years ago. Silver was his preferred form of money.

Under the U.S. Coinage Act of 1792, both gold and silver coins were legal tender in the U.S. From 1794 to 1935, the U.S. Mint issued “silver dollars” in various designs. These were widely circulated and used as money by everyday Americans. The American dollar was legally defined as one ounce of silver.

The American silver dollar of the late eighteenth century was a copy of the earlier Spanish Real de a ocho minted by the Spanish Empire beginning in the late sixteenth century. The English name for the Spanish coin was the “piece of eight,” (ocho is the Spanish world for “eight”) because the coin could easily be divided into one-eighth pieces.

Until 2001 stock prices on the New York Stock Exchange were quoted in eighths and sixteenths based on the original Spanish silver coin and its one-eight sections.

Until 1935 U.S. silver coins were 90% pure silver with 10% copper alloy added for durability. After the U.S. Coinage Act of 1965, the silver content of half-dollars, quarters and dimes was reduced from 90% to 40% due to rising price of silver and hoarding by citizens who prized the valuable silver content of the older coins.

The new law signed by President Johnson in 1965 marked the end of true silver coinage by the U.S. Other legislation in 1968 ended the redeemability of old “silver certificates” (paper Treasury notes) for silver bullion.

Thereafter, U.S. coinage consisted of base metals and paper money that was not convertible into silver; (gold convertibility had already ended in 1933).

Let’s hope that the U.S. is not following in the footsteps of the Roman Empire in terms of a political decline coinciding with the substitution of base metals for true gold and silver coinage.

In 1986, the U.S. reintroduced silver coinage with a .999 pure silver one-ounce coin called the American Silver Eagle. However, this is not legal tender although it does carry a “one dollar” face value. The silver eagle is a bullion coin prized by investors and collectors for its silver content. But it is not money.

Who in their right mind would pay a full ounce of silver for goods or services worth only a buck?

In short, silver is as much a monetary metal as gold, and has just as good a pedigree when it comes to use in coinage. Silver has supported the economies of empires, kingdoms and nation states throughout history.

It should come as no surprise that percentage increases and decreases in silver and gold prices denominated in dollars are closely correlated.

Silver is more volatile than gold and is more difficult to analyze because it has far more industrial applications than gold. Silver is useful in engines, electronics and coatings.

Interestingly, gold is used very little other than as money in bullion form. Gold has some highly specialized uses for coating and ultra-thin wires, but these are a very small part of the gold market.

Both gold and silver are used extensively in jewelry. I consider jewelry to be “wearable wealth” and akin to bullion rather than a separate market segment.

Because silver has more industrial uses than gold, the price can rise or fall based on the business cycle independent of monetary considerations. However, over long periods of time, monetary and bullion aspects tend to dominate industrial uses and silver closely tracks its close cousin gold in dollar terms.

While gold and silver prices have a high correlation, the correlation is not perfect. There are times where gold outperforms silver and vice versa. Right now we are in a sweet spot for silver.

Gold is performing well, and silver is performing even better!

The latest data is telling me that silver prices are set to rally. This conclusion is based in part on a bull market thesis for gold.

Gold staged an historic rally from 1999 to 2011, from about $250 per ounce to $1,900 per ounce, a gain of about 900% in that twelve-year span. Since then, gold prices fell in a 50% retracement (using the 1999 base) and bottomed at around $1,050 per ounce in December 2015.

Secular bull and bear market tops and bottoms are difficult to see in real time, but they become apparent with hindsight. Gold gained over 23% in 2016-2017. From the perspective of early 2018, it is clear than the gold bear market ended over two years ago and a new multi-year secular bull market has begun.

Silver is not only along for the ride, it is showing even better performance than gold, albeit with greater volatility. Both the gold and silver rallies are based on a combination of supply/demand fundamentals, geopolitical pressures creating safe haven demand, and increasing inflation expectations as confidence in central banking and fiat money erodes.

In addition, silver has an excellent technical set-up right now. Precious metals analyst Samson Li writing in Thomson Reuters on January 2, 2018 offers this insight in the current technical trading position for silver:

Technically, silver is ripe for a major breakout to the upside in 2018. The CFTC figures Managed Money positions show that COMEX silver has been in a net short for three straight weeks since 12th December. This is not unheard of but is relatively rare for silver; the last time COMEX silver was net short was between the end of June and the first week of August 2015. As investment sentiment can swing from one extreme to another, and given silver’s innate volatility, this net short position should point to the possibility of a sharp short-covering rally. Looking back at the corresponding period in 2015, silver price was trading at $15.61/oz on the 7th July, and it was the third consecutive week recording a net short position. Approximately a year later, silver was trading over $20/oz in July 2016… [T]he current poor sentiment does suggest that silver could be one of the better performing precious metals in 2018, barring any crisis that could trump most of the commodities but gold.

The good news is that this secular rally in silver is in its early days. Recent gains will be sustained and amplified in the months and years to come.

Silver will outperform gold in the short-run, and shares in well-managed silver mining companies will do even better than silver. – Jim Rickards

 

What Is In Store For The Commodity Markets In 2018?

What Is In Store For The Commodity Markets In 2018?

What Is In Store For The Commodity Markets In 2018?

At the beginning of every year, we update what’s typically one of our most popular pages, the Periodic Table of Commodity Returns. I encourage you to explore 10 years’ worth of data on basic materials such as aluminum, zinc and everything in between. A word of warning, though—the interactive feature makes the table highly addictive. Please feel free to share it with friends and family!

best of the year top 5 frank talk posts of 2017

It was a photo finish for commodity markets in 2017. The group, as measured by the Bloomberg Commodity Index, barely eked out a win for the second straight year, edging up 0.7 percent. Spurred by a weaker U.S. dollar and strengthening materials demand from factories, the index headed higher thanks to a breathtaking rally late in the year that lasted a record 14 consecutive days.

The annual return might not look too impressive, but I believe the economic conditions are ripe for a broad commodities rally in 2018. I’m not alone in predicting they’ll be among the best performing asset classes by year end, perhaps even beating domestic equities as quantitative tightening threatens to put a damper on the nine-year bull run.

Analysts at Goldman Sachs, for instance, are overly bullish on commodities, recommending an overweight position for the next 12 months. Bank of America Merrill Lynch is calling for a $7,700-a-tonne copper price target by mid-2018, up from $7,140 today. In today’s technical market outlook, Bloomberg Intelligence commodity strategist Mike McGlone writes that the “technical setup for metals is similar to the early days of the 2002-08 bull market.” Hedge fund managers are currently building never-before-seen long positions in heating oil and Brent crude oil, which broke above $70 a barrel in intraday trading Thursday for the first time since December 2014. It’s now up close to 160 percent since its recent low of $27 a barrel at the beginning of 2016.

Few have taken such a bullish position, though, as billionaire founder of DoubleLine Capital Jeffrey Gundlach, whose thoughts are always worth considering.

Commodities Ready for Mean Reversion?

Last month I shared with you a chart, courtesy of DoubleLine, that makes the case we could be entering an attractive entry point for commodity markets, based on previous booms and busts. The S&P GSCI Total Return Index-to-S&P 500 Index ratio is now at its lowest point since the dotcom bubble, meaning commodities and mining companies are highly undervalued relative to large-cap stocks. We could see mean reversion begin to happen as soon as this year, triggering a commodities super-cycle the likes of which we haven’t seen since the 2000s.

the new periodic table of commodity returns 2017

Gundlach has more to say on this subject. During his annual “Just Markets” webcast this week, he told investors that “commodities will outperform in 2018” because they “always rally sharply—much more sharply than they have so far—late in the business cycle as we head into a recession.”

Speaking to CNBC, he added that the S&P 500 “may go up 15 percent in the first part of the year, but I believe, when it falls, it will wipe out the entire gain of the first part of the year with a negative sign in front of it.”

Gundlach might be in the minority here, but it’s hard to ignore the tell-tale signs that we’re approaching the end of the business cycle, as I’ve pointed out before. We’ve begun a new interest rate hike cycle, both here in the U.S. and the United Kingdom. The Federal Reserve has started to unwind its massive balance sheet. The Treasury yield curve continues to flatten. And the S&P 500 just had its least volatile year on record.

All of these indicators, among others, have historically preceded a substantial market correction.

In his 2018 outlook, David Rosenberg, chief economist and strategist at Canadian wealth management firm Gluskin Sheff, makes similar observations, writing that “it is safe to say that we are pretty late in the game.”

How late? After looking at a number of market and macro variables, Rosenberg and his team concluded that we’re about “90 percent through, which means we are somewhere past the seventh inning stretch in baseball parlance but not yet at the bottom of the ninth.”

Look for mean reversion this year, Rosenberg adds, “which would be a good thing in terms of opening up some buying opportunities.”

Resource stocks, I believe, could be an attractive place to look, as they’ve traditionally outperformed in the last phase of an economic cycle.

Manufacturing and Construction Booms Underway

You don’t have to bet on a recession to be bullish on commodities. The dollar appears to have peaked, making materials less expensive for overseas markets, and the Global Manufacturing Purchasing Manager’s Index (PMI) ended 2017 at 54.5, close to a seven-year high. The sector has been in expansion mode now for the past 22 months, with the eurozone signaling its fastest growth in the series’ two-decade history.

Global PMI Ended 2017 at Near Seven-Year High

That’s not the only constructive news out of Europe. The European Commission’s headline economic sentiment indicator jumped more than economists had anticipated in December, ending the year at a 17-year high. Construction confidence in the eurozone also looks as if it’s fully recovered and is trending in positive territory for the first time since the financial crisis.

Strong eurozone economy a tailwind for commodities demand (Dec. 1997 - Dec. 2017)

Strong manufacturing and construction expansion here in the U.S. is likewise supportive of commodity prices. December’s ISM Manufacturing PMI clocked in at a historically high 59.7. New orders grew 5.4 percent from the precious month to 59.4, its highest reading since January 2004. What’s more, U.S. construction spending in November rose to an all-time high of $1.257 trillion, according to this month’s report from the Census Bureau.

Strong eurozone economy a tailwind for commodities demand (Dec. 1997 - Dec. 2017)

Which Commodities Are Set to Rally the Most?

Palladium was the best performing commodity of 2017, climbing more than 56 percent on a weaker dollar, concerns of a supply crunch and a robust global auto market. Along with its sister metal, platinum, palladium is used primarily in the production of catalytic converters, which curb emissions from gasoline-powered vehicles.

For the first time since 2001, palladium traded higher than platinum beginning in September, and last week it hit an all-time intraday high of $1,099 an ounce. A healthy correction at this point wouldn’t be surprising, as the metal’s looking overbought compared to platinum.

Palladium looks overheated compared to platinum

“Pressured by diesel-emission scandals, platinum appears too low vs. palladium,” writes Bloomberg’s Mike McGlone. We might be in for another price reversal this year.

As I wrote last week, gold’s Fear Trade growth drivers are firmly in place. If a “Fed rally” occurs similar to the past two rallies, we could see gold climb to as high as $1,500 an ounce by summer. We also have the Chinese New Year to look forward to, which falls on February 16.

I believe 2018 could also be silver’s year to shine. The white metal rose 6.42 percent in 2017, with Indian silver bullion imports jumping an amazing 90 percent compared to imports the previous year, according to Metals Focus. Goldman Sachs analysts point out that silver has historically fared better than gold near the end of the business cycle, “as it is more strongly leveraged to global growth, given its significant industry use.”

A recent online survey conducted by Kitco News found that nearly 40 percent of respondents believed silver would outperform in 2018, compared to four other metals. Twenty-seven percent of readers said gold would outperform, followed by a quarter for copper. About 10 percent were most bullish on either platinum or palladium. – Frank Holmes

 

Epic Rise in Silver Prices Unavoidable & Close-by Simply on this One Major Factor

Epic Rise in Silver Prices Unavoidable & Close-by Simply on this One Major Factor

Epic Rise in Silver Prices is Simply Unavoidable

In the annals of silver in the modern age, there have been two well-known instances of very large investor accumulations of the metal. First came the purchase by the Hunt Brothers and their associates in early 1980, followed by the purchase by Warren Buffett’s Berkshire Hathaway, 17 years later. The Hunts were said to control around 100 million ounces of actual metal (plus another 100 million ounces in long paper futures contracts), while Berkshire held as many as 129 million ounces.

Now there is compelling evidence of a third great investment accumulation of physical silver by none other than JPMorgan, one of the most powerful and connected banks in the world. This accumulation can be dated from the price peak of April 2011, after silver began what is now a near seven-year price decline. From zero in April 2011, the amount of silver in the JPMorgan COMEX warehouse has increased to 120 million ounces. Just about every ounce moved into the JPMorgan COMEX warehouse over the past 7 years has come from futures deliveries stopped (taken) by JPM in its own name. JPMorgan took delivery of 14 million ounces in December and so far, 13 million ounces have remained in the warehouses from which the metal was delivered. So this means that JPMorgan now holds more than 133 million ounces of silver in COMEX warehouses, or more than was held by the Hunt Bros or by Berkshire Hathaway at their peaks. There was a lot more silver in the world in 1980 and 1998 than there is today, meaning that JPMorgan’s accumulation is much more of an accomplishment than previous silver acquisitions.

JPMorgan’s COMEX warehouse silver holdings are only the tip of the iceberg. Beneath the surface, the true extent of JPMorgan’s physical silver accumulation is nothing short of mind-boggling. All told, including the verifiable 133 million ounces held in its own and other COMEX warehouses, JPMorgan holds at least 675 million ounces of actual silver. Simply put, JPMorgan has acquired six times as much metal as bought by the Hunts or Berkshire Hathaway. How is it possible that JPMorgan, could acquire such a massive quantity of physical silver, with no general awareness that it was doing so? More importantly, how did they do it while silver prices steadily declined over the entire time of JPM’s accumulation?

Common sense would dictate that such a large acquisition as JPM’s 675 million ounces (nearly 45% of the 1.5 billion ounces of silver bullion in the form of industry standard 1,000 ounces bars in the world), could not be bought by any entity without driving prices sharply higher. So how could JPMorgan do so without it being noticed and without driving silver prices sharply higher? The answer is that in addition to being the biggest physical silver accumulator in history, JPMorgan has simultaneously been the largest short seller in COMEX silver futures for the entire time since it acquired Bear Stearns in early 2008. JPMorgan has pulled off something that couldn’t possibly be replicated not just in silver but in any other world commodity. Never again will any one entity be able to accumulate 45% of the world’s supply of a commodity. JPMorgan’s accumulation is more bullish on silver than any other single consideration by a factor of 1,000.

How legitimate is it that a large financial entity could sell short massive quantities of paper derivatives contracts which result in lower silver prices, and then use those lower prices to accumulate silver on the cheap? It couldn’t possibly be legitimate and that makes JPMorgan a market crook and manipulator. It also makes the federal regulator, the CFTC, and the self-regulating CME Group, incompetent, corrupt, or both. This takes a special kind of market manipulator, one most likely operating under some type of agreement with the regulators.

As I have explained in past articles, 150 million ounces of silver was acquired by JPMorgan through buying 100 million Silver Eagles from the U.S. Mint, plus another 50 million Silver Maple Leafs from the Royal Canadian Mint. All these coins were melted into industry standard 1,000 ounce bars since as there’s no way anyone to unload 150 million Silver Eagles and Maple Leafs. In 2013 record sales of these silver coins conflicted strongly with reports from retail dealers of weak demand. By process of elimination, if it wasn’t the guy on the street buying all these coins, it had to be someone big. Based upon a variety of other supporting evidence that JPMorgan was the absolute king of the silver market, the most plausible explanation was that JPMorgan was Mr. Big when it came to buying Eagles and Maple Leafs. JPMorgan’s cessation in buying these coins a year or so ago is the only explanation for why sales then fell off a cliff. JPM controlled the price at which the mints sold and JPMorgan bought. It was a particularly clever and deceitful means by which JPM acquired 150 million ounces of silver at give-away prices.

At the exact time that silver prices topped out in April of 2011, JPMorgan opened its COMEX silver warehouse and began its epic accumulation of silver. Another almost impossible to explain phenomenon started then and continues to this day – an unusually large and persistent physical movement of silver brought into and taken out from the COMEX silver warehouses. Over the past near 7 years, there has been an average weekly movement of around 4.5 million ounces of physical silver turning over in the COMEX silver warehouses, far higher than ever before. In total, some 1.4 billion ounces of physical silver were moved in and out of the COMEX warehouses. This physical movement of silver in the COMEX warehouses is highly unique to silver, as no other commodity has seen any unusual turnover in exchange-approved warehouse inventories – just COMEX silver. I believe this unusual turnover was created by JPMorgan gobbling up all available silver in industry standard 1,000 ounce bars. JPM has been able to “skim off” 150 to 200 million ounces, which when combined with the 150 million ounces that JPM accumulated in mint-issued coins, brings to 300 to 350 million ounces of the 550 million ounces JPMorgan holds outside its COMEX warehouse holdings.

