Commodity Trade Mantra

Gold and Silver In an Age of Negative Interest Rates & Madness of Managed Markets

Gold and Silver In an Age of Negative Interest Rates & Madness of Managed Markets

Gold and Silver In an Age of Negative Interest Rates

Time is the soul of money, the long-view — its immortality. Hard assets are forever, even when destroyed by the cataclysms of history. It is the outlook that perpetuated the most competent and powerful aristocracies in continental Europe, well up through World War I and, in certain prominent cases, beyond; it is the mindset that has sustained the most fiscally serious democratic republic in the Western world, that of Switzerland (as demonstrated in this article). In this view, the stewardship of money, formerly known as “banking,” is a serious matter of serious wealth management and not a weird-science lab experiment of investment products ultimately designed for hedge fund managers’ tax arbitrage schemes.

More than ever the focus on hard assets is a dire call to arms given the deformed market culture of central banking monetary magic. Despite the early promise of the Trump presidency to reinvigorate the economy, the United States remains mired in economic stagnation built up over so many years of debt-driven policies, easy-money policies, and the ZIRP fiasco fostering a bizarre-world situation in which the actual economy is doing poorly while the market is soaring. In such an environment, the allure of the centuries’-old tried and true has never had more appeal.

In a word, the hard asset vision is about building wealth outside the stock market. It refers to three main strategies overall:  1) land ownership and/or farmland, forestry and agriculture 2) gold, other precious metals, and certain base-metal commodities 3) The (Old Masters/Classic Modern) art market. Where this last is concerned, we mean art as investment and not art-as-commerce, such as that which contaminates today’s insipid and overpriced world of ‘Balloon-Dog’ bad art. The auction world of Rembrandt and Picasso; of El Greco and Gerhardt Richter has been on a tear, is smashing records, and cannot be ignored as an excellent safe-haven vehicle, as outstanding works of art traditionally always have been.

To begin with, physical gold and precious metals remain an investment enigma despite being market-leading performers for the past seventeen years. Gold is a must-have portfolio asset amid the aggressive debt levels and monetary debasement that have so unhinged the market. Silver, for its part, in addition to its prestige status, also has innumerable industrial applications and throughout the precious-metal bull market since 2000.

Russia, in this context, is leading the charge in the long-view outlook. For the past three years, the Bank of Russia has been the world’s number one stacker of gold, and, thus far in 2017, has taken the lead position among international central banks in buying the commodity. At its current pace, Moscow will unseat China for the number five spot of gold-holding nations by the first quarter of 2018. Currently, the gold-to-GDP ratios of the world’s leading powers are: Russia 5.6%; the Euro Zone 3.6%; the U.S. 1.8% and China 1.5%.

Yet countries buying up gold versus investors who do so are two different worlds. Ninety-five percent of the world’s gold is held as a wealth store.

In other commodities, zinc and copper have been the big movers. Zinc, the key galvanizing agent, claimed the status of the best performing metal last year. Copper began its resurgence in 2017, and in late August of this year, a host of commodities broke out of multi-month consolidation patterns. Nickel and cobalt are also coming into the spotlight as metals essential to the rapidly growing lithium ion (Li-ion) battery sector.

The art world lags not too far behind that of precious metals in terms of history’s preferred storehouses of value as protection against uncertain times. Art as investment has long been a favored strategy of the European elite since, effectively, the High Middle Ages and has never gone out of style. In modern times, the phenomenon of an ever-growing collectors’ base and less supply of museum quality works has been accepted as a meaningful way to protect investors’ cash during economic difficulty. Though continually eclipsed in the media by the brasher contemporary art market, Old Masters (and Classic Modern—the great 20th century works) have shown stable, often spectacular, results over the past ten years with both categories reaching record-breaking highs.

Art, to be a safe haven, must be an investment and not a whim — just as it was for the Liechtenstein family who acquired Leonardo da Vinci’s Ginevra de Benci so many centuries ago. In the wake of the World War II near-bankruptcy of that eponymous principality (whose monarchs were not and are not supported by taxes), that painting was the first of the major, big-ticket art sales of the 20th century, when it was sold to Paul Mellon and The National Gallery of Art in Washington DC. Ginevra continues to hang there today (and to date, is the only Leonardo painting in possession of the United States).  While the average investor may not be in a position to store wealth in a Renaissance master or a Picasso, there are always the underrated gems or the new discoveries that can and will bring in the most unexpected of windfalls decades down the line.

Finally, farmland is seen by many as an excellent addition to a precious-metal portfolio. As Jim Rogers predicted in early September, fortunes will be made in agriculture “and when an industry breaks full faith, even mediocre people make a lot of money” in that sector. Hard asset investors continue to include farmland in their portfolios “for a combination of income generation, diversification and inflation-hedging”. Historically, farmland, like forestland in continental Europe or Latin America, has been a unique asset class demonstrating low-correlation to traditional asset classes, and which performs well as inflation rises.

Cash reserves, land as cash, the endless applications of Nature’s resources to industry; the prestige, privacy, and long-term value of beautiful art: such has been the outlook of the hard-asset philosophy. Today, that cult of independently-minded investors will laugh all the way to the bank — precisely by avoiding the paths laid out, and so horribly deformed, by those very banks. – Marcia Christoff-Kurapovna

Gold and Silver – The Monotonous Madness of Managed Markets

Michael Ballanger: So there you have it. A clear breakout to all-time highs confirmed by every measure everywhere with momentum charging ahead and high-fives and champagne corks flying about with reckless abandon and serial glee. To quote Chuck Prince, who left Citigroup in 2007 with an exit bonus of around $12.5 million, $68 million in stock and options, $1.7 million pension, an office, a car and a driver for five years during which time Citigroup shed $64 BILLION in valuation, “As long as the music is playing, you’ve got to get up and dance.” So when John Paulson’s pit bull Marcelo Kim got up at the Denver Gold Show and assailed the gold mining executives for $85 billion in wealth destruction since 2010, perhaps it might have been instructive to remind him that one executive alone in the banking business (Prince) blew 75% of that on his own.

