Silver May Be Getting Ready to Shine Again

by: Clint Siegner – Money Metals News Service

The setup for higher silver prices is so good it’s scary. The relative positioning of speculators versus the bullion banks in the futures markets is extraordinarily lopsided.

A bet on silver moving higher from here looks a lot like a no-brainer. So much so that David Morgan, publisher of The Morgan Report and silver guru is advising just a bit of caution, as he told listeners in an exclusive interview on this past Friday’s Money Metals Weekly Market Wrap Podcast.

The bullion banks (Commercials) are almost certainly now betting for higher silver prices and have relinquished their concentrated short position.

Meanwhile, the large speculators are positioned increasingly short. The good news for silver bulls is the bullion banks dominate the futures markets, by hook or by crook, and they generally win versus the speculators.

In the chart below from Zachary Storella (Investing.com), the red line represents the “Commercials” which are the bullion banks and miners. It shows their collective position virtually even, or neutral. It is the first time this has happened since the Commodity Futures Trading Commission began publishing the more detailed Commitments of Traders report in 2009.

Silver: COT Futures Large Trader Positions Chart

One could argue that if the commercials are neutral, that isn’t exactly the same as the bullion banks being positioned long.

Remember though, the commercial category includes both the producers and the bullion banks. Miners are generally going to be short by default. It is typical for them to hedge their production by selling futures and delivering the physical metal later. This hedging allows them to raise funds for current operations and protect themselves from a drop in metals prices down the road.

If the miners are short, the bullion banks have to be betting long.

Meanwhile, the speculators are taking the other side of that bet. If history is going to repeat and the banks are going to once again take the specs back to the woodshed for a whipping, it is full steam ahead for silver prices, right? Not quite so fast says David Morgan.

The problem is in the lower of the two charts shown above. Open interest in silver — the number of open futures contracts — is near record highs.

In the past, when the commercial short position approached a bottom, open interest also tended to be near a low point

We are in uncharted territory with both an extreme in Commercial/Spec positioning and an extreme in open interest. That makes predictions about the direction of the price more uncertain.

The COT report isn’t detailed enough to remove all guesswork about how the banks are positioned, so there could be something important that silver bugs are missing.

But if the prop traders at JPMorgan Chase and the other banks who dominate metals trading are positioned heavily long, the huge open interest could fuel a dramatic move in price. If prices start moving higher, there are a lot of specs to be caught in a short squeeze.

Another bit of data supports the notion that silver investors are witnessing history in the markets with the bullion banks FINALLY long silver.

Craig Hemke, of TF Metals Report, noted on Friday that JPMorgan Chase added another 605,000 ounces of physical silver to their COMEX vault. That bank has been notorious for its short position, but it has been steadily building a physical position in recent months. Today it holds a whopping 53.7% of the COMEX bar inventory.

All of this extraordinary positioning in the futures markets could be foretelling something extraordinary is about to happen to the silver price.

Clint Siegner

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Top 20 World Gold Producers 2017 – Countries and companies

A couple of tables from articles published on the Sharps Pixley website last week.

The first is from the article : World Top 20 Gold producing nations in 2017 – not peak gold yet!

Top 20 Gold Producing Nations 2016/2017 (Tonnes)

Rank Country 2017 Output 20 16 Output %  Change
1 China 429 464 -7.9%
2 Australia 289 288 +0.5%
3 Russia 272 253 +7.6%
4 USA 244 229 +6.3%
5 Canada 171 163 +5.0%
6 Peru 167 166 +0.3%
7 South Africa 157 163 -3.6%
8 Ghana 130 131 -0.8%
9 Mexico 122 128 -4.7%
10 Indonesia 114 109 +4.8%
11 Brazil 92 97 -5.1%
12 Uzbekistan 89 87 +2,6%
13 Argentina 65 58 +10.9%
14 Papua New Guinea 63 63 -0.1%
15 Kazakhstan 56 53 +7.1%
16 Mali 51 50 +1.2%
17 Tanzania 53.2 55.3 +4%
18 Colombia 49.2 51.8 +5%
19 Philippines 40 40 +0.6%
20 Sudan 40 37 +7.3%
Others 607 508 +3.1%
  Total 3,292 3,275 +0.5%

Source: Metals Focus

and the second looks at the world’s top producing gold miners: Top 20 Global Gold Miners – Newmont narrows the No. 1 gap

Top 20 Gold Mining Companies 2016/2017 (Tonnes) (1 tonne= 32150.7 troy ounces)

Rank Company 2017 Output 2016 Output %  Change
1 Barrick Gold 165.6 171.7 -4%
2 Newmont Mining 163.8 158.1 +4%
3 AngloGold Ashanti 116.8 112.8 +4%
4 Goldcorp 79.9 89.4 -11%
5 Kinross Gold 78.6 83.3 -6%
6 Navoi MMC (est) 75.5 75.5
7 Newcrest Mining 71.1 76.7 -7%
8 Polyus Gold 67.2 61.2 +10%
9 Gold Fields 62.6 63.0 -1%
10 Agnico Eagle Mines 53.3 51.7 +3%
11 Freeport McMoran 49.1 33.8 +45%
12 Shandong Gold 43.9 37.0 +19%
13 Sibanye Gold 43.6 47.0 -7%
14 China National Gold 42.4 42.0 +1%
15 Randgold Resources 40.9 39.0 +5%
16 Zijin Mining 35.8 42.6 -16%
17 Harmony Gold 34.0 33.2 +2%
18 Polymetal 33.5 27.7 +21%
19 Glencore 32.1 31.9 +1%
20 Yamana Gold 30.4 39.5 -23%

Source: Metals Focus,

a third article published on Seeking Alpha looks specifically at the top North American gold mining companies with notes on their individual performance: Mixed Results And Prospects For North America’s Top Gold Miners

DRC – Mining code proposals from mining companies

Mining companies operating in the Democratic Republic of Congo have submitted their own proposals regarding the recently announced new mining code which has raised some contentious issues.  However, given that the companies had been in discussion with the Mines Ministry ahead of the ratification of the new code without their proposed view being taken into account, we fear that the proposals will fall on deaf ears.  Should the new mining code remain in place, as we feel it will, it could seriously affect new mining investment in one of the world’s most mineral rich areas.