However, the main means by which JPMorgan has accumulated its massive hoard of physical silver is by continuously converting shares of the big silver ETF, SLV, into metal.  All told, JPMorgan has acquired 250 to 300 million ounces of physical silver by this means. By converting shares of SLV into physical silver bullion, a large buyer can convert shares of SLV, (ownership of shares must be publicly-reported at certain SEC-mandated thresholds), into physical metal with no disclosure reporting requirements. It is the perfect means for someone big to acquire significant quantities of physical silver on the sly and no entity in the world is more qualified to do this than JPMorgan. That’s because JPMorgan is not only the largest Authorized Participant (market maker) in SLV, it is also the sole official custodian, which means it is in charge of all physical metal that moves in and out of the trust. Any time you see what looks like a highly counterintuitive redemption of metal from the SLV on rising silver prices, which has happened quite frequently over the past 7 years, dollars to donuts it is the handiwork of JPMorgan converting shares to metal.

With the publically disclosed 133 million ounces JPM holds in the COMEX warehouses, JPM’s total holdings are 675 million ounces at a minimum. For those who would contend that JPMorgan would have to report such holdings publicly, I say poppycock – JPMorgan reports what it wants to report and its vast army of accountants, lawyers and lobbyists are the main parties which determine what has to be reported publicly. Truth be told, JPMorgan could own a fleet of aircraft carriers and keep them off its public reporting books, if it so desired. Who would stop them? The CFTC? That JPMorgan has accumulated at least 675 million ounces of silver appears clear to me. More to the point is what JPMorgan intends to do with its epic physical silver holdings. The bank has maintained its death-grip on lower silver prices for so long it feels like it will do so forever.

However, I remain convinced that JPMorgan has the same intent as did the two previous great physical accumulators of investment silver, the Hunt Bros. and Warren Buffet. That intent is to sell at as large a profit as possible. No one buys any investment asset with the intention of losing money, least of all JPMorgan. They didn’t spend the last seven years accumulating physical silver to sell that silver at anything but the highest price possible. I can’t tell you when JPM will let silver prices fly, but I am certain that that day is coming. And considering the means and deception with which it has accumulated the physical silver it holds, watching JPMorgan distribute its holdings at the highest prices it can attain will be one for the history books. That’s what these guys do for a living.

Given the clear evidence of the historic and epic accumulation by JPMorgan of physical silver in amounts so massive, it’s near impossible to rule out an upside surprise in silver prices at any moment. That certainly includes a possible double cross by JPMorgan of its fellow big silver shorts. An email exchange with a subscriber this week prompted me to think back to the time when JPMorgan acquired Bear Stearns nearly ten years ago. Looking back over what has transpired since then, it’s now very easy for me to imagine JPMorgan playing a previously undisclosed role in Bear’s demise at the time. Who would put it past JPM to have exploited Bear Stearns’ vulnerability as the largest COMEX silver and gold short, at the time by helping to goose prices higher so that it could acquire Bear on the cheap and usurp the role of Mr. Big in matters silver and gold? Not me. – Ted Butler

Geopolitics is no more the Sole Factor to Influence Crude Oil Prices

Crude Oil Prices now Influenced by more Factors than only Geopolitics

Crude Oil Prices now Influenced by more Factors than only Geopolitics

Oil seem immune to what in the past — artificially, effectively and quickly — caused a surge in its prices.  Recent OPEC cuts have had little (or no) effect on the market. The sanctions from Saudi Arabia (and other countries in the Persian Gulf) on Qatar were barely noticed. Unlike all NYSE indexes, that show a steady post-crisis growth, crude oil benchmarks have not taken off, showing a bear market behavior. Forecasting trends and oil prices brings up an important question: Will geopolitics alone be able to influence the oil and gas market as it did in the past?

We may be witnessing a more realistic version of the market taking over — the invisible hand in action. New players have a bigger stake on the oil industry, thus the power to influence oil prices is scattered among a larger number of parties rather than a cartel and its allies (as it was in the past with OPEC). The result is that a single action (i.e., cutting oil production) does not have a large effect on the global oil market, because there are other “forces” playing a role almost just as big in the commodity’s overall supply and demand. Perhaps we are approaching to a period of steadier values — i.e., “lower for (much) longer.” Don’t get me wrong, I am not suggesting that the trends will be easier to predict, but that it may be more difficult for a single party to artificially influence oil prices.

One thing to watch closely is the current glut and the storage capacity, which is likely what has driven not only the market but also OPEC’s decisions in the last years. Russia has agreed to follow Saudi cuts in a hopes of reducing their current stock and rising crude prices, but the market has showed the opposite. The glut alone is far from being the main price driver. There are two main non-OPEC actors that also play an important role.

China’s Slowdown

China’s energy consumption plays a major role in the global economy. According to BP’s Statistical Review of World Energy, China’s total energy consumption increased less than 2% YoY in the last two years (2015, 2016) and its GDP annual growth rate in 2016 (6.79%) was lower than that one in 2015 (6.9%). Oil consumption shows a rather low increase (3%), half of what the country’s oil demand was for the previous year (6.9%).

Infrastructure plans might be seriously jeopardized, amid corruption scandals and a huge debt. All big infrastructure projects (planned, designed and executed by the Chinese communist party) seem to honor the motto “build it and they will come.” According to a study conducted by the University of Oxford, “fewer than a third of the 65 Chinese highway and rail projects he examined were genuinely economically productive, while the rest contributed more to debt than to transportation needs.” With a null return on such big spending, China keeps adding debt to their economy (more debt in the first nine months of 2017 than the US, Japan and the EU combined.). Another global crisis may be on the verge. China, with its demand for energy and its economic policies, is a major external player in the oil and gas market prices.

US: Leading Oil Production, Optimizing Fracking, Withdrawing from the Paris Accord

Unlike China, the United States (a non-OPEC country) does not have the Federal Government playing a big role (by international standards) in the domestic oil and gas market. This is even moreso since the export ban was lifted in 2015. This nation is leading the world oil’s production for the third year in a row; a direct hit on OPEC’s further plans on cutting production. Higher oil prices (if supply reduction is strong enough to rise them) will mean a bigger market share for the current US shale oil and gas industry, where some producers have managed to run the business with lower costs (an incentive created by the low oil prices).  Activity is already showing positive numbers, the US oil rig count has increased for the first time in the last two years.

No less important is Trump’s decision to withdraw from the Paris Climate Agreement, perhaps a breath for the oil and gas industry — at least at a domestic level-. The country has no obligation to impose “green” taxes on fossil fuels; this avoids an artificial, negative effect on oil, gas and coal demand, thus keeping oil prices free to change with the market.  This particular topic should not be isolated from the expected corporate tax cuts (to be approved by Congress), because that might create incentives for investing in technology, targeting a new reduction in production costs. The growth of renewable energy will still depend on subsidies –if current demand of such energy remains unchanged–, but they will not come from taxes on oil, at least temporarily.  The actual destination of those extra bucks in the investor’s pockets will depend on the decisions made by shareholders on the corporate boards.

Crude oil prices have not soared, let alone showed a significant increase in the last three years. The big glut is still driving some geopolitical decisions, but there are other factors, powerful enough to spontaneously challenge the market. With supply and demand not influenced by geopolitics anymore, the oil and gas markets might soon be free or at least strong enough to overcome the remaining political intervention.

How crude oil prices react with upcoming events (i.e., Aramco IPO, future OPEC’s cuts, India and South America development, etc.) will tell us whether the power is still held by a (new) cartel or not. Meanwhile, longer periods of stability in oil prices are good news to consumers and so are they for the industry. – Omar López-Arce

Troubles are just Beginning for the US Dollar & how it will Affect Gold

Troubles are just Beginning for the US Dollar & how it will Affect Gold

Troubles are just Beginning for the US Dollar & how it will Affect Gold

Trillions of dollars in uncontrolled central bank stimulus and years of artificially low interest rates have poisoned every aspect of our financial system. Nothing functions as it used to. In fact, many markets actually move in the exact opposite manner as they did before the debt crisis began in 2008. The most obvious example has been stocks, which have enjoyed the most historic bull market ever despite all fundamental data being contrary to a healthy economy.

With a so far endless supply of cheap fiat from the Federal Reserve (among other central banks), as well as near zero interest overnight loans, everyone in the economic world was wondering where all the cash was flowing to. It certainly wasn’t going into the pockets of the average citizen. Instead, we find that the real benefactors of central bank support has been the already mega-rich as the wealth gap widens beyond all reason.  Furthermore, it is clear that central bank stimulus is the primary culprit behind the magical equities rally that SEEMS to be invincible.

To illustrate this correlation, one can compare the rise of the Fed’s balance sheet to the rise of the S&P 500 and see they match up almost exactly. Coincidence? I think not…

FedBalanceS&P

Another strangely behaving market factor that has gone mostly unnoticed has been the Dollar index (DXY). Beginning after the global financial crisis in 2008, the dollar’s value in reference to other foreign currencies initially moved in a rather predictable manner; collapsing in the face of unprecedented bailout and stimulus programs by the Fed, which required unlimited fiat creation from thin air. Naturally, commodities responded to fill the void in wealth protection and exploded in price. Oil markets in particular, which are priced only in the US dollar (something that is quickly changing today), nearly quadrupled. Gold witnessed a historic run, edging toward $2,000.

In the past few years, central banks have initiated a coordinated tightening policy, first by tapering QE, then raising interest rates, and now by decreasing their balance sheets. I would note that while oil and many other commodities plummeted in relative value to the dollar after tightening measures, gold has actually maintained a strong market presence, and has remained one of the best performing investments in recent years.

Something rather odd, however, has been happening with the dollar…

Normally, Fed tightening policies should cause an ever-increasing boost to the dollar index. Instead, the dollar is facing a swift plunge not seen since 2003.

https://www.zerohedge.com/sites/default/files/inline-images/20180113_gold2.png

What is going on here? Well, there are a number of factors at play.

First, we have a growing international sentiment against US treasury bonds (debt), which may be affecting overall demand for the dollar, and in turn, dollar value.  For example, one can see a relatively steady decline in US treasury holdings by Japan and China over the course of 2016, with China being the most aggressive in its move away from US debt:

We also have a subtle, yet increasing, international appetite for an alternative world reserve currency. The dollar has enjoyed decades of protection from the effects of fiat printing as the world reserve, but numerous countries including Russia, China, and Saudi Arabia are moving to bilateral trade agreements which cut out the US dollar as a mechanism. This will eventually trigger an avalanche of dollars flooding into the US from overseas, as they are no longer needed to execute cross-border trade. And, in turn the dollar will continue to fallin relative value to other currencies.

There is also the issue of coordinated fiscal tightening by central banks around the world, with the ECB and even Japan moving to cut off stimulus measures and QE.  What this means is, other currencies will now be appreciating in terms of Forex market value against the dollar, and in turn, the dollar index will decline further.  Unless the Federal Reserve acts more aggressively in its interest rate hikes, the dollar’s decline will be brutal.

Finally, we also have the issue of nearly a decade of Fed stimulus that has gone without audit (except for the limited TARP audit, which shows tens of trillions in money/debt creation). We truly have no idea how much fiat was actually created by the Fed – but we can guess that it was a massive sum according to the seemingly endless rise in equities from a point of near total breakdown, funded by quantitative easing and stock buybacks. You cannot conjure a market rebound merely with debt. Eventually, that currency creation and the consequences will have to set a foot down somewhere, and it is possible that we are witnessing the results first in the dollar, as well as the Treasury yield curve, which is now flattening faster than it did just before the stock market crash in 2008.

A flat yield curve is generally a portent of economic recession.

https://www.zerohedge.com/sites/default/files/inline-images/20180113_gold3.png

I believe that this is just the beginning of troubles for the dollar and for US bonds. Which raises the question, how will the Fed react to a dollar market that is so far completely ignoring their tightening policies?

Here is where things get interesting.

Throughout 2017, I warned that the Fed would continue to raise interest rates (despite many people arguing to the contrary) and would eventually find an excuse to increase rates much faster than previously stated in their dot plots. I based this prediction on the fact that the Fed is clearly moving to pop the enormous fiscal bubble it has engineered since 2008, and that they plan do this while Donald Trump is in office (whether or not Trump is aware of this plan is hard to say). Trump has already taken credit on several occasions for the epic stock rally, and thus, when the plug is pulled on equities life support, who do you think will get the blame? Definitely not the banking elites who inflated the bubble in the first place.

Even the mainstream financial media has admitted at times that Trump will “regret” his campaign demands that the Fed hike rates and stop pumping up stock markets, as he will be inheriting a fiscal punch in the gut.

The Fed, as well as the mainstream, have also planted the notion that the Fed “will be forced” to raise interest rates faster if the Trump Administration pursues its plans for Hoover-style infrastructure development.

But, on top of this, the “problem” of the falling dollar also introduces a whole new rationale for speedy interest rate hikes. I believe that soon after Janet Yellen leaves as Fed chair and Jerome Powell transitions in, the Fed will begin an exponential increase in rates and will speed up their balance sheet reductions. And, they will blame the unusual decline in the dollar index as well as falling Treasury demand as the cause for more extreme action.

Powell has already backed “gradual rate hikes” in 2018, and, a few members of the Fed expressed a need for “faster hikes” in the minutes of the last meeting in December. I predict this sentiment will expand under Powell.

A small number of Wall Street economists are also warning of more rate hikes in 2018, and that this could cause considerable shock to the virtual stock rally in play right now.

That might be the Fed’s plan. The central bankers need a scapegoat for the eventual bursting of the market bubble that they have produced. Why not simply allow that bubble to finally implode in the near term, blaming the Trump administration and, by extension, all the conservatives that supported him? To do this, the Fed needs an excuse to hike rates swiftly; and they now have that excuse with the dollar dropping like a stone (among other reasons).

But how will this affect gold?

So far, gold has actually spiked along with Fed rate increases, which might seem counter intuitive, but so is the dollar falling along with rate increases.

https://www.zerohedge.com/sites/default/files/inline-images/20180113_gold4.png

I do think that there will be an initial and marginal drop in gold prices if the Fed increases the frequency of rate hakes. That said, eventually reality will set into stock markets that the party is over, the punch bowl is being taken away, and Trump’s tax reform will not be enough to offset the loss of access to trillions in cheap fiat dollars from the central bank.

Once stocks begin to collapse in the wake of Fed hikes and balance sheet reductions (and they will), and uncertainty in the fate of the dollar swells, gold will bounce back stronger than ever. In the meantime, I would treat any drop in precious metals as a major buying opportunity. Gold is one of the few assets that always does well during times of crisis. –  Alt-Market’s Brandon Smith via Zerohedge

Gold and Silver – Review of Charts & Reality v/s Sentiment

Gold and Silver – Review of  Charts & Reality v/s Sentiment

Gold and Silver – Review of  Charts & Reality v/s Sentiment

Usually we have a commentary of some kind as a back story to what is going on in gold and silver.   Our commentaries have become fewer and farther  between because of the absurdity of government control, which in turn is controlled by the ruling elite.  Not a day goes by that the president elect, Donald Trump, is not severely criticized by mainstream media, both televised and in print.  We have never seen this kind of maltreatment toward a president, ever.    It is the Deep State exposing its ugly tentacles to keep Trump from gaining any traction in popularity, and it speaks to the bitter disappoint that Deep State favorite, and one upon whom they could depend, Hillary Clinton lost.

Sadly, Trump has been overwhelmed by the shadow powers and turned into yet another presidential puppet that will disappoint perhaps even more than turncoat Obama.  Many of Trump’s promises of reform have been cast aside in favor of bowing to the dictates of the ruling elites. The swamp creatures have survived the draining attempt and are back stronger than ever.

It makes absolutely no sense to discuss any information that the government puts out because it is all based on lies and deceit and probably worse in Europe than the dismal state of affairs in the US.  No one has defined the “shithole” countries Trump denies saying, but few have stated the more obvious ones, America and almost every European country.

America has become a police state with a tightening noose on all freedoms, including free speech and the internet.  Europe is worse, compounded by the massive immigration of Middle Easterners, many legitimately wanting to escape from wars and unlivable conditions, but there are too many extremist Middle Easterners infesting the overall numbers, and they have become breeders of rape, robbery, and living instability.