Now add up the other guys like Bear Sterns and JP Morgan and the rest of the money-centre banks and they make the Gold Miners look like rocket scientists. Oh, and don’t forget to mention that the gold mining industry has to cope with serial intervention and malevolent manipulation affecting the product they sell while the banking industry consistently rips off millions of consumers with nary a crook landing in jail. And—let us not forget who it was that asked Goldman Sachs to design a product specifically for him that was actually intended to fail, to die, to go-to-zero, so he could SHORT it. It was John Paulson. Does anyone hear get the impression that it might be a good time to trot out the word “hypocrisy”?

I have followed Art Cashin for years and as the director of floor operations for UBS, he is one of two people often contributing to CNBC content that I actually admire and enjoy (the other being Rick Santelli). Last night after the close, Art actually told Kelly Evans that “I’ve been doing this for fifty years and I’ve never seen anything like it so it is rather odd.” Wait a minute. “RATHER ODD”? Now, Mr. Cashin—was it not “rather odd” that the global banking industry went from devastation to celebration in a mere five years as the Fed, the Bank of Japan, the European Central Bank and the Swiss National Bank all conspired to buy every toxic bond on the planet with fictitious money?

Was it not “rather odd” that stocks are not allowed to correct despite national disasters like three hurricanes into the U.S. within a four-week period? Was it not “rather odd” that gold and silver have never followed through once in the past four years after a technical “breakout”? This entire travesty of commerce referred to lightly as a “market” has gone from “rather odd” since the end of the GFC in March 2009 to “exceedingly corrupt” here in Q4 2017. However, at the end of the day, it has come down to doing one’s utmost to avoid LOSING money and that is the sole reason I write this missive.

Silver Year to Date

One month ago tomorrow, I posted this chart with the sage advice that one must REDUCE RISK. Now, while I abhor commentaries that constantly remind the reader of one or more decent “call(s)” on any particular market, most fail to include the prior ten that were poor, so what I want to make perfectly clear is that I did NOT sell all of my holdings in gold miners nor gold miner ETFs. In retrospect, THAT should have been the “call.” However, I sold only the call options and the leveraged positions in SIL (Global X Silver Miners ETF) and JNUG (Direxion Daily Gold Miners Bull 3X ETF). Granted, I am now flat SIL and holding fully-paid-for JNUG, with the $13.55 ACB for the latter certainly little solace now that it has been crushed from $25 to under $18. Similarly, I should not have simply exited the SIL positions; I should have shorted it or at least bought a few put options to take advantage of the impending top that was so very clear.

Shifting to the present, it is obvious that market participants have indeed had to experience additional pain since my last post last week. I thought the Commercials would behave a little better into the end of the month but, alas, they really didn’t and just kept pressing their luck covering a paltry amount in the week ended September 22. Last Tuesday marked the second week of short covering with an even greater 19,750 contract reduction in the aggregate but it is still way too high for a meaningful bottom to be in place.

Silver Chart

As you can see, we are still long way off the net Commercial short position reported on July 18 at 73,635 for gold as it traded at around $1,232. While that figure has started to reverse downward, I need to see a great deal more covering before I want to go long and since I have tended to be painfully early in the past, I am going to err on the side of caution and capital preservation this time around. One thing for sure is that “seasonality” has not worked worth a pinch of whale blubber as the two strongest months of September and October have proven 50% faulty with twenty-eight days left for October to validate the trade. Perhaps the Indian wedding season has been postponed and perhaps the global demand for jewelry has been vaporized due to the hurricanes but more than likely, some twenty-something desk trader was promised a new iPhone if he could find a way to keep gold and silver under $1,250 and $16.00 through Diwali and Christmas.

Gold COT Chart

As for the current state of the junior exploration sector, the one stock dominating the airwaves in the past three months has been Novo Resources (NVO.V), which has seen a meteoric rise in price since last July when it exploded out of the gates after reporting results from a small bulk sample that sent the market into a major “tizzy.” In the printed material, the company is attempting to draw a corollary to the Witwatersrand Basin of South Africa, the largest gold bearing region in the world with some fifty tons of gold (as opposed to “ore”) having been extracted from the area. The gold in Witwatersrand was situated in conglomerates and the basis of the excitement is that Novo’s “Purdy’s Reward” project apparently has the same “nugget effect” in situ gold mineralization as the monster in South Africa. Now, to date, a relatively small bulk sample and a highly-effective video shown at the Denver Gold Show has propelled from a 52-week $0.66 low to well over $8.00, creating an (undiluted) market cap of in excess of $1 billion. Now, IF this turns out to be “real” and all of the hype and fist-pumping bears out, it will mark the first major “new discovery” story (it really isn’t) in years and based upon the price action, it will be a shot of adrenalin for a largely moribund exploration market.

However, if it turns out to be, err, shall we say, “a disappointment,” the resulting losses are going to be the fodder upon which books are written, lawsuits are launched, and sectors (like junior gold exploration) get ignored for at least half a decade. I have no means of determining the outcome so I congratulate all that took the (early) plunge and wish the rest of you the very best of fortune as the larger bulk sample ultimately reveals how this story unfolds. At a $1 billion (plus) market cap, there is not only no room for error or disappointment; there is a prerequisite for world-class grades and ounces. In the meantime, the momentum crowd is having a field day and since “the music is playing, you got to get up and dance.”

Novo Resources

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