The mining companies have issued a press release regarding their proposals for constructive adjustments to the new code as follows:

Mining industry representatives* in the Democratic Republic of Congo have submitted a formal proposal to the country’s Ministry of Mines that is designed to address concerns about the recently revised mining code as well as the government’s revenue needs.

Among other things, it proposes linking a sliding scale of royalty rates to the prices of the key commodities, which industry representatives believe would be a more effective mechanism than the windfall tax introduced in the new code and at current prices would immediately give the government a higher share of revenues than what is provided in the new code.  It also deals with stability arrangements, state guarantees and mining conventions.

Along with the stability afforded to convention holders, enshrined in the 2002 mining code is a 10 year stability clause which provides that the holders of mining and exploration titles will continue to be governed by the terms of the 2002 mining code for such period in the event of the implementation of any new law.

Article 276:
“The State guarantees that the provisions of the present Code can only be modified if, and only if, this Code itself is the subject of a legislative amendment adopted by Parliament.

The rights attached to or deriving from an exploration licence or mining exploitation licence granted and valid on the date of the enactment of such a legislative modification, as well as the rights relating to or deriving from the exploitation licence subsequently granted by virtue of such an exploration licence, including among others, the tax, customs and exchange regimes set forth in this Code, remain acquired and inviolable for a ten-year period from the date of:

  1. the entry into force of the legislative modification for the valid exploitation licences existing as of that date;
  2. the granting of the exploitation licence subsequently granted by virtue of a valid exploration licence existing on the date of entry into force of the legislative modification.”

However, the proposal accepts 76% of the articles in the 2018 code and suggests changes to the rest only to ensure the effectiveness and legality of the code.  The mining industry representatives believe these changes will resolve issues with the code and contractual relationships while giving the DRC and its people increased participation in the proceeds of mining.

* Issued on behalf of members of the DRC mining industry representing more than 85% of the DRC’s copper, cobalt and gold production and most significant development projects: Randgold Resources, Glencore, Ivanhoe Mines, Gold Mountain International/ Zijin Mining Group, MMG Limited, Crystal River Global Ltd and China Molybdenum Co, Ltd (CMOC), AngloGold Ashanti.

 

All fall down? Is the predicted crash starting to hit?

Edited and updated article which first appeared on the Sharps Pixley websire earlier i n the week

As I switched on my computer this morning I was faced with a sea of red ink!  Equity prices were down across the board – in the U.S., Asia and Europe and no doubt elsewhere too. Most major stock indices were down by between 1 and 3% yesterday and in early trade today with the NASDAQ being particularly hard hit.  The markets are currently mostly moving on whether a trade and tariff war between the U.S. and China is imminent or not and prospects and views on this are mixed.  Tech stocks too, which have been responsible for much of the peaking of the markets earlier this year, have also been falling out of favour.

Bitcoin (BTC) was this morning stuttering down below the $8,000 level (it has since fallen to the low 7,000s) – around 60% off its high point achieved only a month and a half ago – and if Ethereum is a pointer, with it down at $450 as I write, the next leg down for BTC could well be to around $6,000.  (When Bitcoin and Ethereum were at their respective peaks early in the year BTC was trading at about 14x the Ethereum price.)

In the precious metals, gold, silver and the pgms were all down as well, although perhaps not by nearly as much in percentage terms as the equity markets.  The dollar Index was one of the few positives showing a tiny gain but it was still stuttering well below the 90 level and thus around 13% lower against other currencies than it was when President Trump came into office some 14 months ago.  Obviously a strong dollar is not part of ‘making America great again’.

So what has changed?  The U.S. Fed seems to be committed to raising interest rates perhaps at a faster rate than had previously been anticipated with higher rate targets for 2019 and 2020.  Wall Street may not be liking this prospect.  But perhaps it is the sudden recent downturn in the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google), following Facebook’s problems, which is a primary cause of the falls in the Dow, S&P and NASDAQ (in particular). High flyer Tesla is also a significant contributor to the Wall Street sell-off and when Wall Street falls equities worldwide tend to follow its lead.

Is this the start of the equities crash many commentators have been predicting – and if so how will it affect gold and the other precious metals?  It’s probably too early to say, but after almost nine years of virtually uninterrupted rises in the equities indices we suspect something will have to give – indeed it may already have started.  We’ve already seen the bitcoin bubble burst and, as noted above, we feel the cryptos may yet have further to fall until the bottom is reached.  Are equities next?

What will have changed with the latest downturns is investor sentiment.  Equity increases look to no longer be the ‘sure thing’ that they were, buoyed up by the Fed’s Quantitative Easing policy which poured increased liquidity into the markets.  Now the Fed’s policy is in reverse with what many observers now refer to as Quantitative Tightening.  If history is anything to go by, equities markets may well suffer as a consequence of a rising interest rate path, at least initially.

Precious metals have moved up from their lows, but down again from their subsequent interim peaks, with gold reaching around the $1,355 mark which has proved to provide strong resistance on the upside.  It has since fallen back to the low $1,320s and is still looking vulnerable, with silver following a somewhat similar pattern.  The pgms seem to be treading a slightly different path as befits their industrial metal status.  The gold:silver ratio (GSR) remains above 81 which usually suggests silver is a better buy than gold – the late Ian McAvity used to say buy silver if ratio above 80, but buy gold if ratio 40 or below which has proved to be pretty wise advice over the years, although the 40 level hasn’t been seen since 2011 when it touched 33.7.  We’d probably suggest a range of buying silver with a GSR of 80 and above and gold with a GSR of 60 and below as being good advice under more recent price patterns and with more modest expectations!