The European immigration issue is also an attack on Christianity and the white race with the intent to eliminate sovereignty, national borders, even individual identity.  Those governments most effected, Sweden a prime example, have lost control over the criminal elements that have invaded their countries, and it is considered a crime to point the finger at those elements most guilty.  The victims are being victimized by their own elected officials.

Yet, people like Merkel are still in charge.  A country like Poland, with zero immigration problems, because Poland has refused Middle Easterners into the country, has become the target of the EU bureaucrats to be punished for exercising Polish sovereignty.  The EU is telling Poland, if you are not willing to destroy your country with immigrants, we will help destroy your existence by financially punishing and weakening Poland.  How dare you defy our dictates on how you should run your country!

Congress just passed an extension of the massive spying on all Americans, well the entire world, for that matter.  Facebook wants to have video and microphone capability in every home.  [1984 is alive and well, everywhere.]  Twitter has been exposed for shadow censoring dissenting views, like those favorable to Trump, freedom, and truth.  What is going on everywhere is disgusting, and very few seem to care or want to do anything about it.

The debt in this country is in unabated trillions that continues to grow, but all that financial enslavement of the population has done nothing to grow the economy, improve severely deficient infrastructure, or show up in some positive manner anywhere…except for the Fed’s balance sheets in order to support the severely bloated stock market and support the financial farce known as Treasury Bills and bonds.

The world makes less and less sense, except for the realization that the central bankers and ruling elites are spinning it out of control, even losing control themselves, to a degree, but they will ultimately prevail.  This will all come crashing down, sooner or later, and later seems to be the operative word, but subject to a reality check in any given month.

Just like the stock market crash of 2008-2009 turned the fundamental investment world upside down and destroyed all sense of what is value, in addition to wiping out millions of individual investors, many of whom have never recovered, what will inevitably happen next in the stock markets around the world will be an even greater shock.

We are painting broad strokes here, and we suggest everyone do their own due diligence and draw their own conclusions.  We already have, and for that reason we continue to withdraw from the insanity that has gripped the world.  Unfortunately, too many have become anesthetized and keep believing in the treadmill of their daily existence because to believe otherwise is too scary or simply unfathomable.

Commentaries just do not make sense because the world has become senseless and very dangerous.  The US has more armed bases around the world and is fomenting as much proxy war and chaos as possible.  Russiagate, as it were, will not go away, at least in the MSM and Congress, even though it has been proven that there is not a single piece of evidence to back up any such claim.  The US wants to punish Russia for being in and even winning in Syria, for being against US financial interests, and for refusing US access to Russia’s many natural resources that the neocons in this country want to exploit/steal.

The one arena where we find calm and reliability, even truth, is in the charts.  Both gold and silver continue to be suppressed, and those doing the suppression have been given a pass recently by Donald Trump.  He just exempted the five largest banks in the world from any criminal actions.  Theft on the highest level and in the greatest amounts of money can operate with impunity.

The Deep State is operating in the open, more and more, but the warning signs are being ignored.  Society is disintegrating as people are being herded like lemmings to do the bidding of governments or suffer the consequences.  In the past, owning gold and silver kept those who had it free from government dependence, which is yet another reason why governments do not want people to have it.  There is a message there, and one worth heeding.

Some have asked our opinion on Bitcoin.  We have not participated, at all, even when it was first introduced to us at under a dollar!  It was not understood then, and it still is not understood now, [by us].  We see it as akin to the Tulip Mania.  It has no intrinsic value that we know of.  It has no history of performance during bad times, which may be fast approaching, and we choose to steer clear of it.  Good for those who have made money with it over the past few years.  We will stick with what we know, or choose to think we know…the charts.  Hint:  governments will not stand for competition and are already taking defensive measure, as is the IRS.  Too many unanswered questions remain.

Those who have no patience for or understanding of the higher time frames, particularly the annual and quarterly charts, are missing out on some very valuable market information.  No, they are not timing tools, and one cannot use them for trading, but they are invaluable for keeping the market in context.

What these gold and silver charts have been saying since the highs of 2009 and 2011 is that there is little reason for trading from the long side, if one wants to maximize potential results.  Our largest losses in the past few years have come from the long side of gold and silver.  We know first hand of what we speak.  Sentiment does have a way of clouding reality.

The gold and silver chart comments are apt.  Unfortunately, we can not make them larger should one find it difficult to read the comments.

Gold and Silver – Review of  Charts & Reality v/s Sentiment

We focused on the two largest volume trading weeks in late 2017, the red bars depicting volume at the bottom.  It is only large money interests and those most in a position to know of a shift in price sentiment that can produce such large trading volumes at any point in time.  It is impossible for the public to act in unison to create large volumes.  Instead, it is the public that reacts to them, almost always to their detriment.

You can see how the high volume weeks correspond to almost the exact week low before price turned around for an extended rally.  High volume periods, monthly, weekly, daily, intraday even, are very significant pieces of information.

Gold and Silver – Review of  Charts & Reality v/s Sentiment

We watched the gold and silver market turnaround from the December low, a week or two after the low.  We choose to buy on pullbacks in response to market activity.  It is obvious from the chart that there were no pullbacks from 1250 up to 1320.  Entry under these circumstances is more difficult because past recent history says market rallies have not been sustained, and identifying risk as price continues higher become a mitigating factor for risk v reward.

The higher controlling time frames were of no help and suggested price still has a way to go before turning into a bullish market.  Right now, risk is greater than potential reward.  [We are talking trading the gold and silver market and not buying physical gold and silver.  We have been purchasers of physical gold and silver consistently over the past few years, as advocated.]

Gold and Silver – Review of  Charts & Reality v/s Sentiment

At first, there appeared to be little to say about silver, given its location at/near the bottom of its multi-year TR.  We drew attention to the Qrtly chart last October, and we saw even more reason to keep a strong focus on it currently because it appears to be offering some valuable information that is not as apparent on the other time frames.

This is a great example of what is meant by saying smart money always leaves a footprint on the charts that can reveal their intent, something they are keen on hiding from the public.  It is a matter of knowing what to look for and how to interpret it.  This is more of the art form of chart reading, for reading charts is not a cookie-cutter exercise as so many might think or want it to be.

The clustering of closes, occurring during this labored correction, adds weight to the potential for preparing for a long position on breakouts.  Plus, you can see the location of the closes for the last 2 Qtrs was near the high indicating buyers overwhelming sellers.

Gold and Silver – Review of  Charts & Reality v/s Sentiment

Again, the potential for a trade from the long side is not even close to apparent on the weekly chart.  This is why it is so important to have an awareness of all time frames.  Otherwise, the possible clue[s], as described on the Qtrly, would be lost.

Gold and Silver – Review of  Charts & Reality v/s Sentiment

As we said, the higher time frames are not for timing, and the weekly and this daily chart are examples.  There does not appear to be a possible trade or reason for trading from the long side, yet.  The Qtrly says to be aware and keep looking for a reason.

Gold and Silver – Review of  Charts & Reality v/s Sentiment

Edgetraderplus

Silver (and Gold) – The ONLY Remedy to the Ongoing Bubble Mania

Silver (and Gold) - The ONLY Remedy to the Ongoing Bubble Mania

Silver (and Gold) – The ONLY Remedy to the Ongoing Bubble Mania

CHARACTERISTICS OF BUBBLE CRAZINESS:

  • U.S. stocks, according to many measures, are the most over-valued in history. We live in a Bubble Zone!
  • Bitcoin and other cryptos are definitely in a bubble, but they could rise even higher.
  • Bonds yield little, and in many European countries, less than zero. Central banks have created this distortion to the detriment of savers, insurance companies and pension funds.
  • Real estate: Some locations, such as New Zealand, Canada and Australia are up a factor of 8 to 20 since 1980. Houses have become unaffordable for many, even with historically low interest rates.
  • Silver and gold: No bubble since 1980. Prices have been repressed since 2011 and are attractive now.

INVESTING IN BUBBLE CRAZINESS:

  • Institutions buy stocks because bonds yield so little. This works until the inevitable crash. Think tech stocks in 2000 or 2018(?).
  • Institutions and central banks buy bonds trusting the “greater fool” theory. Argentina sold 100 year bonds. What happens when the world runs out of “greater fools?”
  • People buy Bitcoin because it is going up, and it might double again from here. Are you comfortable investing savings with that plan?
  • Others deposit their digital currency units into a “high yield” checking account that yields 0.01% interest. Or they “invest” in a CD that guarantees a yield of 1% per year in a currency that will be devalued by far more. Others buy a motor coach that depreciates $100,000 when they drive it from the dealer lot. Or they purchase a house that costs $10,000 to $50,000 per year in taxes, insurance, maintenance and utilities before principal and interest.
  • Demand value! Not doing any of the above! Avoid fads, bubbles, central bank distortions and obvious financial insanity.

WHAT’S LEFT? GLAD YOU ASKED!

  • What has been money for thousands of years?
  • What is more permanent than ephemeral digital currency units that are continually devalued?
  • Asia has aggressively accumulated it for decades.
  • What has been secretly sold from western vaults and shipped to Asia?
  • What is used in thousands of industrial and medical applications?
  • What has been suppressed by governments and central banks because they promote their own digital and paper currencies which have zero intrinsic value?

THE WINNERS ARE SILVER AND GOLD!

  • But “they” claim gold and silver are volatile and dangerous. Gold and silver might go up or down (for a few years) when measured in digital currency units created from “thin air” by corrupt central banks. Gold in 1971 was $42 and is about $1,300 today. Silver prices have increased similarly as central banks devalued the dollar.
  • For other examples of volatile and dangerous prices, consider the price chart for Global Crossing stock or Enron stock. Or the NASDAQ 100 from 2000 to 2002 (down 84%). Or the S&P 500 Index from 2007 to 2009.
  • But “they” claim gold and silver are relics of a bygone era, and digital is the wave of the future. So why are Russia and China accumulating gold bullion? What happened to Iraqi gold, Libyan gold, and Ukrainian gold, and who wanted it?
  • Do dictators escape while carrying paper currency units or gold bullion?
  • Would you prefer 100 ounces of gold or 130,000 paper dollars in a ten year time capsule?
  • Central banks create trillions of U.S. dollars, euros, pounds, yen and Swiss Francs each year. The Swiss central bank “creates” currency units and buys U.S. stocks. The media thinks “creating from nothing” is normal and healthy, yet informs us that investing in gold, to protect from devaluing currencies, is silly and dangerous!

GOLD AND SILVER IN THE BIG PICTURE:

U.S. dollars are created as debt. Central banks and governments want more currency units so debt, deficits and expenses exponentially increase.

Graph the price of silver (times a trillion) divided by the national debt. The ratio is low because debt has increased rapidly and silver is inexpensive.

Graph the price of silver (times a trillion) divided by U.S. government annual expenses. The ratio is low and silver is inexpensive compared to total U.S. government expenses.

Graph the price of silver (times one trillion) divided by currency in circulation as measured by M3 (St. Louis Fed).

Graph the ratio of silver to the Dow Jones Industrial Average over 30+ years. The ratio is low, as it was in 2001 when silver sold for under $5.00. In early 2018 the DOW is too high and silver is inexpensive. Both will reverse.

SHOULD WE BUY SILVER OR GOLD?

Graph the ratio of silver to gold. Since 1971 a high ratio has indicated the top of a bull market in both silver and gold. But when the ratio is low (silver is inexpensive compared to gold) both silver and gold are cheap, especially compared to other paper and digital assets – like now!

The lows in the ratio show excellent times to purchase both silver and gold, particularly silver. Silver prices are listed in the boxes at the ratio lows. Expect the ratio to increase as both metals rise in price during the metals bull market that restarted in December 2015.

CONCLUSIONS

  • Bonds, most stocks, and Bitcoins are too expensive and have risen too far and too fast.
  • Some, perhaps most, real estate is overpriced and ready to fall.
  • Silver in early 2018 is inexpensive compared to M3, National Debt, government expenditures, the Dow and gold.

– Gary Christenson

2018 Is Shaping Up to Be a Solid Year for Silver

Last year was a tough one for silver. Despite showing some promise early in the year, it has lagged behind its more valuable peer gold. While gold shot up almost 13% over the last year to be trading at its highest price since September 2017, silver has remained flat, only rising by just under 4%. This has created an opportunity for investors seeking to profit from the optimism surrounding precious metals in 2018.

Now what?

Silver, unlike gold, possesses considerable utility; it’s used in industrial processes because of its conductive properties, which make it a key element in a wide range of electrical and electronic applications. This endows it with the attributes of being both a precious metal which benefits during times of crisis as well as an industrial metal that profits from stronger economic growth.

Because silver is a precious metal, its price is closely correlated to that of gold, which means that as gold rises, notably in response to geopolitical crises, then silver will appreciate. There is every sign that a multitude of geopolitical crises could emerge over the course of 2018. Middle East tensions continue to rise, as the conflict for regional ascendency between Iran and Saudi Arabia intensifies. There is no sign of the conflict in Yemen abating anytime soon, and Trump’s decision to decertify Iran last year has applied considerable pressure on Teheran, which is also facing its own domestic crisis.

The standoff between a rogue North Korea and the U.S. remains tense. It could escalate at any moment, and this along with rising tensions between China, Russia, and the U.S. increases the risk of economic fallout, as each nation jockeys to assert its national interest.

Nevertheless, any uptick in global economic growth will apply pressure to gold, because it means a stronger U.S. dollar and higher interest rates, all of which are bad news for the yellow metal. This is where silver will shine.

You see, silver’s important role as an industrial metal, particularly in the fabrication of components used in electronic devices, means that manufacturing demand for the white metal will rise. Supplies remain constrained because of a lack of investment in new silver mining projects caused by the protracted slump in prices since 2014. That means there has been a physical supply deficit over the last five years, as demand has outstripped supply.

Any sharp increase in silver consumption will give its price a healthy bump.

Even the gold-to-silver ratio, which is a key means of determining whether silver is undervalued in comparison to gold, remains well above its 40-year historical average. Currently, it takes 77 ounces of silver to buy one ounce of gold, whereas over that period, on average, it has taken 62 ounces. If the ratio reverts to the historical mean, silver could rise to as high as US$21 per ounce, or 23% higher than its current spot price. That would be a boon for silver miners, which offer investors levered exposure to the white metal.

So what?

A miner poised to unlock considerable value as silver appreciates is Silvercorp Metals Inc. (TSX:SVM)(NYSE:SVM), which is focused on silver mining in China. Despite weak silver prices, the miner is free cash flow positive and remains one of the most profitable among its peers, because of its low all-in sustaining costs of US$2.26 per ounce. Unlike silver bullion or an ETF, Silvercorp generates income for investors, paying a regular dividend which yields just under 1%. The dividend payout ratio of a mere 4% indicates that not only is it sustainable, but that there is considerable room for dividend growth. – Matt Smith

If The Banks Try To Unwind Their Silver Short, Who Are They Going To Buy From?

While there’s a lot of commentary about the large paper short position that exists in the silver market, there’s an additional factor exacerbating the situation that few have mentioned. Specifically, given the mindset of the investors that actually own silver, if the banks and hedge funds have to cover their short position, who are they going to buy the metal from?

In a typical free market the price of an asset would be where there is an intersection of supply and demand. Yet consider the mindset of the average silver investor, which is far from your typical market participant.

Most of the people who own silver purchased their metal primarily in response to endless dollar printing. Often with a belief that the printing will continue, ultimately until the dollar is worth little or nothing.

This is different from the typical investor profile in many of the other standard investment markets. Usually in trading markets such as the stock market, people invest with the hope that a position goes their way, and then eventually convert to cash or another investment.

But those who own physical silver are generally coming at their investment from a different perspective. They bought silver because of concerns about the currency system, and are not necessarily looking to book a gain and convert back into dollars just because the price hit $20 or $30.

If someone has expenses or bills to pay, then sure, it’s possible they might sell some silver to access funds. But especially with silver so far below it’s 2011 $49 high, and with more money in the system than ever, at least the silver buyers I’ve spoken to over the past decade don’t seem like they’ll be in any rush to go out and sell.

So if the banks wanted to unwind their position, who are they going to buy all that silver from?

Part of the answer depends on the context in which a move occurs. If we just saw silver prices rise to $100 per ounce without any news or further significant dollar degradation, perhaps there would be more metal holders who might wonder if the price has hit a top and if it’s time to sell. But if silver hits $100 because the Fed just launched QE 5, 6, and 7, are silver investors going to be clamoring to convert back to dollars at the same time there are more of them in circulation than ever?