Where are we now?  If I were an investor in U.S. equities or in bitcoin I’d be nervous and with global markets tending to follow Wall Street that nervousness would tend to extend to any major global markets.  Watch U.S./China trade negotiations and don’t necessarily trust either side to keep to any promises made to the other.  I would prefer gold and silver as safer investments than equities and see bitcoin as pure speculation with the potential to crash much further than it has already.  Precious metals may well see some falls but these are unlikely to be of the kind of magnitude which could befall equities so we’d continue with the theme of using gold, and perhaps silver, as wealth insurance.  They may not see major gains if equities collapse, but they shouldn’t see major falls either and, as in 2009 in the aftermath of the last big financial meltdown, they will probably recover far faster.

Is $1,500 gold on the cards this year?

Could the Stars Be Aligned for $1,500 Gold?

By Frank Holmes – CEO and Chief Investment Officer U.S. Global Investors

How the stars could be aligned for 1500 gold

In a January post, I showed how the price of gold rallied in the months following the 2015 and 2016 December interest rate hikes—as much as 29 percent in the former cycle, 17.8 percent in the latter. Gold ended 2017 up double digits, despite pressure from skyrocketing stocks and massive cryptocurrency speculation.

Will there be a fed rally in 2018
click to enlarge

I forecast then that we could see another “Fed rally” this year following the rate hike in December 2017. Hypothetically, if gold took a similar trajectory as the past two cycles, its price could climb as high as $1,500 this year.

As I told Kitco News’ Daniela Cambone last week, I stand by the $1,500 forecast. Before last week, investors might have been slightly disappointed by gold’s mostly sideways performance so far this year. But now, in response to a number of factors, it’s up close to 3 percent in 2018, compared to the S&P 500 Index, down 2.4 percent.

Living with Volatility

While I’m on the topic of equities, the S&P 500 dividend yield, for the first time in nearly a decade, is now below the yield on the two-year Treasury. Historically, the economy has slowed around six months after dividends stopped paying as much as short-dated government paper. This could spur some stock investors to trim their exposure and rotate into other asset classes, including not just bonds but also precious metals, which I believe might help gold revisit resistance from its 2016 high of $1,374 an ounce.

Two year treasury yeild is now higher than sp 500 dividened yield

click to enlarge

Volatility has also crept back into markets. It began with the positive wage growth report in February, implying the possibility of faster inflation. More recently, the CBOE Volatility Index (VIX), or “fear gauge,” has surged on the departures of Gary Cohn as chief economic advisor and Rex Tillerson as secretary of state, as well as the application of tariffs on steel and aluminum imports. Last week, President Donald Trump ordered tariffs on at least $50 billion of Chinese goods, stoking new fears of a U.S.-China trade war. In response, the Asian giant proposed fresh duties on as much as $3 billion of U.S. products, including wine, fruits, nuts, ethanol and steel pipes.

Volatility has returned to markets after a calm 2017
click to enlarge

As I see it, there could be other contributing factors pushing up the price of gold. A good place to start is with Trump’s recent appointment of former CNBC star Larry Kudlow as White House chief economic advisor.

Kudlow’s Kerfuffle Over Gold

Between 2001 and 2007, I appeared on Kudlow’s various CNBC shows a number of times, and though he always struck me as highly intelligent, informed and accomplished—he served as Bear Stearns’ chief economist and even advised President Ronald Reagan—it was clear he had a strong bias against gold. This was the case even as the price of the yellow metal was on a tear, rising from $270 in 2001 to more than $830 an ounce by the end of 2007.

Gold price continued to rise last decade even as bearishness in media persisted
click to enlarge

Kudlow showed his true colors toward gold as recently as this month, telling viewers: I would buy King Dollar and I would sell gold. As you can see below, this has’t been a prudent trade for more than a year now.

Gold price vs US dollar
click to enlarge

Earlier this month, Kudlow wrote that falling gold is good, as it “bodes well for the future economy.” He said he agreed with a friend, who called the metal an “end-of-the-world insurance contract.”

While there are those who would agree with him, it’s important to remember that gold is used for much more than as a portfolio diversifier, and its price is driven by a number of factors. These include Fear Trade factors, from inflation to negative real interest rates, and Love Trade factors such as gift-giving during cultural and religious festivals. The precious metal has important industrial applications as well.

And since I first went on Kudlow’s program, gold has outperformed the S&P 500’s price action nearly two-to-one, as I showed you back in December. Even with dividends reinvested, the market is still trailing the yellow metal.

Gold price has crushed the market more than 2 to 1 so far this century
click to enlarge

So it’s fine if gold isn’t your favorite asset, but to dismiss it wholesale as Kudlow has again and again is, with all due respect, irrational.

It’s Not About Steel, It’s About Stealing

Kudlow isn’t just anti-gold, however. He’s also anti-China, and even though he’s traditionally opposed tariffs in general, he supports Trump’s efforts to levy taxes on Chinese imports. Specifically, the duties are designed to offset the cost of intellectual property allegedly stolen by the Chinese over the past several years.

China’s J-31 fighter jet, for example, is believed to be a knockoff of Lockheed Martin’s F-35, the most expensive piece of U.S. military equipment. It’s for this reason that Lockheed’s CEO, Marillyn Hewson, was present when Trump signed the authorization to impose new tariffs.

The Chinese J31 fighter jet is thjought to be a knockoff of Lockheed Martins F35

Our intellectual property is hugely important to the U.S. economy. As important as steel and aluminum are, they account for only 2 percent of world trade, and in the U.S., it’s even less than a percent of gross domestic product (GDP). Technology exports, on the other hand, represent about 17 percent of U.S. GDP.

That said, the implications of a trade war with the world’s second-largest economy certainly have many investors concerned—all the more reason to consider adding to your gold allocation at this time. As always, I recommend a 10 percent weighting, with 5 percent in gold bullion, 5 percent in high-quality gold mining stocks and ETFs.

Is Trump Betting on the Wrong Guy?

On a final note, we were pleased to have an old friend visit our office last week. Michael Ding, a veteran of the U.S. Global investments team, joined us to share some laughs and his thoughts on what’s happening in Asian markets right now.

Specifically, Michael said that Ray Dalio, founder of mammoth investment firm Bridgewater Associates, which manages around $160 billion, has become something of an economic guru for members of the Chinese ruling party’s highest-ranking members, including Premier Li Keqiang. Dalio—whose most recent book, Principles, nowtops China’s bestseller list—is reportedly advising the country’s top bankers and economists on how to deleverage safely without triggering a so-called “hard landing.”

A trade war between the U.S. and China, Ray Dalio said recently, would be a “tragedy.”

So to put it in perspective: Whereas Trump has just now brought on Kudlow, the Chinese are leaning on a fellow American, Dalio, one of the smartest, most gifted money managers in the world—not just of our time but of all time.

Did Trump make the right call? Which player would you want on your team: Kudlow or Dalio? For my money, I would pick Dalio.

Gold hit lowest level ytd – will it recover?

March has been a pretty bleak month for investors in almost all asset classes.  Equity investment, which had been a such a sure thing for the past few years, has been wavering and stocks in general are well off their highs and looking vulnerable to further falls, bitcoin has seen its bubble burst and has halved in value – and we think there could be more pain yet to come for the past year’s speculative investment star, and even precious metals have come down with gold languishing at the time of writing at around $1.312 (spot gold had fallen to around $1,307 an ounce at one stage yesterday morning) and could well breach that on the downside this week although it has made a small recovery since.

The bond market is also weaker on the prospect of continuing Fed interest rate rises.

The only positive spot seems to be the U.S. dollar, but people have short memories.  The dollar index did see a small recovery to sit back above the 90 level  but has been under pressure again and it is still around 12% below the level it was when President Trump took office only 15 months ago.  While there now seems to be a consensus that the dollar could continue to see a short term rise, along with whatever decision the FOMC meeting next week makes on U.S. interest rates, there are still many commentators who feel that a rising dollar is not sustainable long term and that it could quickly start coming down again.  If so that is certainly gold positive – at least in dollar terms

As for gold and the other precious metals we have noted before that they are facing headwinds, but perhaps not insuperable ones.  Global demand – particularly in the Middle East and Asia in general – remains relatively positive and there is the distinct impression that global new mined gold production has at last peaked and may be beginning to turn down, albeit at a pretty marginal rate.

Some commentators sing the praises of silver as perhaps the best speculative bet, with a current gold:silver ratio of over 80.  They feel the ratio is too high and recent pricing history tells us it is likely to come down from this level thus enhancing the percentage growth prospects for silver over gold.

Of the other precious metals, although it has some adherents, platinum tends to follow the ups and downs in the gold price to an extent, while palladium, for the time being at least, looks to be in a better fundamental position due to a perceived production deficit and stronger industrial demand in the autocatalyst sector.

So gold could fall back further – much will depend on whether the FOMC meeting seems to be suggesting a further two, three or even four more rate hikes this year, although given that equity and bond markets are looking vulnerable to more than the generally expected two more rate increases this year, we suspect that discretion may prove to be the better part of valour in this respect.  Certainly if the Fed looks at the historical effects of a rising rate scenario, caution may well reign.  Under such circumstances gold could see something of a recovery back to the $1,350s by the mid-year – but don’t put your shirt on it!

The above article is a lightly edited version of an article posted a day earlier to the Sharps Pixley website

Kudlow on gold – Admin stooge or …?

A view on Larry Kudlow, President Trump’s new Chief Economic Advisor, who apparently advocated buying the dollar and selling gold in one of his first pronouncements after accepting the new position.  This statement had an immediate negative effect on the gold price.  But, does he really believe what he said or is he just toeing the party line?

By Clint Siegner*

Gary Cohn resigned as President Donald Trump’s Chief Economic Advisor on March 6th. He and Trump didn’t see eye to eye on the recently imposed tariffs and the President selected CNBC commentator Larry Kudlow to replace him Wednesday. Perhaps it was Kudlow’s experience on television that got him the job.

Larry Kudlow

It doesn’t look like he was chosen for his intellectual honesty. Kudlow was quite vocal with his own opposition to tariffs.

He has suddenly done an about face and now says he can “live” with targeted tariffs. However, it gets worse than simply flip-flopping on trade.

In one of his very first interviews after accepting the post, Kudlow offered this bit of advice to investors: “I would buy King Dollar and I would sell gold.”

The dollar went on a dramatic losing streak during Trump’s first year in office – one of its worst annual performances in decades. Of course, that is just a single year.

The fiat dollar has been in almost continual decline versus real assets since the Federal Reserve’s establishment 105 years ago. It has lost 98.5% of its purchasing power relative to gold since then.

Kudlow must have seen the forecasts which show federal deficits spiking higher as the combination of tax cuts and higher spending wreak havoc on the budget. The tariffs should further weigh on the U.S. dollar as higher steel and aluminum prices drive inflation.

The prospects for the U.S. dollar are downright awful and Kudlow isn’t advocating for reforms which might improve that outlook. Instead, he is vocally advocating for the Federal Reserve to slow down on interest rate hikes.