Speaking for myself, I first bought silver in 2010 primarily because I finally grasped the situation with the money supply. Based on the amount of money that had been printed and simple math, it always seemed to me that if silver were allowed to trade freely, the price would simply have to be a lot higher.

Yet as I learned more about the market and what Federal Reserve actually does, I started to realize that just like in other hyperinflation scenarios, eventually the dollar price just stops being relevant. At some point there would just be no reason to trade back into something that’s lost it’s value.

What all of this leads to is an environment where there could be incredible pressure on the shorts to cover their position at the same time it would be hard to find an offer. Which is why it always seemed that the longer the banks sold metal they don’t own, the more of a corner they backed themselves into.

Perhaps they’ll ultimately be successful in unloading a portion of their position onto the hedge funds that buy or sell based on the 50 and 200 day moving averages. But regardless of who holds that side of the trade, my guess is that the majority of silver owners are unlikely to let them off so easy.

I often read comments by frustrated metal owners that accept the markets are manipulated, and question why that would ever change. Which is reasonable enough. Although keep in mind that even the mighty J.P. Morgan has historical precedent for getting caught red-handed with a position that was too big. As was seen with their London Whale trade back in 2012.

So while that doesn’t mean the manipulation will end tomorrow, it does mean that market dynamics are in place that could facilitate some large gaps up in – Chris Marcus

 

Will Crude Oil Prices hit $55 before Rising to $82, or Continue this Rally?

Will Crude Oil Prices hit $55 before Rising to $82, or Continue this Rally?

Unchanged Factors that Threaten the rise in Crude Oil Prices

The bearish pressures seen working against crude oil prices earlier are still in place, and could make it tough for crude to hold onto its gains. One thing the major forecasters agree on is that, after shrinking dramatically in 2017, oil stockpiles should be starting to build up again.

Global oil demand dips seasonally as the need for winter fuels recedes, and data from both OPEC and the International Energy Agency suggest that will tip the market back into surplus in the first half of this year. Inventories will shrink again in the second half, their data indicate.

Supply disruptions boosted oil prices in early December, when a critical North Sea pipeline was halted, and at the end of the month when a pipeline explosion curbed flows from OPEC member Libya. The suspension of the Forties Pipeline System — one of the North Sea’s biggest disruptions since the 1980s — was resolved by the end of last month, and repairs on the conduit to Libya’s Es Sider terminal were completed about the same time. Risks to production still remain, though, with Goldman Sachs Group Inc. considering Venezuela and Nigeria to be among the most vulnerable.

An even bigger boost came last month when Iran, OPEC’s third-largest producer, faced its biggest street protests in almost a decade amid discontent with the country’s economic stagnation. Though these didn’t escalate or threaten oil facilities, crude prices didn’t fall back. Another risk to Iranian exports appears to have been dodged as U.S. President Donald Trump backs away from tearing up an accord on Iran’s nuclear program, which would have slapped American sanctions back on oil shipments.

Crude Oil Prices above $60 may not remain stable so soon

U.S. oil prices are treading water above $US 60/B (WTI) again, the first time since 2015.

Crude oil prices have a northerly wind in its sails, though everybody on board this fickle ship is cautious about its compass bearing. Since 2013 we’ve seen the price of a barrel peak to $110, capsize to $26, and roll back to $60.

The gyrations make sense.

Here is what we’ve learned over the past decade:

Above $80 is too high. Cash flow is ample. Investors gladly fund more drilling rigs. Pump jacks work hard. Too much productive capacity is added. But costs inflate quickly too—competitiveness diminishes within the oil industry, and also encourages alternative energy systems. Consumers become more miserly and demand growth decelerates.

Under $40 is too low. Cash flows dry up and investors jump ship. Rigs head back to their yards with drooping masts. Costs deflate, rapidly decimating employees and equipment in the service industry. Production begins to decline in marginal regions. State-owned enterprises are unable to pay their ‘social dividends’. On the consumption side, conservation and efficiency lose meaning; consumers revert to guzzling oil like free refills of coffee.

So, simplistically a mid-range price of $US 60/B should represent what oil pundits call “market balance.” It’s the elusive price point where daily consumption is equal to production; inventory levels are neither too low nor too high; and economists’ cost curves intersect with demand.

Yet, if there is one thing 160 years of the oil age teaches us, there is no such thing as a mid-range balancing point in oil markets. Everyone either rushes to one side of the ship or the other, almost always at the wrong time.

As in any marketplace, oil producers and consumers respond to price signals. Those on the using end of petroleum products respond to the changing winds of price fairly quickly. On the other hand, much of the world’s big producers are not like nimble sailboats, rather they act like big supertankers that take time to change direction. In other words, the time between investing capital (or not) to realizing changes in production is slower.

Even in the last 10 years, the frequency of price data (WTI) shows clustering around either the $45 to $50/B grouping or the $95 to $100/B range (see Figure 1). Of course, costs have come down significantly, and the shale revolution has not only lowered the cost curve, but also shortened the cycle time of responding to price signals. So, in theory it’s easy to believe that the low end of the price spectrum may be the new norm.

But that’s theory. In the oilfields of the world, much of the changes in cost have been a result of taking margin out of the service industry, something that goes up and down with the same waves that bob price. Further, productivity gains seen in US and Canadian shale plays are not the norm in the world—most oil producing nations are rocking the boat by shutting off oil valves rather than innovating on their processes.

Today’s choppy world of lower extraction costs, process innovation, investor apathy, disruptive alternatives and environmental pressures, have made us skeptical in believing in the possibility of higher oil prices. And when prices are high our minds become landlocked into thinking about endless demand growth, geopolitics, cartel collusion, steep decline rates and the necessity of high levels of capital investment.

I’m only skeptical of one thing: That world oil markets will balance around $US 60/B. Historically, oil prices have not anchored in the calm of mid-ranges for long. So, today’s price is only a way point to either $US 45/B or much higher. – Peter Tertzakian

Will Surging U.S. Shale Kill Off The Rally in Oil Prices?

The U.S. shale industry is bringing enormous volumes of new oil supply online, breaking records each month. The U.S. could top 10 million barrels per day (mb/d) by February, and reach a staggering 11 mb/d by the end of next year.

The EIA released the latest version of its Short-Term Energy Outlook (STEO), in which the agency dramatically revised up its expectations for U.S. oil output. Previously, the EIA thought the U.S. would only surpass the 10 mb/d threshold at some point in mid-2018; now they see it happening in February.

The larger production increase occurring on an accelerated timeline means that U.S. production will average 10.3 mb/d in 2018, the EIA says, up from its prior forecast of just 10.0 mb/d. In other words, U.S. output in 2018 will be 970,000 bpd higher than last year, a larger increase than the previous estimate of a 780,000-bpd increase.

The gains keep coming—the agency expects the U.S. to average 10.8 mb/d in 2019, while surpassing 11 mb/d by November 2019. Obviously, as has been the case for some time, most of the growth will come from the Permian basin.

On the demand side, the EIA sees consumption growing strongly this year and next, with global demand rising by an average of 1.7 mb/d in both 2018 and 2019.

These are staggering figures, and if realized, it would mean the U.S. will be producing more than Saudi Arabia and Russia by the end of next year. “If the pricing environment is supportive, there is no reason” why the U.S. couldn’t match the EIA’s projections, said Ashley Petersen, lead oil analyst at Stratas Advisors in New York, according to Bloomberg. “Saudi Arabia and Russia aren’t really making new investments on the scale we would expect to be competitive at those volumes in 2019.”

The U.S. shale industry, despite promises from executives about approaching their drilling plans with caution, is clearly putting its collective foot on the accelerator. “Yesterday, the U.S. EIA revised U.S. crude oil production for 2018 up by 250 k bl/day to 10.27 m bl/day. That was the fourth revision higher in four months,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “We still think it is too low with yet more revisions higher to come and we think that everyone is probably able to see this with just a half eye open.”

Schieldrop cites the dramatic increase in the backlog of drilled but uncompleted wells (DUCs) from last year. The DUC list expanded by 30 percent in 2017, rising from 5,674 wells in January to a whopping 7,354. Some of that increase had to do with supply constraints in the market for completion services. If the shale industry starts to whittle away at that DUC list in 2018, it could provide a jolt to oil supply. “Last year’s shale oil activity was mostly about drilling, with fracking and completion substantially trailing the drilling activity,” Schieldrop said. “For the year to come, we’ll likely see a shift towards completions of these wells and less focus on the drilling of new oil wells.”

But to a large extent, the massive level of growth from U.S. shale that everyone is counting on is predicated on continued strength in prices. The forecast could be derailed if there is another price slump for an extended period of time. A rapid increase in supply in and of itself could cause prices to fall, killing off the price rally that started the drilling frenzy to begin with.

“It’s not completely unexpected given the price momentum,” Eugen Weinberg, head of commodities research at Commerzbank AG, told Bloomberg, referring to the recent run up in oil prices. However, “the shale rebound is also for real,” he says, risking a “massive price slump.”

But oil traders don’t want to hear that right now. Brent crude is just shy of $70 per barrel, a level not hit in about three years. The bulls are running rampant. However, that level of one-sided sentiment often precedes a sharp change in direction.

Commerzbank noted the irony of oil prices hitting fresh highs on the same day that the EIA published a report forecasting U.S. oil supply rising to 11 mb/d.

“Reading the latest U.S. Energy Information Administration (EIA) prediction of U.S. crude oil production makes it seem virtually impossible for the price to react in this way,” Commerzbank analysts wrote. “Selective perception is the reason why the market is completely ignoring this just now. Attention is paid only to news that tallies with the picture of rising oil prices.”

The report from the investment bank pointed out that oil prices surged because of the large expected decline in crude inventories, a piece of data that may seem bullish but was undercut by the fact that gasoline inventories also spiked. “Oil prices are become increasingly detached from the fundamental data and risk overshooting,” Commerzbank concluded. – Nick Cunningham

Shale Restraint Could Lift Oil Prices above $80

Brent recently hit $70 per barrel and WTI surpassed $64.50, and oil executives from the Middle East to Texas no doubt popped some champagne. The big question is whether or not U.S. shale will spoil the party by ramping up production to extraordinary heights, setting off another downturn.

The EIA made headlines a few days ago when it predicted that U.S. oil production would surge this year and next, topping 11 million barrels per day by the end of 2019.

But shale executives repeatedly promised their shareholders that they would be prudent this time around, eschewing a drill-no-matter-what mentality that so often led to higher levels of debt…and ultimately to lower oil prices. Shale executives repeatedly insisted in 2017 that they would not return to an aggressive drilling stance even if oil prices surged.

We will soon find out if oil in the mid-$60s can entice shale drillers to shed their caution and jump back into action in a dramatic way. For its part, Goldman Sachs seems to believe the promises from the shale industry.

The investment bank said that at an industry conference in Miami on January 10-11, shale executives reiterated their strategies of caution. “Shale producers are largely not looking to use $60+ oil in their budgets and spoke more proactively about debt paydown, corporate returns and returning cash to shareholders.”

This newfound restraint would contribute to still more gains in oil prices, the investment bank said. “With Discipline along with Demand and Disruptions (the 3 Ds) key drivers of Energy equity sentiment, we see potential for a grind higher as long as datapoints are favorable,” Goldman wrote. Global oil demand is set to grow at a robust rate this year, and a series of disruptions could keep supply offline in places like Venezuela, Iraq, Iran, Libya and Nigeria.

It remains to be seen if Goldman, along with the rest of us, are being taken for a ride by the shale industry. The investment bank said that guidance announcements in February will be “key” to figuring out if shale drillers will follow through on their promises of restraint for 2018.

But based on a series of comments at the conference, Goldman cited a long list of shale companies that will use extra cash from higher oil prices to either pay down debt or to pay off shareholders rather than using that cash for new drilling. “In particular, E&Ps highlighted debt reduction (SWN, CLR, RRC, DVN, APA, EOG, MRO, RSPP, WPX), dividends (OXY, COG, MRO, EOG) and share repurchases (APC) as potential options for redeploying greater cash ?ow,” Goldman wrote in its report, using the ticker symbols for the companies who spoke at the conference.

There were a few companies that signaled an openness to new drilling if oil prices continued to rise. “FANG, JAG, PDCE and XEC noted higher cash ?ows will allow their ?rms to raise drilling activity over time,” Goldman said, although they voiced caution about the recent run up in prices as evidence that prices will remain elevated. Moreover, any uptick in drilling in response to price increases might not result in production changes before the end of 2018.

Another uncertainty that could blunt the euphoria surrounding the recent oil price rally is the rising cost of production. With drilling on the upswing, oilfield services companies are looking to claw back some of the ground that they felt compelled to cede to producers in the past few years. That means higher prices for the cost of completions, rigs, sand and other services and equipment. Goldman predicts cost inflation from oilfield services on the order of 5 to 15 percent year-on-year.

The investment bank said that the winners will be the “operators that are able to mitigate higher service costs through productivity gains and more ef?cient operations will attract investor interest in 2018.” Goldman singled out Pioneer Natural Resources, EOG Resources and Occidental Petroleum, a few companies that are typically cited as some of the strongest in the shale patch.

So, at least according to the latest comments from shale titans, the industry appears resolved to stick by its word to not drill recklessly. That could lessen production gains from the U.S. over the next year or so…which would provide more upward pressure on prices. – Nick Cunningham

Crude Oil Commercials at Record Short Exposure

Tim Taschler – On April 10, 2017 I penned a piece called Taking A Look at Silver where I wrote: “When watching COT levels each week, what is important to me is the trend in the positions that Commercials and Large Specs hold. But what is also important to me is when extreme positions occur.” 

A week later, as the chart below shows, silver peaked at $18.65 and started a slide that took prices to $14.34 at the low in early July.

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Figure 1: Silver Continuous Contract

This reaffirmed my belief that it is important to pay close attention to COT data, especially when it is making new 52-week or all-time record readings. Today, crude oil COT data is at an extreme, meaning it is time to pay attention.

The chart below shows that Commercials are at a new 52-week-high in the number of net short futures contracts they hold, while Large Speculators (aka managed money and hedge funds) are at a 52-week-high in the number of long contracts they hold.

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Figure 2: Crude Oil Net Commitments of Futures Traders

 

Commercials, often referred to as the ‘smart money,’ are hedgers that deal with the underlying commodity as part of doing business. Commercials are large operators with very deep pockets, and they are exempt from position limits and are allowed to post smaller margins (i.e., they are able to use more leverage). It’s important to note that this snapshot of commercial positions is as of the close Tuesday, January 2, 2018 and are reported by the CFTC on Friday afternoon of the same week.

When watching COT levels each week, what is important to me is the trend in the positions that Commercials and Large Specs hold. However, what is also important to me is when extreme positions occur. Looking at the chart below we see commercial positions back to 1993, and what jumps out at me is the fact that the current commercial short position of 1,414,461 short contracts is a record short position.

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Figure 3: Crude Oil Hedgers Position

The weekly price chart below shows that $WTIC has rallied nicely from its early January 2016 low, and is sitting at the 2015 high.

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Figure 4: Light Crude Oil Continuous Contract

The bottom line is that investors are excessively optimistic while Commercials are at a record level of bearishness.

The price chart (Figure 5) has a couple of divergences (RSI, MACD, volume) and might be set up for a decline, or correction at a minimum. What is unknowable is whether a pullback will be short and shallow or long and deep.

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Figure 5: Crude Oil Continuous Contract

US Dollar Galloping towards Collapse – Reflecting in Gold and Silver Prices

US Dollar on a Fast Track towards Collapse - Reflecting in Gold and Silver Prices

US Dollar Galloping towards Collapse

How quickly will the US dollar collapse?  – This might seem a frivolous question, while the dollar still retains its might, and is universally accepted in preference to other, less stable fiat currencies. However, it is becoming clear, at least to independent monetary observers, that in 2018 the dollar’s primacy will be challenged by the yuan as the pricing medium for energy and other key industrial commodities. After all, the dollar’s role as the legacy trade medium is no longer appropriate, given that China’s trade is now driving the global economy, not America’s.

At the very least, if the dollar’s future role diminishes, then there will be surplus dollars, which unless they are withdrawn from circulation entirely, will result in a lower dollar on the foreign exchanges. While it is possible for the Fed to contract the quantity of base money (indeed this is the implication of its desire to reduce its balance sheet anyway), it would also have to discourage and even reverse the expansion of bank credit, which would be judged by central bankers to be economic suicide. For that to occur, the US Government itself would also have to move firmly and rapidly towards eliminating its budget deficit. But that is being deliberately increased by the Trump administration instead.