It’s hard to believe anyone today could be particularly bullish on the greenback. Now that Kudlow is getting a federal paycheck, he is simply toeing the company line like he did for years at CNBC.

Kudlow has made a name for himself by constantly hyping the economy and stock market, cheering for “king dollar,” and criticizing gold – much to the detriment of viewers who followed his advice ahead of the 2008 financial crisis.

We’ll be paying particularly close attention to Kudlow’s moves now that he’s in the Trump administration. Early indications are not positive.

Paul Burton R.I.P. updated with funeral details

We are sad to report the passing of Paul Burton, Camborne School of Mines graduate, erstwhile colleague, long time presenter and moderator at many gold conferences and specialist on gold and gold stocks.  Paul passed away in Cornwall UK on March 15th, after a long term battle with cancer which had returned aggressively after a period of remission.

Some years ago, when I was MD of Mining Journal, we hired Paul as editor of our gold publications and he quickly made his mark as an important contributor/expert on gold mining and gold companies worldwide setting him on course for his subsequent career.  He took the publications with him as part of a severance package and the then World Gold Analyst and World Gold – which had developed from Mining Journals’ Quarterly Review of Gold Stocks, and the International Gold Mining Newsletter (originally started by yours truly!) – were important and relevant reading within the global gold community.

After a spell with GFMS as one of their gold experts (he was managing Director of GFMS World Gold) and following the take-over by Thomson Reuters, Paul became an independent analyst, setting up his own company, Piran Mining Research With his own company, he conducted specialist research, mostly on gold, for a number of companies as well as continuing to publish World Gold Analyst which continued to  provide independent, online research on, and evaluations of,  selected gold companies worldwide.

Paul will be sadly missed within the global gold community.

Funeral is at Penryn Chapel, Penryn, Cornwall on April 4th at 11.30 am

Snakes and Ladders – Market Karma, Gold and Commodities

My latest posting on the sharpspixley.com website

Of the various regular publications which I receive in my inbox, one of the most thought provoking is always Grant Williams’ ‘Things that make you go hmm..’ (www.ttmygh.com) newsletter, published roughly fortnightly.  Grant always develops a theme for his exceedingly comprehensive commentaries – how he has the time and the imagination to do this to this degree of depth alongside his other work and interests I do not know – but his insights into aspects of the global economic picture are perhaps unsurpassed.  His newsletters are always inclusive of a large number of illustrative charts and are backed up with excerpts of articles from, and interviews with, some other key commentators.

Grant is also much in demand as a speaker at conferences and his presentations should not be missed – they are filled with remarkable insights into global finance and always presented with a degree of humour sadly lacking from many of the other financial speeches at these events.

Grant’s latest newsletter is over 60 pages long and he takes the ‘Snakes and Ladders’ board game as his inspiration.  According to the newsletter’s introduction, the game is one of the oldest board games known to man and has its origins in pre-Colonial India where it was called Moksha Patamu.

The game centres around the Hindu philosophy of Karma which is the spiritual principle of cause and effect whereby actions taken today will determine the nature of tomorrow’s consequential ramifications.  Grant applies this philosophy to the various supposedly ‘economy-supportive’ programmes implemented by the U.S. Federal Reserve, and other central banks, over the past four decades where successive Fed chairmen have taken interest rates on a continuous downward path and are only now trying to redress the balance, but in the meantime have built up staggering volumes of debt.  The problem with taking interest rates down to near zero is that that leaves the Fed with little interest rate lowering leeway should the economy teeter into the next almost inevitable financial crisis – hence the pressure to try and normalize rates before the next crisis strikes.

As Grant puts it though “For investors, the last 9 years has been one long, mostly pleasant climb up a nice, shallow ladder, however we’ve reached the point where the chances of stepping on a snake have reached a level which demands precautions be taken.”

Other commentators point to the fact that equity market investors represent only a small part of the population – the ‘already haves’ – but the years of investor prosperity have largely passed the general public by.  The rich and the Wall Street elite have been getting richer, while the average person in the street remains relatively unaffected financially and continues to struggle and may even be persuaded to spend money they don’t have by optimistic media reporting, bordering on the euphoric, that the economy is extremely strong!  It isn’t.

He also reckons that the new Fed Chairman, Jay Powell, has taken over and is ripe for what rugby players call a ‘hospital pass’.  While Powell in the past has expressed opinions on Fed policy which Grant strongly agrees with, he may well also have inherited a situation under which he may have little immediate control given the scenario which has already been set in motion.

So how does one protect oneself from this particular snake should markets peak and start to slide. Equity markets, as is bitcoin, are essentially speculative, and have had a very good run, but have to be considered vulnerable to a major reversal.  (Bitcoin has already seen such a move, halving in value, and, in our view, there could well be further pain ahead for bitcoin investors).

Thus, those with the wherewithal to do so might look at alternative perhaps more stable assets like gold, though to protect themselves should Karma strike and overbought markets lose ground substantially as many are predicting.  This is particularly so as we appear to be transitioning from Quantitative Easing (QE) to Fed-implemented Quantitative Tightening (QT).  That could be seen as a significant game-changer and trend reverser for the markets.

Grant goes one step further though in recommending gold stocks over physical gold and looking at commodities in general which he feels have been heavily oversold.

So his initial recommendations are go long gold mining stocks against physical metal (as represented by GLD) and against general equities which he sees as ripe for a major downwards correction (the next snake).  He notes that the HUI Index of gold miners is at the same level it was in October 2000, when gold was trading at $265 and that with a current gold price of over $1,300 an ounce, and with the drastic improvements miners have been forced to make to their operations in the last 7 years, he expects gold miners to outperform the metal significantly.  It’s not that he doesn’t rate physical gold investment positively, but that he feels that, for now, gold mining stocks have an even better growth potential.