Explaining the consequences of these monetary dynamics was the purpose of an essay written by Ludwig von Mises almost a century ago. At that time, the German hyperinflation was entering its final phase ahead of the mark’s eventual collapse in November 1923. Von Mises had already helped to stabilise the Austrian crown, whose own collapse was stabilised at about the time he wrote his essay, so he wrote with both practical knowledge and authority.

The dollar, of course, is nowhere near the circumstances faced by the German mark at that time. However, the conditions that led to the mark’s collapse are beginning to resonate with a familiarity that should serve as an early warning. The situation, was of course, different. Germany had lost the First World War and financed herself by printing money. In fact, she started down that route before the war, seizing upon the new Chartalist doctrine that money should rightfully be issued by the state, in preference to the established knowledge that money’s validity was determined by markets. Without abandoning gold for her own state-issued currency, Germany would never have managed to build and finance her war machine, which she did by printing currency. The ultimate collapse of the mark was not mainly due to the Allies’ reparations set at the treaty of Versailles, as commonly thought today, because the inflation had started long before.

The dollar has enjoyed a considerably longer life as an unbacked state-issued currency than the mark did, but do not think the monetary factors have been much different. The Bretton Woods agreement, designed to make the dollar appear “as good as gold”, was cover for the US Government to fund Korea, Vietnam and other foreign ventures by monetary inflation, which it did without restraint. That deceit ended in 1971, and today the ratio of an ounce of gold to the dollar has moved to about 1:1310 from the post-war rate of 1:35, giving a loss of the dollar’s purchasing power, measured in the money of the market, of 97.3%.

True, this is not on the hyperinflationary scale of the mark – yet. Since the Nixon shock in 1971, the Americans have been adept at perpetuating the myth of King Dollar, insisting gold now has no monetary role at all. By cutting a deal with the Saudis in 1974, Nixon and Kissinger ensured that all energy, and in consequence all other commodities, would continue to be priced in dollars. Global demand for dollars was assured, and the banking system of correspondent nostro accounts meant that all the world’s trade was settled in New York through the mighty American banks. And having printed dollars to ensure higher energy prices would be paid, they would then be recycled as loan capital to America and her friends. The world had been bought, and anyone not prepared to accept US monetary and military domination would pay the price.

That was until now. The dollar’s hegemony is being directly challenged by China, which is not shy about promoting her own currency as her preferred settlement medium. Later this month an oil futures contract priced in yuan is expected to start trading in Shanghai. Only last week, the Governor of China’s central bank met the Saudi finance minister, presumably to agree, amongst other topics, the date when Saudi Arabia will start to accept yuan for oil sales to China. The proximity of these two developments certainly suggest they are closely related, and that the end of the Nixon/Saudi deal of 1974, which created the petrodollar, is in sight.

Do not underestimate the importance of this development, because it marks the beginning of a new monetary era, which will be increasingly understood to be post-dollar. The commencement of the new yuan for oil futures contract may seem a small crack in the dollar’s edifice, but it is almost certainly the beginning of its shattering.

America’s response to China’s monetary manoeuvring has always been that of a nation on the back foot. For the last year, the yuan has been rising against the dollar, following President Trump’s inauguration. Instead of responding to China’s hegemonic threat by increasing America’s role in foreign trade, President Trump has threatened all and sundry with trade restrictions and punitive tariffs. It is a policy which could not be more designed to undermine America’s global economic status, and with it the role of the dollar.

In monetary terms, this leads us to a further important parallel with Germany nearly a century ago, and that is the contraction of the territory and population over which the mark was legal tender then, and the acceptance of the dollar today. The loss of Germany’s colonies in Asia and Africa, Alsace-Lorraine to France, and large parts of Prussia to Poland, reduced the population that used the mark without a compensating reduction of the quantity of marks in circulation. Until very recently, most of the world was America’s monetary colony, and in that context, she is losing Asia, the Middle East and some countries in Africa as well. The territory that offers fealty to the dollar is definitely contracting, just as it did for the German mark after 1918, and as it did for the Austro-Hungarians, whose Austrian crown suffered a similar fate.

The relative slowness of the dollar’s decline so far should not fool us. The factors that led to the collapse of the German mark in 1923 are with us in our fiat currencies today. As von Mises put it,

“If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely.”

Updated for today’s monetary system, this is precisely how the American government finances itself. Instead of printing notes, it is the expansion of bank credit, issued by banks licenced by the government with this purpose in mind, that ends up being subscribed for government bonds. The same methods are employed by all advanced nations, giving us a worrying global dimension to the ultimate failure of fiat currencies, whose only backing is confidence in the issuers.

Now that America is being forced back from the post-war, post-Nixon-shock strategy of making the dollar indispensable for global trade, the underlying monetary inflation of decades will almost certainly begin to be reflected in the foreign and commodity exchanges. There is little to stand in the way of the global fiat monetary system, led by the dollar, to begin a breakdown in its purchasing power, as prophesied by von Mises nearly a century ago. Whether other currencies follow the dollar down the rabbit hole of diminishing purchasing power will to a large extent depend on the management of the currencies concerned.

How a fiat currency dies

The last thing anyone owning units of a state-issued currency will admit to is that they may be valueless. Only long after it has become clear to an educated impartial monetary observer that this is the case, will they abandon the currency and get rid of it for anything while someone else will still take it in exchange for goods. In the case of the German hyperinflation, it was probably only in the last six months or so that the general public finally abandoned the mark, despite its legal status as money.

Von Mises reported that throughout the monetary collapse, until only the final months, there persists a general belief that the collapse in the currency would soon end, there always being a shortage of it. The change in this attitude was marked by the moment people no longer just bought what they needed ahead of actually needing it. Instead, they began to buy anything, just to get rid of the currency. This final phase is what von Mises called the crack-up boom, though some far-sighted individuals had already acted well ahead of the crowd. Both these phases are still ahead for the American citizen. However, we can now anticipate how the first is likely to start, and that will be through dollars in foreign hands being replaced for trade purposes with the yuan, and then sold into the foreign exchanges.

Once the process starts, triggered perhaps by the petrodollar’s loss of its trade settlement monopoly, it is not beyond the bounds of possibility for the dollar to initially lose between a third and a half of its purchasing power against a basket of commodities, and a similar amount against the yuan, which is likely to be managed by the Chinese to retain its purchasing power. It will be in the interests of the Chinese authorities to promote the yuan as a sounder currency than the dollar to further encourage foreign traders to abandon the dollar. From China’s point of view, a stronger yuan would also help ensure price stability in her domestic markets, at a time when countries choosing to remain on a dollar-linked monetary policy will be struggling with rising price inflation.

There then emerges a secondary problem for the dollar. A fiat currency depends in large measure for its value on the credibility of the issuer. A weakening dollar, and the bear market in bonds that accompanies it, will undermine the US Government’s finances, in turn further eroding the government’s financial credibility. This will be happening after an extended period of the US Government being able to finance its deficits at artificially low interest rates, and is therefore unprepared for this radical change in circumstances.

As the dollar’s purchasing power comes under attack, lenders, whether they be those with surplus funds, or their banks acting as their agents, will increasingly take into account the declining purchasing power of the dollar in setting a loan rate. In other words, time-preference will again begin to dominate forward rates, and not central bank interest rate policy. This will be reflected in a significantly steeper yield curve in the bond market, forcing borrowers into very short-term financing or using other, more stable monetary media to obtain capital for longer-term projects. This, again, plays into the yuan becoming the preferred currency, possibly with a rapidity that will be unexpected.

The US Government is obviously ill-equipped for this drastic change in its circumstances. The correct response is to eliminate its budget deficit entirely, and refuse to bail out failing banks and businesses. Bankruptcies will be required to send surplus dollars to money heaven and therefore stabilise the dollar’s purchasing power. A change in the Fed’s attitude towards its banks and currency is, however, as unlikely as that of the Reichsbank subsequent to the Versailles Treaty.

Therefore, it follows that capital markets in dollars will inevitably be severely disrupted, and market participants will seek alternatives. Remember that the dollar’s strength has been based on its function in trade settlement and its subsequent deployment as the international monetary capital of choice. Both these functions can be expected to go into reverse as the trade settlement function is undermined.

Whether China will be tempted to employ the same methods in future to support the yuan as the Americans have during the last forty-three years for the dollar, remains to be seen. It may not be a trick that can be repeated. There is a great danger that a significant fall in the dollar will lead to global economic stagnation, coupled with escalating price inflation, affecting many of China’s trading partners. China will want to insulate herself from these dangers without adding to them by going for full-blown hegemony.

We are beginning, perhaps, to see this reflected in rising prices for gold and silver. China has effectively cornered the market for physical gold, the only sound money of the market that over millennia has survived all attempts by governments to replace it. Her central planners appear to have long been aware of the West’s Achilles’ heel in its monetary affairs, and have merely been playing along to China’s own advantage. As the dollar weakens in the coming years, her wisdom in securing for herself and her citizens the one form of money that’s no one else’s liability will ensure her survival in increasingly turbulent times.

Now that’s strategic thinking. – Alasdair Macleod

 

Global Debt Surges – Gold and Silver Investors’ Patience will soon Pay off

Global Debt rises thrice as Fast as Global Wealth

Global Debt rises thrice as Fast as Global Wealth

Some nasty dark clouds are forming on the financial horizon as total world debt is increasing nearly three times as fast as total global wealth.   But, that’s okay because no one cares about the debt, only the assets matter nowadays.  You see, as long as debts are someone else’s problem, we can add as much debt as we like… or so the market believes.

Now, you don’t have to take my word for it that the market only focuses on the assets, this comes straight from the top echelons of the financial world.  According to Credit Suisse Global Wealth Report 2017, total global wealth increased to a new record of $280 trillion in 2017.  Here is Credit Suisse’s summary of the Global Wealth 2017: The Year In Review:

According to the eighth edition of the Global Wealth Report, in the year to mid-2017, total global wealth rose at a rate of 6.4%, the fastest pace since 2012 and reached USD 280 trillion, a gain of USD 16.7 trillion. This reflected widespread gains in equity markets matched by similar rises in non-financial assets, which moved above the pre-crisis year 2007’s level for the first time this year. Wealth growth also outpaced population growth, so that global mean wealth per adult grew by 4.9% and reached a new record high of USD 56,540 per adult.

This year’s report focuses in on Millennials and their wealth accumulation prospects. Overall the data point to a “Millennial disadvantage”, comprising among others tighter mortgage rules, growing house prices, increased income inequality and lower income mobility, which holds back wealth accumulation by young workers and savers in many countries. However, bright spots remain, with a recent upsurge in the number of Forbes billionaires below the age of 30 and a more positive picture in China and other emerging markets.

There are a few items in the Credit Suisse’s summary above that I would like to discuss.  First, how did the world increase its global wealth at a rate of 6.4% in 2017 when world oil demand only increased 1.6%??

As we can see from the IEA – International Energy Agency’s Global Oil Demand table above, total world oil demand only increased 1.6% over last year.  Thus, the rate of increase of global wealth of 6.4% in 2017 was four times higher than the 1.6% increase in world oil demand.  I would imagine some readers would stand on their soapbox and emphatically claim that energy has nothing to do with wealth creation.  Unfortunately, these individuals somehow lost the ability to reason along the way.  And we really can’t blame them for making such an absurd remark because they probably believe their food magically appears on the Supermarket shelves.

Second, the financial wizards at Credit Suisse reported that global wealth also outpaced the population growth.  What they are suggesting here is that the “Millenials” who (many) are becoming wealthier by sitting in front of a screen and clicking on a mouse than their grandparents (the poor slobs) who were mainly working in the manufacturing industry by producing real things.

Third, while the Credit Suisse analysts stated that the Millenials were facing some disadvantages, there was a bright spot with a recent surge in the number of Forbes billionaires below the age of 30.  Well, ain’t that a lovely statistic.  What once took an individual at the ripe old age of 55-70 years to achieve a billionaire status, now can be done right out of college.  It’s probably not a good sign for the economy going forward that we are seeing more billionaires below the age of 30.

Global Debt Is Destroying Real Wealth

Okay, now that we know the global wealth reached a new record high in 2017, what about the other side of the story?  You know… the debt.  As I mentioned in my previous article, ECONOMICS 101 states:

NET WEALTH = ASSETS – DEBTS

Now, that equation above is a simple one… kind of like 2 + 2 = 4.  However, the financial industry likes to focus on the assets and not the debts.  But, according to a recent article on Zerohedge, Global Debt Hits Record $233 Trillion, Up $16Tn In 9 Months, the world added more debt in 2017 than total U.S. GDP:

As we can see, total global debt increased from $217 trillion at the beginning of 2017 to $233 trillion in the third quarter of 2017.  That is a $16 trillion increase in global debt in just nine months.  While U.S. GDP hit $19 trillion in Q3 2017, if we add another quarter for the increase in global debt, it could surpass $20 trillion for the entire year.

So, even if global wealth surged in 2017, so did world debt.  According to the data, global wealth increased by $16.7 trillion in 2017 while global debt expanded $16 trillion… nearly one to one. However, this is only part of the story.

If we look at the increase in total world debt and total global wealth over the past 20 years, we can see a troubling sign, indeed:

Since 1997, total global debt increased from $50 trillion to $233 trillion compared to the rise in global wealth from $120 trillion to $280 trillion.  There are two disturbing trends shown in the chart above:

  1.  Global Debt has increased 366% vs. 133% for Global Wealth since 1997
  2.  Net Wealth was $70 trillion in 1997 versus $47 trillion in 2017

If we compared the percentage increase in global debt versus global wealth, global debt is rising at nearly three times the rate of global wealth.  Furthermore, doing simple arithmetic by substracting DEBTS from ASSETS, global net worth fell from $70 trillion in 1997 to $47 trillion in 2017.

By putting the numbers together, right in front of our eyes, we can clearly see that the world is going broke by adding debt.  Basically, we erased $23 trillion in Global Net Wealth in the past 20 years.  However, I believe the situation is much worse than the figures shown above.  For example, I came across an article several months ago on Zerohedge that also reported the increase in global debt, stated it did not include FX Swaps, etc.  According to their data, Foreign Exchange Swaps likely exceeded $13 trillion.  FX Swaps are more short-term debt instruments, but they are still debt instruments.

Moreover, we have no idea what other nasty debts or obligations are hidden out of sight of the public.  Regardless, if we were just to include the FX swaps worth $13 trillion, the estimated net worth of Global Wealth would only be $34 trillion ($280 – [$233 +$13] = $34).

The Percentage Of World Gold Investment To Global World Assets Is Much Higher Than We Realize

Now, here’s how the financial situation gets really interesting.  If we go by NET WEALTH, then the value of global gold investment as a percentage of world assets, IS MUCH HIGHER.  According to the typical financial asset allocations, precious metals comprise approximately 1% of total global assets.  The following chart shows that total global gold investment is valued at $3 trillion and silver at $51 billion (based on $20 silver, last year):

Thus, $3 trillion in the value of world gold and silver investment equals a little bit more than 1% of the $280 trillion in global wealth.  However, if we are clever and remove the debts, the real NET WEALTH is closer to $34 trillion.  Thus, total world gold and silver investment comprises nearly 10% of GLOBAL NET WEALTH, or ten times higher than it is currently valued.

Furthermore, we must remember, physical gold and silver, purchased and held in one’s hand has no debt attached to it.  Of course, this assumes that an individual didn’t take a loan out against their precious metals holdings.  Thus, the precious metals have always been the highest quality stores of wealth for 2,000+ years… even though the Millenials forgot about them for the promise of millions of Crypto profits.

Unfortunately, the situation is much worse than what the figures in the charts above reveal.  Why?  Because, the only way that debts can be paid down is if we have another $233 trillion worth of profits from economic activity, correct?  Now, I am not talking about $233 trillion in costs; I am talking about PROFITS.  Big difference.

To pay back $233 trillion in debts, we have to burn one hell of a lot of energy… don’t we?  That’s correct; we have to burn energy to create economic activity.  And not just plain ole economic activity, PROFITABLE economic activity.  Well, we are in BIG TROUBLE because we have been burning one hell of a lot of oil (95+ million barrels per day), but global debt is increasing faster than global wealth.

So, it’s just a matter of time before GRAND FACADE comes crashing down.