He also feels that commodities in general have been underpriced.  He thus suggests a thematic investment in the commodities sector could be well worthwhile thus capturing the overall thrust of his thinking revolving around a weak dollar in the long term, rising inflation and a Fed which will be forced to either hike rates to choke off inflation or embark on another round of monetary profligacy in the face of a recession triggered by its own policies.

He does have a caveat, though, in that the dollar may try to move swiftly higher in the short-term, but that he doesn’t see this continuing for long and, utilising the words of ice hockey player Wayne Gretsky feels that this positions him for where the puck is going – not necessarily where it is today.

Gold’s many uses – investment, industrial and decorative

Frank Holmes of U.S. Global Investors summarises gold’s many uses in a blog article first published on his company’s website.  It contains links to other data on the website

The Many Uses of Gold

By Frank Holmes – CEO and Chief Investment Officer, US Global Investors

The many uses of gold

As our loyal readers know, at U.S. Global Investors we carefully monitor the price of gold. We pay close attention to the macro drivers moving the yellow metal, like government policy and cultural affinity spurring demand globally. We also monitor the micro drivers, like company management and quant factors that make one gold stock superior to the next.

Gold’s qualities make it one of the most coveted metals in the world and a popular gift in the form of jewelry – this is what I call the Love Trade. From the beginning of the Indian wedding season in September until Chinese New Year in February, the price of gold tends to rise due to higher demand from the two biggest consumers of gold, China and India.

The Love trade China and India gift gold for weddings and other celebrations

On the other hand is the Fear Trade, driven by negative real interest rates and the fear of poor government or central bank policies that could result in currency devaluation or inflation. This fear triggers people to buy gold as a hedge against possible negative returns in other asset classes, which in turn, pushes the gold price higher.

For more on gold’s seasonal trading patterns, download the free whitepaper Gold’s Love Trade.

Gold in a Portfolio

We believe gold is an essential part of a portfolio due to its history as a protector against inflation. I’ve always recommended a 10 percent weighting in the metal, 5 percent in gold bullion or jewelry, and 5 percent in gold stocks, mutual funds and ETFs.

In fact, current economic conditions make an even greater case for gold. The stock market is still on a historic bull run, and the tax reform bill is helping ratchet up share prices. It’s important to remember that the precious metal has historically shared a low-to-negative correlation with equities. For the past 30 years, the average correlation between the LBMA gold price and the S&P 500 Index has been negative 0.06.

Gold has also performed competitively against many asset classes over the past few decades, as seen in the chart below. This makes the metal, we believe, an appealing diversifier in the event of a correction in the capital markets or an end to the bull market.

Gold has performed very competitively against a number of asset classes over the years
click to enlarge

Our investment team brings knowledge and experience in a variety of fields, with one of the most notable being gold. As such, we have written numerous pieces about the precious metal. One of our most popular is the Many Uses of Gold slideshow that outlines eight different uses of gold, other than in your portfolio. From dentistry to electronics and space travel to currency, gold remains widely used in everyday life.

We believe it’s important to truly understand the asset class you are investing in, and we hope this slideshow does just that. Explore gold’s many uses here!

Explore the many uses of gold slideshow

 

Lawrieongold: Gold/silver articles published on other sites

As readers of lawrieongold will know I also publish articles on other websites.  A couple of recent ones are linked below:

Metals Focus sees strength in Chinese gold demand in 2018

 

SGE gold withdrawals down in Feb but up YTD

Both the above articles were published on www.sharpspixley.com.

However, I also write occasional articles for U.S. site – www.usgoldbureau.com, but this site is blocked for access from outside North America unless one uses a browser, like Tor, which can be set to mimic access from other countries.  So for North American readers, or Tor users, a link to my latest article on this site follows:

Equities and Bitcoin Looking Vulnerable, Put Your Trust in Precious Metals

Peak gold maybe but Australian and Russian output still rising

Article first posted today on sharpspixley.com

Now March is with us we are beginning to receive reasonably accurate figures on 2017 gold production around the world and the bi g question is is peak gold here or not.  The answer is maybe.  According to the World Gold Council’s figures, global gold output actually increased in 2017, but by such a small margin that it should probably be considered flat at 3,267 tonnes – as compared with 3,260 tonnes a year earlier – a tiny 0.2% increase and with global output continuing to trend downwards we can probably assume that 2017 was indeed the year of peak gold.

But, there is much variation between national outputs.  While the world’s largest gold producer – China – is estimated to have seen its gold output fall by 9-10%, the world’s second, third and fourth largest miners – Australia, Russia and the USA have reportedly seen their annual gold production increase, but perhaps by not as much in combination as the fall in Chinese output.

As to the actual figures it all comes down to the accuracy of those reporting.  China’s output reportedly fell to 430 tonnes from over 460 tonnes in 2017.

There is an argument ongoing as to which nation is currently the world’s second largest gold producer.  In 2016 it was Australia with 287 tonnes while Russia was in 3rd place with 274 tonnes.  Australian consultancy, Surbiton Associate which tends to produce very accurate figures on Australia reports 2017 Australian production at 301 tonnes, a good increase on 2016, and avers Australia remains the world’s second largest producer of gold.  However, as we reported here three weeks ago (See:  Russia may now be World No. 2 Gold Miner), the Russian Finance Ministry stated that Russian gold output in 2017 was a little over 306 tonnes which would put it ahead of Australia as the World No.2.  Reports also suggest that gold output from other top producers Canada and Peru grew in 2017, while that of the former No.1 gold miner, South Africa continued to fall by nearly 4% last year according to that country’s Bureau of Statistics.

But the actual league table of producers is probably immaterial – it is the overall figure which counts and that does suggest that global gold production has, at the very least, plateaued. Cutbacks on gold exploration and big new capital projects, as the lower gold prices after the 2012 peak caused the big mining companies to rethink their expansion plans and capital expenditures, are taking their toll.  Most of the big miners are predicting short term  production falls after a number of years of ‘growth at any cost’.

Back to Australia and the latest Surbiton Associates assessment though: Australian gold mine production in calendar 2017 resultedin the highest annual output since 1999.  Total gold mine output in 2017 reached 301 tonnes or almost 9.7 million ounces, up three tonnes on calendar 2016. Production in the December quarter 2017 totalled some 80 tonnes, up six tonnes on the previous quarter.

“At the average gold price for 2017, the 301 tonnes was worth almost A$16 billion,” said Dr Sandra Close, a Surbiton Associates’ director. “Australian gold production is still trending upwards and the next few years look promising.”

“The higher output in the December quarter was due to a number of factors including the strong recovery at Newcrest’s Cadia East mine near Orange, NSW which was almost 60,000 ounces higher,” Dr Close said. “Other operations with higher output included the Super Pit’s increase of 28,000 ounces, Peak up 21,000 ounces and Tropicana up 19,000 ounces.

“Further out, development of the Gold Fields and Gold Road Resources’ Gruyere joint venture in WA is one-third complete, with the start of mining scheduled for late this year,” Dr Close said. “The operation will commence in early 2019 at a rate of around 270,000 ounces of gold per year when in full production.”

The only closure of note was Doray Minerals’ Andy Well mine. It commenced production in 2013 and was placed on care and maintenance in early November, after producing about 40,000 ounces in 2017.

“Given the number of projects coming on stream and with few closures anticipated, it would not be surprising to see another 20 tonnes of production added to Australia’s annual output,” Dr Close said. “This suggests that Australia’s all-time record annual gold production of 314 tonnes recorded in 1997 might well be exceeded.”

She said however, that despite the generally upward trend anticipated, production will probably decline in the March quarter 2018 due to wet weather in Western Australia which is a common occurrence early in the year.

As noted above, Surbiton estimates thst Australia remains the world’s second largest gold producer behind China which produced an estimated 4300 tonnes in 2017.

Australia’s largest gold producers for the 2017 year were:

Operation Ounces Owner
Boddington 787,000 Newmont Mining Corp
Super Pit – JV 738,000 Newmont Mining Corp 50%, Barrick Gold Corp 50%
Cadia Valley* 545,869 Newcrest Mining Ltd
Tropicana 461,704 AngloGold 50%, Independence Group NL 50%
Tanami 419,000 Newmont Mining Corp

 

 

Gold demand growing as supply starts to fall

Article firsT posted on sharpSpixley.com

Gold investors should be looking at gold for the long term.  Demand growth fundamentals are looking positive to this writer, while there is, in parallel, the prospect of diminishing supply.  It is the combination of these factors that makes gold so appealing in the medium and long term.  Even in the short term the general consensus among many analysts is that the gold price will likely rise as well – perhaps not by much but many are predicting a $1,400 gold price, or higher, by the year end.  The recent price drop is seen as a blip in an overall upwards path for the yellow metal.

The big factor to take into account is the sustained move into the middle class earnings category in the world’s biggest population nations – China and India – both of which currently have around 1.3 billion people.  By contrast the USA only has a population of some 320 million and is currently experiencing very slow population growth.

By contrast, China, currently the world’s largest gold consumer, is seeing huge growth in numbers entering the middle class classification.  Total population is estimated at over four times that of the USA.  Major, and well respected, consultancy McKinsey recently went on record as predicting that by 2022, 76% of China’s urban population will have moved into the middle class bracket.  That nation’s urban population numbers around 750 million, so 76% represents around 570 million people in what McKinsey describes as the middle class earnings bracket – more than one and three quarter times the total population of the USA.  McKinsey, however, classifies the Chinese middle class as urban households earning between US$9,000 and US$34,000 annually – which may seem low by U.S. standards, but purchasing priorities tend to be hugely different with many Chinese middle class families, even at the lower end of this income bracket, buying small amounts of gold on a regular basis as their prime savings mechanism.   The Chinese banks make this an easy process.

In the West gold is mostly seen as a tradable asset and is perhaps more readily sold as and when the price rises.  There are some in the West, notably large investors, who may see gold as a safe haven form of wealth protection, but in China that tends to be the norm rather than the exception and gold holdings there tend to be, consequently, in firmer hands than in the West and only released back into the market in cases of dire need.  Gold may also be held as jewellery and artefacts which, again in the East, tends to be a realistic option because price mark-ups are very low.

The gold purchase pattern in India, the world’s No. 2 gold consumer, somewhat mirrors that of China, although probably coming from a lower base.  But the birth rate is higher and the total population is set to exceed that of China in the next year or so – it may already have – and continue to grow at a significant rate.  Gold hoarding is an integral part of the Indian psyche, perhaps more so than anywhere else in the world, so it wouldn’t surprise us to see Indian gold demand move back above that of China in the next few years, despite the government’s attempts to thwart this because gold imports are a substantial component of the country’s current account deficit!  This year we have already seen a recovery in Indian gold imports to over 900 tonnes after an exceptional low of just over 580 tonnes in 2016.  The 2017 figure is still below those of 2010-2012 and 2015, but is indicative of a possible return to the old higher levels.

As a proxy for gold flows from West to East we only have to look at Swiss gold export figures with around 80% of these gold exports tending to be destined for Asia and the Middle East.  The Swiss figures are particularly significant because the Swiss gold refineries provide the key conduit for converting doré (impure) bullion, received from mines around the world, and large gold bars (mostly imported from the UK) into the small bar and wafer sizes in demand in the East.  Overall, Swiss refineries currently process a volume equivalent to around two-thirds of global new-mined global gold output annually.  These huge gold flow percentages are indicative of the total gold flows leaving depositories in the West for stronger hands in the East.  Sooner or later these will generate a shortage in the West which will ultimately positively impact prices beyond the capabilities of the powers-that-be to hold them down.