Here’s how I see the future unfolding…

  1. The Falling EROI- Energy Returned On Invested will continue to gut the oil industry, and in time the world will experience CLIFF LIKE declines in global oil production
  2. As oil production suffers massive declines, global debt will become unmanageable.
  3. As debt becomes unmanageable, it starts to collapse.
  4. As debts collapse, so will assets.  Why?  Because debts are the other side of the assets
  5. As assets collapse, so with the value of STOCKS, BONDS, & REAL ESTATE
  6. As investors watch their investments implode, some who still can think for themselves will buy gold and silver
  7. As investors flock into gold and silver, patience will finally pay off for precious metals holders

 – SRSroccoreport

Five Oil Market Myths that need Dispelling: Fuel for Thought

Five Oil Market Myths that need Dispelling: Fuel for Thought

Five Oil Market Myths that need Dispelling

The oil market has come to be defined by several narratives over the past couple of years: market rebalancing, OPEC versus shale, Russia’s delicate relationship with OPEC, OPEC’s conformity with production cuts with the latest deal extension running to end of 2018 and shale’s resilience to lower oil prices. But these frameworks have created a narrow ideology that could harm the way producers participate in the oil market this year and beyond.

Myth 1: OPEC’s exit strategy means exit

The idea that the 24 producers who came together and struck a deal to cut production by 1.8 million b/d in November 2016 are somehow going to ‘exit’ the alliance later this year is misleading. There will be no exit when OPEC, Russia and other non-OPEC producers decide the market has rebalanced—based on OECD stock levels reaching their five year average — rather a continuation of the grand alliance under amended, and most probably looser, terms.

OPEC’s hands are somewhat tied: unwind from the deal and undo all the good work achieved and so must continue managing the market in another guise to create stability and encourage long-term investment in oil.

Gary Ross at Platts Analytics has been talking of cuts “into perpetuity” since the historic deal was made and informed industry sources note that the exit strategy is the wrong phrase to be using. But while there is uncertainty as to what that new agreement will look like, the market will anxiously hang on to the exit strategy term and these jitters could serve to keep an ultimate cap on prices.

Myth 2: OPEC’s top priority is market rebalancing

Market rebalancing may be the measure, backwardation may be the means but price is the ultimate goal.

When prices tanked after a nine-month extension was agreed in May 2017, there was clear disappointment from OPEC sources even if publicly the whims of the market were dismissed and ministers anxiously waited for prices to recover in the medium term.

The difficulty with a price target is that nobody knows what an optimal long-term sustainable price is so the goal posts keep shifting. Besides, different price levels create new supply-demand dynamics and the price maybe influenced by more than just underlying fundamentals such as geopolitical risk.

Thus, for now OPEC’s clumsy priority is market rebalancing. It just needs remembering that bringing down the more than 100 million barrels in stocks to its five-year average could prove elusive given the oversupply in recent years.

There is also the flipside risk in which OPEC tightens too much. Indeed, Saudi Arabia oil minister Khalid al-Falih has admitted that OPEC may need a more concrete goal at its June meeting and when it alters its market management strategy it may well coincide with a new long-term target.

Myth 3: Russia will end its alliance with OPEC

Russian oil companies have begrudgingly stayed on board with the deal due to the iron hand of President Vladimir Putin and steely determination of oil minister Alexander Novak.

Russia is not so at ease with ongoing market management and the fanfare and media circus that surrounds OPEC. Russia also arguably needs the extra revenue less and is more worried about losing market share in Europe and Asia to competition from rising US shale oil exports. But the growing political nexus between Russia and Saudi Arabia, Russia’s increasing swagger as joint head of this broad OPEC alliance (as noted at the November 30 meeting in Vienna with everyone awaiting Novak’s arrival) as well as the budgetary need for sustained higher prices means Russia could well be in it for the long haul.

Putin is keenly aware of the US-Saudi ties and has been building relations with Saudi Arabia since 2007 when it offered the kingdom nuclear aid.

Indeed, the overriding concern for the world’s biggest oil producer is that should the agreement unravel, prices could plunge putting the country back at ground zero. It may be an inconvenient truth for both, but to wield the necessary global energy influence, OPEC and Russia need each other indefinitely.

Myth 4: The battleground is OPEC versus US Shale

US shale crude oil and condensate production forecast

Ever since OPEC did an about-turn on its pump-at-will strategy and started building a market share tactic that was first brokered in Algiers in September 2016, the battle between OPEC and shale has been exaggerated. What may have started out as a move to crush US shale in 2014 has transformed into a broader coexistence at the end of 2017 in a bid to find an equilibrium that allows profits to be made and coffers to be filled by all producers.

There has been growing dialogue between US frackers and the oil producer group.

It could be argued that OPEC’s first mission was to stop the runaway train that was OPEC output as producers ramped up production month on month as competition intensified. It could also be argued that the real target for OPEC is still unconventional and uneconomic oil as once investment becomes a free for all, OPEC risks a repeat of oil boom and bust and the volatility it is trying to guard against. But at what point deepwater, oil sands and Arctic drilling in general becomes economic enough to persuade investors to commit?

For example, the US deepwater Gulf of Mexico sector has struggled since crude dropped in late 2014, but costs have dropped and efficiencies improved, and analysts suggest the sector may be at a turning point if prices are maintained.

Myth 5: US shale is simply resilient

US shale producers may well be predicted to make capex gains in 2018, have made technological innovations in drilling and completions that have brought down costs and have adapted to a lower price environment.

Platts Analytics predicts US shale production growth of 900,000 b/d in 2018. But it appears to have reached a productivity inflection point and a crossroads for investors.

Cyclical cost efficiencies and geological productivity are beginning to unwind with a combination of inflation and a broadening from the sweetest spots and core acreage.

In the Permian, rig efficiency peaked in July 2016 according to the EIA, and has since consistently decreased, while the Eagle Ford and Anadarko (Woodford) plays have experienced a significant drop-off in rig productivity. Moreover, investors want a return on their capital and have tired of capturing resources without seeing value being maximized. For almost a decade, the US exploration and production industry has outspent its cash flows in drilling costs, requiring a constant inflow of debt and equity financing to keep going.

With crude oil prices back above $60 a barrel can investors make a healthy sum? With the biggest producers now the oil majors, their shareholders may prefer returns over market share. – Paul Hickin

 

All the Major Factors that come into Play for Gold in 2018

All the Major Factors that come into Play for Gold in 2018

The Inflation Expectations Play on Gold in 2018

Inflation and the Fed

As discussed in the previous part of this series, the Fed is keenly looking at inflation data to decide on the frequency of rate hikes in 2018. While the Fed kept on stating for some time that the weaker inflation data is transitory, recently it said low inflation is “a mystery” and an “unexplainable surprise.”

The minutes for the Fed’s December 2017 meeting showed that Fed officials are still worried about low inflation. However, the Fed believes the recent tax changes should boost consumer spending, which, in turn, should drive the inflationary pressures.

Inflation

Inflation firming up

While inflation has remained low for several months, the most recent readings might suggest that it has started to pick up. The latest consumer price inflation (or CPI) came in at 2.2% while headline personal consumption expenditure (or PCE) inflation came in at 1.8%. The Fed’s preferred measure of inflation, core PCE, came in at 1.5%, which is below its target of 2.0%. The producer price inflation (or PPI) came in over 3%, which is a multiyear high. As PPI remains high, chances are that this inflation will pass onto consumers, resulting in higher consumer price inflation as well.

Inflation and gold

Since gold is often used as an inflation hedge, firming up inflation is a good prospect for gold. On one hand, rising inflation should encourage the Fed to increase rates. On the other hand, it should drive investors toward gold (GLD). In such an event, key gold stocks (GDX)(GDXJ) like Gold Fields (GFI), IamGold (IAG), Kinross Gold (KGC), and New Gold (NGD) should also benefit. While company-specific factors led to annual gains for IAG, GFI, and KGC, NGD saw losses amounting to 6.0% in 2017.

The Safe-Haven Status into Play for Gold in 2018

Protests in Iran

A few scattered protests in Iran on December 8 over the cost of eggs quickly escalated into a countrywide movement. Iranians are now protesting in large numbers, calling for an end to corruption, unemployment, high inflation, and oppressive government.

War

These protests mark the biggest opposition movement since the Green Revolution in 2009, when Iranians protested the re-election of then-President Mahmoud Ahmadinejad. While the current protests have started to ebb, the anger among the public doesn’t seem to be waning. Analysts feel that, this time, the protests seem to be different. These protests didn’t start in Tehran, nor have activists been the usual elite. In fact, these activists are mostly working and young people, which might suggest that the protests could mark a longer period of unrest.

North Korea

While there isn’t any real news regarding the US and North Korea, fears of a conflict are on the rise. North Korea continues to launch missiles and perform weapons testing. Statements out of North Korea don’t seem to be simmering down, which could mean the possibility of a conflict at any time.

Geopolitical tensions and gold

History serves as a guide that when geopolitical tensions rise, investors seek refuge in safe-haven assets—including gold. In September 2017, after North Korea test-fired missiles, gold’s price zoomed past $1,300 per ounce level. Any conflict going forward could support gold prices, which would also be positive for gold investments such as Barrick Gold (ABX), AngloGold Ashanti (AU), B2Gold (BTG), and Yamana Gold (AUY). Collectively, these four stocks form 13.7% of the VanEck Vectors Gold Miners ETF (GDX).

Equity Market Correction & the Outlook for Gold

Equity markets

Investors are well aware that US equity markets (SPY)(SPX) have hit higher highs seemingly every other day. The Dow Jones Industrial Index (DIA)(DOW) made a record of 70 all-time high closes. The S&P 500 rose 19.4% to hit record highs. Volatility, on the other hand, has remained quite low in 2017. High volatility is usually good for gold prices. Now, after a string of highs, a correction in the market might be on the horizon.

Equity market

Correction in the cards

Blackstone Group’s vice chairman, Byron Wien, predicts that 2018 will see a correction of 10% in the S&P 500. He said speculation will get ahead of itself in 2018, leading to a short correction. Many other experts have also started to worry that stock prices might be too high and that positive news for 2018 might already be priced into the equity markets, which could mean downside for the markets.

Overbought?

The stock markets are trading at very high valuations versus a year ago. While this difference doesn’t automatically mean that the market has become overbought or overvalued, many market participants believe, since most of the positives are already priced into the stock prices, that there’s downside potential.

If this downside potential materializes, gold might be in for a treat. Investors usually flock to gold when other investment alternatives aren’t doing well. The positive sentiment for gold could also affect miners such as Royal Gold (RGLD), Barrick Gold (ABX), Kinross Gold (KGC), and Coeur Mining (CDE), which are leveraged plays on gold (JNUG).

Although royalty companies such as RGLD did well in 2017, other miner categories lagged. ABX and CDE returned -9.4% and -17.5%, respectively. KGC has been an outlier with returns of 39.9% in 2017.

The US Dollar Play & It’s Influence on Gold in 2018

US Dollar in 2017

In 2017, the US dollar or USD (UUP) witnessed its worst performance since 2003, falling 9.8%. The weakness in the US Dollar Index continued, mainly due to the delay in various reforms in the United States (SPY)(QQQ) and the flattening yield curve. A flattening yield curve generally raises concerns about the long-term economic growth outlook.

USD

The USD even started 2018 on a weaker note, sliding to its lowest level in more than three months. This fall came in anticipation of a slower pace of Fed rate hikes as inflation remains weak. But it rebounded on stronger-than-expected US economic data.

US Dollar Outlook

While there’s no crystal ball that can accurately predict the outlook for the USD in 2018, we’ll analyze some variables that can significantly influence the USD in 2018. Inflation is one of these factors. If inflation pressures build up in the US, the USD could strengthen, and vice versa.

Moreover, the performance of the US economy relative to the rest of the world also influences the outlook for USD. Global growth has started accelerating relative to the US, which could decrease the USD’s attractiveness compared to other currencies, reducing its demand and leading to a decline in value. The euro, for example, strengthened compared to the USD in 2017. It has gained the most against the USD since 2003, supported by strengthening European economies as expectations of monetary tightening from the European Central Bank (or ECB) increase.

Citibank (C) is also forecasting that the USD will decline by 5.0% in 2018 due to:

  • the build-up of foreign-owned liabilities
  • accelerating global economic growth relative to the US
  • weaker inflation expectations

It also believes tax reform is now “substantially known and priced.”

US Dollar and Gold

Dollar-denominated assets such as gold and oil become cheaper when the value of the US dollar falls, and vice versa. As we’ve discussed in the above paragraphs, the weakening USD would be positive for the price of gold. It could affect miners positively. This bounce back in gold prices could lead to gains in the stocks of companies such as Goldcorp (GG), Randgold Resources (GOLD), Hecla Mining (HL), and Franco-Nevada (FNV). These stocks are trading at $12.8, $97.6, $4.0, and $79.9, respectively. – Annie Gilroy

 

The Investment Case for Gold Suddenly got very Attractive

The Investment Case for Gold Suddenly got very Attractive

Rising Inflation and Fear will Boost Gold Prices

The price of gold and gold mining stocks were very competitive in 2017. The yellow metal ended the year up a little more than 13 percent—its best year since 2010—while gold stocks, as measured by the NYSE Arca Gold Miners Index, gained more than 11 percent. All of this occurred even as large-cap stocks regularly closed at all-time highs and cryptocurrencies invited massive speculation.

We can thank the Fear Trade for much of gold’s performance last year. The Fear Trade, of course, is driven by low to negative real interest rates—when inflation erodes away at government bond yields—deficit spending, a weaker U.S. dollar and geopolitical uncertainty.

I believe these forces will only intensify in 2018. With inflation finally showing green shoots and President Donald Trump’s $1.5 trillion tax reform law expected to increase deficit spending, this year could provide the right conditions to spur gold prices higher.

The risks inherent in the Federal Reserve’s monetary policy tightening is a good place to start.

Beware the Rate Hike Cycle?

Since the Fed lifted rates last month, gold has behaved just as it did following the last two December rate hikes—that is, it’s begun to appreciate. On the final trading day of 2017, gold broke above $1,300 an ounce, a psychologically important level, and has since climbed an additional 1 percent. This is the first year since 2013, in fact, that gold has started the year above $1,300.

We’ve seen this movie before. In July 2016, the yellow metal peaked close to $1,370 an ounce, a 29 percent surge since the December 2015 rate hike. (If you remember, this represented gold’s best first half of the year since 1974.) And in September 2017, it topped out around $1,360, up close to 18 percent since the December 2016 rate hike.

Will there be a fed rally in 2018

So will we see a “Fed rally” in 2018 as well? Obviously nothing is guaranteed, but let’s say gold were to follow a similar trajectory this year as it did in 2016 and 2017. That would put gold somewhere between $1,460 and $1,600 an ounce by summer. These are prices we haven’t seen in four years.

I think it’s also worth pointing out in the chart above that support looks good for gold. For the past couple of years, it’s steadily posted higher lows.

But wait—shouldn’t rate hikes put a damper on gold prices? Gold, as I’ve discussed many times before, has typically thrived in a low-rate environment since it’s a non-yielding asset. What’s really happening here?

I’ll let Jim Rickards, editor of Strategic Intelligence, field this question. In a recent Daily Reckoning article titled “The Next Great Bull Market in Gold Has Begun,” Jim explains that the market is looking beyond the rate hike and “asking what comes next.”

After all, the December rate hikes in 2015, 2016 and 2017 were all advertised well in advance by the Fed and were fully discounted by the market. This means that the rate hike was a nonevent, because gold was already priced for it.

Yet the rate hike itself and the Fed’s commentary suggest both a headwind for economic growth and possible Fed ease in the form of future inaction and forward guidance relative to expectations.

Gold markets, in other words, could be forecasting slower economic growth as a result of higher borrowing costs. You might not agree with Jim here, and I’m not asking you to. After all, the U.S. economy is humming right now. Consumer spending is up, optimism is high and we have a robust labor market with unemployment at a 17-year low of 4.1 percent. Many people expect the Trump tax cuts to prompt multinational corporations to bring home cash that’s been held overseas, lift wages and boost capex spending.

At the same time, we can’t ignore the historical implications of past rate hike cycles. I shared with you last month that in the past 100 years, only three such cycles out of at least 18 didn’t end in a recession.The current cycle could turn out to be just as benign, but that would make it a huge exception, not the norm.

U.S. Yield Curve Flattens to Level Not Seen Since 2007

Then there’s the flattening yield curve. The yield curve is said to “flatten” when the difference between the two-year Treasury yield and 10-year Treasury yield starts to tighten. As of today, that spread drew up to around 0.496 percentage points, its flattest level since October 2007.

This measure is worth watching because it’s often seen as one of the most reliable “canary in the coal mine” predictors of recession. The past seven U.S. recessions were directly preceded by an inverted yield curve—that is, when short-term yields rose above long-term yields.

An inverted 10 year minus 2 year treasury yeild spread has historcially preceeded a recession

To be clear, we still have a way to go before the yield spread inverts. But if this observation concerns you—if you believe the business cycle is in fact getting a little long in the tooth—it might make sense to ensure you have a 10 percent weighting in gold bullion and high-quality gold mutual funds and ETFs.

Inflation Could Be a Lot Hotter Than We Realize

Another factor that’s driven gold prices in the past is inflation. When the cost of living has eaten away at government bond yields, investors have tended to seek more attractive stores of value, including gold. This is at the heart of gold’s Fear Trade.

The problem is that inflation has been sluggish lately—if we’re using the official consumer price index (CPI). In 2017, the CPI just barely met the Fed’s 2 percent target rate. Many economists had expected prices to start creeping up last year in response to President Trump’s nationalist “America first” agenda, complete with new tariffs, strong crackdown on illegal immigration, cancellation of U.S. participation in the Trans-Pacific Partnership (TPP) and a renegotiation of the North American Free Trade Agreement (NAFTA). So far these policies haven’t had much effect on inflation.

But what’s the “real” inflation? Which gauge should we be looking at? Again, the CPI doesn’t show much movement.

The underlying inflation gauge (UIG), however, tells a different story.

The UIG, introduced only last year by the New York Fed, is a much broader measure of inflation than the CPI. It includes not just consumer prices but also producer prices, commodity prices and financial asset prices.

When we use this dataset, we find that—surprise!—inflation is not as subdued as we initially thought. Whereas the November CPI came in at 2.2 percent, the UIG heated up to 3 percent, its highest reading since August 2006.

Would the real inflation metric please stand up

The implications here are huge. Three percent is higher than the five-year Treasury yield, currently around 2.3 percent, and the 10-year yield, about 2.5 percent. It’s even higher than the 30-year Treasury yield at 2.8 percent!

But there are even more ways to measure inflation, and some show it being higher than the UIG. Economist John Williams runs a website called Shadow Government Statistics, where you can find, among other “alternate” datasets, current inflation rates as is they were calculated the way the U.S. government did pre-1980. Note the huge bifurcation between the official CPI and alternate 1980-based CPI. According to the alternate gauge, consumer prices in November rose close to 10 percent year-over-year, or 7.75 percentage points more than the CPI.

US consumer inflation official vs shadowstats 1980 based alternative

“In general terms,” Williams writes, “methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.”

So which metric do you believe? The official CPI? The 1980-based CPI? The broader UIG? If it’s one of the last two, you have to ask yourself why you would lock your money up for five years, 10 years or even 30 years in a government bond that fails to keep up with real inflation. The investment case for gold suddenly becomes very attractive. – Frank Holmes

 

2018 Promises To Be A Major Turning Point In Commodities

2018 Promises To Be A Major Turning Point In Commodities

2018 Promises To Be A Major Turning Point In Commodities

Commodities are forging a record-setting run of gains that straddles the end of 2017 and the start of the new year as crude oil notches multiyear highs and investors bet that booming global manufacturing output will help to sustain rising demand for raw materials. Commodities eked out a second annual gain last year and heading into 2018, banks including Goldman Sachs Group Inc. are optimistic there will be further advances. Last month, the firm reiterated its 12-month overweight recommendation.

The commodity rally has ignited shares of producers. BHP Billiton Ltd., the world’s largest mining company, has risen in London to the highest since 2014. BP Plc, the British oil major, posted the first back-to-back annual gain last year since 2005. Invesco’s PowerShares DB Commodity Index Tracking Fund climbed for an 11th straight session through Wednesday, the longest winning streak since it was listed in 2006.

Cheap and Unloved, but Commodities Blasting Higher in 2018

The S&P 500 delivered returns just shy of 20% in 2017.

The Nasdaq gained more than 28%, with household name tech stocks like Facebook, Netflix, and Amazon leading the way higher. Each of these plays boasts 2017 gains of more than 50%.

But the cryptocurrency space tops them all. Bitcoin launched to ridiculous 12-month gains of more than 1,300% — even after retreating more than $5,000 from its December peak.

There was no shortage of opportunities for investors in 2017. Historically low volatility provided excellent profit chances for traders and investors alike. It was downright impossible to lose money in 2017. Unless you bet big on commodities…

Thanks to a first half swoon, the Bloomberg Commodity Index went nowhere in 2017. Gold and oil both underperformed the major averages. Stocks and sectors with exposure to these commodities were dead money walking for most of the year.

But the market is quickly shifting to begin 2018 trading.

Energy stocks rallied off their lows during the third and fourth quarters. Metals and mining stocks are also blasting higher. Heck, we even saw a bounce in gold to cap the final trading weeks of the year…

2018 Promises To Be A Major Turning Point In Commodities

Bottom line: we’re starting to see rumblings of a major turning point in commodities. In fact, this forgotten trade could turn into one of the biggest comeback moves of 2018.

No one in their right mind is paying any attention to commodities right now. Why should they? After all, we haven’t seen a sustained rally throughout the commodity space in a long time. The Reuters-Jefferies CRB Index officially topped out in late 2008. Even after its recent rally, the commodity index isn’t far from its 2001 lows. That sets up a compelling trading opportunity for anyone looking for value in this red-hot market.

Fact is, commodities are cheap compared to stocks. Historically cheap. The CRB’s performance compared to the S&P 500 has spiraled lower over the past five years as stocks have rallied. The CRB – S&P 500 ratio is now at its lowest level since the CRB Index was created in 1957, John Murphy notes on his blog at Stockcharts,com.

Commodities have become the most unloved trade on the market. Now that the group is finally bouncing off extreme levels, some of the smartest market minds in the world are taking notice.

“You go into these massive cycles,” DoubleLine CEO Jeffrey Gundlach tells CNBC. “The repetition of this is almost eerie. And so if you look at that chart the value in commodities is, historically, exactly where you want it to be a buy.”

Economic catalysts are also bolstering the value argument for commodities. An uptick in global growth is boosting copper, Bloomberg notes, while increased demand for electric vehicles is a positive for the price of nickel. Executive orders signed by Trump could also lead to more mining activity in the U.S. Sprinkle in a weakening dollar and you have the fundamental pressure the commodity market needs to see to sustain a successful rally.

Major turning points like the one we’re seeing right now can generate spectacular comeback moves. In fact, we’re already witnessing several of these rallies in our commodity-centric plays. Just look at copper miner Freeport-McMoRan Inc. (NYSE: FCX).

FCX posted gains of more than 36% in December alone, capping a six-month comeback move of more than 56%. If we turn to the charts, it’s easy to see copper’s impressive turnaround. After years of pain and suffering, a sustainable rally is in the works.

2018 Promises To Be A Major Turning Point In Commodities

FCX first ripped off its 2017 lows right after reporting second-quarter profits back over the summer. The company didn’t even beat earnings expectations, but solid revenue and upbeat guidance was enough to spike the stock. It’s certainly come a long way since bottoming out in early 2016. Now its sitting at prices we haven’t seen since 2015.

When we last updated you on FCX in early December, its share price had gained more than $2 over just six trading sessions. Freeport has now broken out to new two-year highs and appears primed and ready to make a legitimate run above $20. If momentum traders continue to pile into unloved materials and mining stocks like this one, we could be in for a wild ride. – Greg Guenthner

 

The New Bull Market in Gold will be More Powerful than Ever Before

The New Bull Market in Gold will be More Powerful than Ever Before

The New Bull Market in Gold will be More Powerful than Ever Before

A new, long-term, secular bull market in gold has begun.

This new trend will take gold prices past $1,400 per ounce by the end of 2018, past $4,000 per ounce by 2020 (if not sooner) and ultimately to $10,000 per ounce or higher by the mid-2020s.

This bull market in gold actually began on Dec. 17, 2015, when the dollar price of gold sank to $1,051 per ounce. This new bull market in gold was two years old last weekend.

That’s OK. Bull markets begin slowly, almost unnoticed in the gloom of the prior bear market. The biggest gains often come after a few years when the crowd catches on and the price action gains momentum.

This new bull market in gold is the real deal and should last until 2028 or beyond.

The moves so far have been relatively small compared with what’s ahead. This is the perfect time to make your allocation to physical gold, gold mining shares and gold royalty companies or “streamers.”

The last secular bull market in gold began on Aug. 25, 1999, when gold bottomed at $252 per ounce. From there, it began a spectacular 12-year run until peaking at just under $1,900 per ounce on Sept. 2, 2011.

The 1999–2011 bull market represented a 655% gain over the starting price, easily outpacing stocks, bonds, emerging markets and other competing asset classes.

September 2011 marked the start of a brutal four-year bear market, with gold finally bottoming at $1,051 per ounce. Unfortunately, that bear market included a lot of head fakes and bear traps along the way.

Gold managed a 13% rally from around $1,580 to $1,780 per ounce in the late summer and early fall of 2012. It also managed another 15% rally from $1,200 to $1,380 per ounce in the first quarter of 2014.

There were other notable rallies along the way, but every one was snuffed out by disinflation, Fed tightening after 2013 or manipulation in the gold futures markets.

No gold investor can forget the “April Massacre” in 2013 when gold was crushed from $1,550 to $1,360 per ounce in two weeks, a 12% rout.

Buying the dips was a consistently losing strategy as gold continued its downward trajectory after every brief rally. The pain continued until December 2015.

The Next Great Bull Market in Gold Has Begun

The most important piece of evidence that the next great bull market in gold has begun is the technical behavior of the prior bear market itself.

Over many decades, commodities rallies have exhibited 50% retracements (bear markets) before resuming their long-term upward trends based on the slow, steady devaluation of the fiat currency in which the commodities are priced.

Using the $252 price from August 1999 as a baseline and referencing the September 2011 peak price of $1,900 per ounce, gold gained $1,648 per ounce in the bull market. A 50% retracement of that 12-year rally means a decline of $824 per ounce (i.e., 50% of the $1,648-per-ounce gain), which would put gold at $1,076 per ounce.

Guess where gold prices bottomed?

It bottomed at $1,051 per ounce, within 2% of the 50% retracement target. That decline is an almost perfect technical retracement.

By itself, this pattern proves nothing without additional confirmatory evidence. This is why we did not call the end of the bear market in 2015. We needed more proof.

There were (and still are) plenty of analysts calling for $800-per-ounce gold. How do we know that recent gains are not just another bear trap?

The reason rests in the consistency of the gains. Gold rose 8.5% in 2016, a solid if not spectacular gain. Then gold rose again in 2017, by over 12%.

Gold fell on an annual basis in 2013, 2014 and 2015. Gold has not had back-to-back annual gains since 2011–12. These back-to-back gains in 2016–17 point to a solid foundation and a decisive break in the prior years’ bear market trend.

This “steady Eddie” performance the past two years has been overshadowed by much more spectacular gains in stocks and bitcoin.

Recent gains in stocks may continue for a while but are ultimately unsustainable because of the likelihood of a recession or liquidity crisis in the next few years. In those conditions, a retreat in stock prices of 30–50% would not be at all unusual.

Bitcoin is an unprecedented combination of fraud, mania and a Ponzi scheme all in one. The bitcoin price could go higher in the short run but will also end in tears, with 90% losses for naïve “investors” from around the world lured into an artificially pumped-up mania.

Meanwhile, gold is in the early stages of a sustainable long-term bull market that will come to surpass the 1999–2011 bull market in time.

Investor psychology has been slow to change despite recent gains. Gold investors have been discouraged by the periodic drawdowns in the gold price, including the November–December 2016 mini-crash after Trump’s election.

But these short-term drawdowns need to be considered in the context of the much more positive long-term trend just described.

The historic 1999–2011 rally also started slowly and then gained steam. The largest percentage gains year over year did not begin until 2005, almost six years after the bull market began. From there the bull market still had almost six years to run.

In addition to the retracement pattern and back-to-back annual gains that validate the start of a new bull market in gold, another technical pattern (with fundamental roots) has emerged as a positive for gold.

I’m sure you’ve heard the old adage that things happen in threes. This can apply to good things and bad. Right now we’re witnessing a positive phenomenon in threes when it comes to gold and Fed monetary policy.

On Dec. 16, 2015, the Fed raised interest rates for the first time in nine years. This was the famous “liftoff” and happened after the Fed teased markets about a rate hike through all of 2015.

Immediately after the rate hike, gold prices surged from $1,062 per ounce to $1,366 per ounce by July 8, 2016, a spectacular 29% rally and gold’s best six-month performance in decades.

Then on Dec. 14, 2016, the Fed again raised rates for the first time since the December 2015 rate hike despite earlier expectations that the Fed would hike rates four times in 2016. Gold surged again from $1,128 per ounce at the time of the rate hike to $1,346 per ounce on Sept. 8, 2017, a 19% rally in just over nine months.

Last month, for the third December in a row, the Fed hiked rates again after taking a “pause” on rate hikes in September. Once again, gold answered the starting gun. Gold immediately rallied from $1,240 per ounce on the afternoon of Dec. 13 to $1,258 per ounce the next day, a solid 1.5% gain in one day.

If gold follows the pattern of the last two December rate hikes, this new rally could go to $1,475 or higher by next summer. That would be a 20% rally in six months, roughly comparable to the rallies after the December 2015 and December 2016 rate hikes.

Price of Gold

This chart shows the U.S. dollar price of gold from March 2015 to December 2017. The Federal Reserve (“Fed”) raised interest rates in December 2015, December 2016, and December 2017. After the first two rate hikes, gold staged spectacular rallies of 29% and 19% respectively in a matter of months. Gold is up about 4% since the Fed’s December rate hike. A powerful new “Fed rally” has begun from a higher level than the past two. This should take gold to $1400 per ounce by mid-2018.

 

Of course, nothing moves in a straight line. There will be new drawdowns to go along with the new rallies. But the upward trend seems well-established at this point.

Some of this price action following the three December rate hikes could just be noise or coincidence. We all learned in statistics class that correlation does not mean causation. And three events may correspond to the adage, but it’s not exactly a longtime series on which to build a statistical case. Still, it’s an intriguing pattern.

Gold has a reputation for being the most forward-looking of all macro indicators. Gold investors smell trouble and opportunity long before stock and bond markets catch the scent.

The fact that gold would rally after a rate hike is counterintuitive. Usually higher nominal rates equal higher real rates, which is poison for gold.

Why the rallies?

The gold market is looking through the rate hike and asking what comes next. After all, the December rates hikes in 2015, 2016 and 2017 were all advertised well in advance by the Fed and were fully discounted by the market. This means that the rate hike was a nonevent, because gold was already priced for it.

Yet the rate hike itself and the Fed’s commentary suggest both a head wind for economic growth and possible Fed ease in the form of future inaction and forward guidance relative to expectations.

That’s exactly what happened after the 2015 and 2016 rate hikes. If the Fed takes its time on future rate hikes because of weak growth and disinflation, the dollar will weaken and gold will get a huge lift.

If the pattern of the last two years repeats this year, gold will reach a much higher level because it’s starting from a much higher level. The December 2015 rally started from $1,062 per ounce.

The December 2016 rally started from $1,128 per ounce. This rally starts from $1,240 per ounce.

This pattern of “higher highs and higher lows” has persisted through the past three years despite rallies and drawdowns along the way.

If good things come in threes, then this was the third December rally in a row and could take gold back to the long-awaited $1,400-per-ounce level. Now looks like a good time to jump on board to enjoy the ride.

What other evidence exists for the conclusion that we’re in a sustainable long-term bull market in gold and not just another false start?

The most important fundamental factor in favor of higher gold prices right now is the imbalance between physical supply and demand. I have seen both sides of this equation firsthand.

On the supply side, I have visited gold mines in South Africa, Canada, Australia and the U.S. I have been to gold refineries in Switzerland and gold vaults in Sydney, Switzerland and New Castle, Delaware. I speak with gold dealers on an almost daily basis.

On the demand side, I have met with government officials in Russia and China and with the senior officers responsible for gold trading at the biggest banks in China.

In every visit and every conversation, I encountered the same complaint: Physical gold is in short supply. Refiners can’t get enough to meet demand. Miners are looking at five-year lead times on new discoveries and reopening old mines shut in during the price collapse of 2013–15.

Vault operators are seeing the shift from bank storage to private storage, which reduces the floating supply needed to support the paper gold manipulations.

In addition, we are looking at several major gold spike catalysts in 2018, including a trade war with China and a shooting war with North Korea.

Russia, China, Iran and Turkey, what I call the “Axis of Gold,” continue to buy gold overtly and covertly in prodigious quantities.

The western gold powers such as France, Italy, Switzerland, Germany and the IMF have not sold an ounce of gold since 2010. The U.S. has barely sold an ounce of gold since 1980.

On a worldwide basis, demand is up and supply is down, and that can only mean one thing in the long run — higher prices.

This combination of fundamental, technical and geopolitical factors is converging in 2018 in a way we have not seen since the late 1970s. The new bull market in gold will be even more powerful than the 1971–1980 bull market and the 1999–2011 bull market in gold. – Jim Rickards

 

Stealth Rally in Gold Prices Enabled by the battered US Dollar

Stealth Rally in Gold Prices Enabled by the battered US Dollar

Stealth Rally in Gold Prices Enabled by the battered US Dollar

We are now officially on board a train which is gathering speed towards its buffers: the end of dollar hegemony and its potential collapse. It might take a few years yet to get there, but the speed of our train is dependent to a large degree to how the engine’s boiler is stoked by America through her isolationist plans. It is very hard to see how the dollar cannot decline significantly with America’s autarkic trade policies, benefiting gold prices.

The erosion of the dollar’s petrodollar status

In all currency pairs, international traders have to take into account factors driving two currencies in assessing a future exchange rate. The purpose of foreign exchange at its most basic is to settle gross cross-border trade movements, with the balance of these flows paramount in determining the exchange rate. Today, by far the largest trading nation is China, so settling trade between the dollar as the default currency for trade and the yuan is the most important currency issue today.

China manages her currency rate to her perceived national advantage. In recent years, this has meant tracking industrial commodity prices. When they were falling measured in dollars, the yuan was managed lower with them. But with commodity prices rising from last January, the yuan has also risen. We can therefore assume that as China’s imports of commodities accelerate to satisfy the ambitions of her current thirteenth five-year plan, the yuan will continue to be managed to rise in line with the general level of commodity prices.

From this flows the relationship between the yuan and the dollar. That said, China manages to keep commodity prices suppressed through the simple expedient of bypassing markets by purchasing agreements that only use market prices for reference. Doubtless, China hopes that through off-market supply agreements, her infrastructure plans will not raise commodity prices unduly against her.

This hoped-for period of relative calm in international commodity markets should allow China to pursue her plans to increasingly use yuan for trade settlement with her energy and commodity suppliers. She has already set up some of the financial instruments to make the yuan more acceptable to suppliers, and held back on others, notably energy. The oil-yuan futures contract has been the subject of considerable controversy, because it will allow oil suppliers such as Iran to bypass the dollar entirely and to hedge yuan by buying gold through matching yuan-gold futures.

For the avoidance of doubt, these contracts are only available to non-domestic traders, and any gold bullion acquired through the yuan-gold futures contracts will be sourced from international markets, not China nor her citizens.

The problem with these contracts is they amount to a frontal attack on the US-dominated international financial system. Since the collapse of the Bretton Woods Agreement in 1971, the Americans have rejected all monetary roles for gold, and selling commodities or goods for gold is strongly discouraged. More sensitively, pricing and selling oil in anything other than the dollar is a direct threat to the petrodollar and the dollar’s hegemony. For these reasons, the Chinese have held back on plans to introduce an oil-yuan futures contract, though the exchange is set up and ready to go.

It is quite likely the subject of these contracts has been discussed between Beijing and Washington, given their sensitivity. However, if the Chinese don’t introduce oil-for-yuan futures soon, it is likely other exchanges might, given the potential demand and China’s preference for settling energy purchases in yuan. There already exists a yuan-for-gold future in Dubai, and it would make enormous sense to introduce a matching oil-for-yuan future alongside it.

The largest oil exporters by volume to China are Russia, followed by Saudi Arabia. Both Russia and Angola, another major supplier, are selling oil for yuan. Saudi Arabia will need to do the same, to maintain market share, and there are rumours this will happen early in the new year.[vi] Saudi Arabia is tiptoeing cautiously towards China and Russia, recognising that is where her commercial future lies. However, it was the agreement between Nixon and King Faisal in 1973, which created the petrodollar and ensured all other commodities would continue to be priced in dollars after the Nixon shock. If the Saudis start accepting yuan for oil, it will mark the end of that agreement and therefore the beginning of the end for the petrodollar. At that point, the oil-for-yuan futures contract becomes inevitable, if not already introduced beforehand.

Applying the brakes on the speed of change is never easy, and if the market wants something, someone, somewhere, will provide it. This is the reality behind the oil-for-yuan issue. Elsewhere, China’s plans move on. Financing structures for Asian infrastructure spending are being assembled. For example, a private £750m fund, chaired by ex-Prime Minister David Cameron, was announced this week and it will act as a lead manager for UK and European based infrastructure investments in Silk Road and other Asian Infrastructure Investment Bank projects. This will help ensure the City of London continues to play a major international financial role after Brexit.

These developments will undoubtedly be a major blow for the dollar in 2018, adding to selling pressure on the exchanges. Once these pressures become more apparent, foreign owners of dollar investments are bound to become nervous, being over-weighted, holding $17.139 trillion in mid-2016, the last date of record.

Global interest rate outlook, and the implications for gold

In 2018, major economies can expect to run into a brief expansionary phase of the credit cycle before the next credit crisis. By the expansionary phase, we mean the reallocation of credit from financial assets to non-financial activities, which will be recorded as a further fall in bond prices, the beginnings of an equity bear market, and a material acceleration in nominal GDP.

This phase happens in every credit cycle, when returns on financial investments decline and risks in non-financial lending appear to have receded, along with memories of the last credit crisis. When extra bank credit is then applied to non-financial demand and supply, prices of goods and services inevitably begin to rise as that credit is spent and the price effect spreads through the economy. In some nations, this process has been evident for some time. Given these things develop a momentum of their own, it is likely that in 2018 prices of raw materials will resume their upwards trajectory, and price inflation in fiat currencies will rise as well.

Fueling this trend will be China, whose appetite for industrial commodities is planned to escalate significantly. This is why China is likely to offset some price inflation pressures through managing the yuan’s exchange rate upwards against the dollar. While China’s commodity purchases will predominantly bypass markets (as stated earlier in this article), there can be little doubt major shortages will develop as other economies, benefiting indirectly from China’s expansion, increase their demand for raw materials. A combination of rising goods and services prices will be coupled with falling bond and equity prices, as the reallocation of bank credit from financial activities gathers pace. Central banks will desperately try to moderately adjust interest rates upwards, hoping not to trigger a credit crisis. The result is they will always be one step behind the markets, and these are the optimum conditions which favor gold.

Driving the global economy, is of course, China. Without China, other major economies would stagnate, with ordinary people heavily encumbered by a triple burden of taxes, regulation, and wealth destruction through monetary inflation. It stands to reason that those closest to the Asian story benefit most. Commodity suppliers, led by Russia, the Central Asian states, Australasia, the Middle east, sub-Saharan Africa and Latin America all benefit from China’s thirteenth five-year plan. Canada does as well. Europe benefits from increased trade through the Silk Road, where goods are now in transit for less than two weeks compared with a month by sea, a time that will soon be cut to less than ten days.

The observant reader will notice the United States is missing from this list. America has moved from being the world’s dominant economic power, to only supplying the commonly used currency, a currency that is rapidly becoming irrelevant for trade. By pursuing an isolationist “America first” policy that restricts free trade, America will end up last.

For this reason alone, the bearish headwinds facing the dollar and an isolated US economy in 2018 appear to be badly underestimated.

The Year for Gold

On domestic and international considerations, the outlook for the dollar is deeply negative, and so is correspondingly positive for the dollar price of gold. Price inflation in the US will likely increase, and the Fed, fearful for bond markets and asset prices generally, will be too slow in its response. In any event, raising interest rates does not restrict the money quantity, which according to monetarist thinking is what will be required to bring price inflation under control.

Instead, rising interest rates alters the allocation ratios between cash and term loans. Eventually, central banks raising interest rates will trigger the next credit crisis, but until that happens, the dollar is likely to be weak against commodity prices in particular, and the yuan as well, assuming the Chinese authorities continue to track commodity prices in their currency management strategy.

Internationally, portfolios are loaded to the gunwales with dollars, a remnant of past dollar strength, so they are quite likely to turn sellers. Meanwhile, the largest trading nation by far, China, is doing away with the dollar, and is fully aware that this policy could easily end in a disaster for the world’s reserve currency. Presumably, the Chinese anticipated this eventuality when they began to accumulate gold from 1983 onwards, and encouraged their citizens to do so as well after 2002. Owning physical gold is the ultimate protection against a fiat currency collapse.

Next year is almost certain to see the introduction of hedging facilities for oil exporters to China, forced to take yuan for oil. An oil-for-yuan contract is ready for launch, and could easily be announced in the coming weeks. This event, which is increasingly inevitable, will mark the end of the petrodollar, and can be expected to begin a major financial upheaval, likely to spread to all commodity markets.

Meanwhile, the Americans seem oblivious to these challenges. Only this week President Trump in his National Security Strategy document again promoted his trade isolationist policies, while maintaining that America still has primacy over other nations. This is wholly delusional, because the economic locomotive pulling the world along is China, not America.

The cryptocurrency phenomenon, if it continues, is likely to be an additional destabilising factor for the dollar. In truth, bitcoin and the dollar share the same lack of true monetary status, but their supply characteristics are where they differ. Cryptocurrencies seem likely to expose fiat currencies’ weaknesses, which after all is why they come into existence.

This background of negative events for the dollar is also the primary positive factor for gold. For years, control of the gold price has been suppressed in American markets, through the expansion of unbacked gold derivatives. That control is likely to be first challenged by a weakening dollar, and ultimately wrested from US futures and London’s forward markets, if only because physical gold markets are now firmly under Chinese control. – Alasdair Macleod

Keep Watching The US Dollar In 2018

After a major downside surprise in 2017, one of the biggest stories for 2018 will be the relative value change in the US dollar.

We say “relative value change” because, of course, the US dollar is typically measured by changes to the US Dollar Index. This index compares the value of the dollar to a basket of other major fiat currencies. So when we say, “the dollar is falling”, what we’re really saying is that it is depreciating versus the euro, yen, pound and others. See below:

2017 began with the general consensus that the US dollar would strongly rise in the months ahead. Almost all Wall Street economists predicted this, and it led the venerable “Economist” magazine to print this cover in late 2016:

Well, a funny thing happened on the way to a dollar resurgence. . . . The index actually fell …and, in fact, it fell quite sharply. It seems that though The Economist believed a dollar rise was coming, Janet Yellen and President Trump said otherwise.

And now here we are again at the start of a new year …and, once again, predictions of “dollar strength” abound. But is that about to play out? The chart below from the first trading day of 2018 appears to disagree. Note the breakdown below 92 with what appears to be a test of the 2017 lows near 91 coming very soon:

For further clues, check what the CRB Commodity Index is telling us. Any breakout about 195 would be significant:

More specifically, what is copper saying about the future of the US dollar? Ole DrC is now at multi-year highs and at levels not seen since July of 2014. And where was the US Dollar Index trading back then? Close to 80!

So let’s be sure to watch the US dollar very closely in the months ahead. If it falls another 10% or more in 2018, what will that mean for gold, silver and commodity prices, in general? And with so many prices already on the verge of significant breakouts, the surprise of a falling dollar may be the fuel to prompt renewed bull markets across the board. – Craig Hemke

Gold and Silver Price Predictions for 2018

Gold and Silver Price Predictions for 2018

Gold and Silver Price Predictions for 2018

With such a solid end to 2017, it prompts the question what we might expect of gold prices in 2018. The most immediate question is whether or not it will pick up where it left off 2017 and continue its climb into the New Year, or fizzle and spend the year going sideways or worse, down. I have refrained from the perennial turn of the year prediction sweepstakes for a number years, but I will venture out on the limb this year to say a price in the mid-$1500s looks achievable in 2018.

Coming off two successive positive years, gold seems to be building toward something. Fizzling or dropping seem unlikely given 2017’s surprise performance and the general state of global equity markets – most of which seem to be overpriced, over-loved and over the top. 2017 will be recorded as a transition year for gold; 2018, in my opinion, will go down as the year gold reasserted itself as a primal force in the global financial marketplace.

I base that opinion not so much on the fundamentals or a technical reading of the charts – or anything overly scientific for that matter, but rather on a gut feeling that comes with being in the gold business for 45 years. When all is said and done for 2018, after all the factors have been weighed and measured, I see sentiment – a thing that cannot be measured or weighed – emerging as the principal determinant for gold in 2018.

http://www.goldseek.com/news/2018/1-1mk.png

Investment capital is forever rummaging around for an opportunity and smart money will always find what is undervalued. That in a nutshell is what gold has going for it as we enter the new year. In 2017, we saw the first signs of a sentiment-driven, smart money migration to gold – a vanguard led by professional investors who govern institutional trading desks and manage multi-billion dollar hedge funds. In 2018, cash-flush private investors, absent the past year, will join with professional money in the pursuit of gold both in physical and paper forms. That will be good enough to generate a 20% improvement from December’s closing number and put the gold price in the $1550-$1560 range.

As for silver, I would not be surprised to see it trading over $22 at some point during the course of the new year – the equivalent of a 30% price increase. It has a history of outperforming gold on both the upside and the downside, and this time around is unlikely to be an exception. Silver will also continue to benefit from its new role as a safe-haven asset and junior partner to gold in the asset preservation business. – Michael J. Kosares

 

Copper Price Outlook & It’s Implications on Silver Prices

Copper Price Outlook & It's Implications on Silver Prices

Copper Price Outlook & It’s Implications on Silver Prices

Technical analyst Clive Maund delves into the reasons behind the recent rise in copper prices and what that could mean for silver prices.

We have seen an unusually steady uptrend in copper this month that has resulted in it appreciating by about 10%, which might not sound like much, but makes a big difference if you are a producer with fixed costs. What is remarkable about this uptrend is not only that it came hard on the heels of a high volume smackdown in the early days of the month that at the time looked bearish, but that we have seen 16 days trading days in a row of higher closes as of the close of trading on Thursday, as can be seen on the 3-month chart for copper shown below. After doing some extensive research it has been discovered that the fundamental reason for this day after day seemingly interminable uptrend was that a prominent Chinese buyer, who has an old fashioned way of doing things, was walking over to the London Metals Exchange every day for weeks with his black briefcase in hand and buying roughly the same amount of copper.

But sadly, on Friday, he was run over by a London bus while on his way to the exchange, and was thus unable to buy and the price dipped for the first time in long while.

We will now zoom out to look at copper on its latest 1-year chart. On this chart we can see that, while copper still has not broken down from its steep uptrend in force all this month, it is getting very overbought on its MACD and RSI indicators and is quite a long way ahead of its 200-day moving average, and these factors, taken together with the now extreme COT structure and sentiment indicators that we will look at shortly, suggest a high chance that it will go into reverse here or very soon and react back.

Next we will look at copper’s latest COT chart, which, since it also goes back a year, can be directly compared to the 1-year copper chart above. As we can see, Large Spec long positions are very close to their highs of the past year, and when they have reached these sorts of levels in the past, a reaction back by copper reaction has ensued, and a reaction is made more likely given the factors that we have observed on copper’s 1-year chart, and the sentiment extremes that now exist that we will look at next.

On the latest copper optix, or optimism chart, we can see that bullish sentiment towards copper is at the sort of wild extremes that we have only seen once before in the last 10 years, and that coincided with a major top. This is not to say that it does this time, but it would certainly seem to indicate a high probability that we are at or close to a significant intermediate (medium-term) top.

Chart courtesy of sentimentrader.com

The long-term chart for copper actually looks very bullish, because the bull market that began in October 2016 has been driven by record strong upside volume, which has propelled both volume indicators to clear new highs. What this suggests is that, while the other factors that we have already looked at, allied with the considerable resistance approaching the old peaks that we can delineate on this chart, will probably force a reaction back soon, the longer-term outlook remains favorable, with a high probability that copper will eventually proceed to break out to new all-time highs, i.e., get above even its 2011 peak in the $4.60 area. If that happens its rate of rise can of course be expected to accelerate.

While a detailed look at the copper price technicals may seem like a waste of time to some of you, given all the other subject matter for such analysis, it is important to keep in mind that we are not looking at copper for its own sake, we are looking at it because of its implications for the economy generally, and especially because of its implications for the outlook for the prices of other metals, especially silver prices. What we are seeing on these copper charts, principally its long-term chart, bodes very well indeed for the future trend of silver prices.

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