Asian and Middle Eastern demand alone would seem to be more than sufficient to keep the gold train rolling, but it is all in addition to some still decent gold demand throughout the rest of the world.  When the gold price came down from its 2012 peak, supply was boosted by huge liquidations of gold out of the big gold ETFs, but this source of supply has dried up and, if anything, gold is beginning to flow back into the ETFs – perhaps not at a high rate but the overall flow has very definitely seen a reversal to the positivel.

At the same time, the volume of new mined gold supply at around 3,200 metric tons a year, may well be beginning to fall .  Peak gold may well be with us.  The drop in the gold price following its 2012 peak led to cutbacks in capital projects and gold exploration around the world.  While any output decline may be very slow at the moment, with some countries like Russia, Australia and Canada still seeing growing new mined supplies, the overall global trend is definitely downwards.  It will take the industry some time – and probably much higher prices – to recover from this downtrend in output, particularly given the long lead times in bringing a new mine into production from scratch.

So, the twin effects of continuing high demand (in the East in particular) driven by the growth in the middle classes in the high population countries like China and India, coupled with a decline in new mined gold production – seen as likely to accelerate – are likely to increasingly put a strain on the supply/demand balance.  This may not initially lead to a big price boost for gold, but it should keep prices rising at least gradually over the years ahead.  Should the equities markets and bitcoin collapse, as many experts are predicting, then this could drive more investment into perceived safe havens like gold.

Looking at these gold fundamentals, the prospects for gold over the next few years look good – and given gold’s propensity to react positively to disruptive global geopolitical and geo-economic events we could even see much bigger increases than the general picture, as noted above, might suggest.

Mad rush into gold ahead when fiat currencies tank – Pento

Mike Gleason* of Money Metals Exchange interviews Michael Pento who is predicting an eventual crash in fiat currencies and a parallel take-off in precious metals.  As Mike says in his introduction, Coming up we’ll hear a tremendous interview with Michael Pento of Pento Portfolio Strategies. Michael shares his very troubling outlook for the 10-year Treasury note, the tipping point that will cause the destruction of confidence in the dollar and what this all means for gold prices.

Mike Gleason: It is my privilege now to welcome back Michael Pento, president and founder of Pento Portfolio Strategies, and author of the book The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market.

Michael is a well-known money manager and a fantastic market commentator, and over the past few years has been a wonderful guest and one of our favorite interviews here on the Money Metals Podcast and we always enjoy getting his Austrian economist viewpoint.

Michael, welcome back and thanks for joining us again.

Michael Pento: What a great introduction. Thanks for having me back on, Mike.

Mike Gleason: Well, we often talk about bond yields with you, Michael, and I think that’s a good place to start today. You recently published an article where you made the case that 4% would be the floor when it comes to the 10-year note – not the ceiling, the floor, and you made some observations that now seem striking. The yield on that note averaged 4.6% in 2007, just the year before the 2008 financial crisis.

Today practically nobody remembers yields ever being that high… 10 years is a long time we suppose. Heck, it seems like investors have already forgotten the early February selloff in the equities market, so I guess we can’t be surprised that they can’t remember the situation a decade ago.

In any event, markets are not prepared, or priced for 4% yields on the 10-year. Talk a bit about why 4% is likely to be a minimum and why yields should probably be much higher than that.

Michael Pento: Let’s start with the fact that normally speaking throughout history, the 10-year note seems to run with nominal GDP growth, which is basically your real growth plus inflation. So, if we’re running around 2% inflation and we have growth at 2.5% around that, you would assume that the 10-year note should be historically speaking around 4.5% right now. But I can make a very cogent argument, Mike, that rates should be much, much higher because if you look back … as you mentioned the 2007 when that average interest rate was, again, 4.6% and nominal GDP was sort of around that same ballpark, the annual deficit was 1.1% of GDP.

But going into fiscal 2019… sounds far away, not maybe that far away, but it sounds further away than really what it is. It begins in October of this year. Our annual amount of red ink will be $1.2 trillion. That is the Treasury’s annual deficit, but you have to add to that to the fact that the central bank of the United States will be selling… and I say selling, because what they don’t buy the Treasury must issue to the public, $600 billion less of Treasury Bonds. So, that’s $1.8 trillion deficit. That has never before happened in the history of mankind, a $1.8 trillion deficit, which happens to be 8.6% of our phony GDP if we don’t go into a recession.

If we go into a recession anytime in the near future, and I don’t think the business cycle has been outlawed, then we’re talking about $3 trillion annual deficits. Let’s just take the 1.8 which is 8.6% of GDP. Why would the 10-year note not go to at least 4.5% where nominal GDP is? It would probably go much higher, especially even the fact that back in 2007 we had $5.1 trillion dollars of publicly traded debt, but not we have $15 trillion dollars of publicly traded debt. So over above the fact that the Fed’s balance sheet went from $700 billion to $4.5 trillion; it’s $4.4 trillion right now.

But you still have $4.5 trillion that they hold, but guess what? There’s an extra … what’s that, $11 trillion of publicly traded debt that has to be absorbed by private bond holders? So deficits are exploding. The amount of publicly traded debt has exploded. And there isn’t any reason, and there isn’t any rationale. Central banks are getting out of the bond buying business so there isn’t any cohesion, rationale, for rates not to not only normalize but be much higher than they were normally.

Let’s just say they normalize… 4.6%, 4.5%, maybe higher than that. By the way, let me just add this quickly Mike, the average interest rate going on a 10-year note going back since 1969 is over 7%. So, the interest rate on the 10-year right now is 2.88%. It is going to not only go up much higher, but it’s going to rise dramatically, probably towards the end of this year as the ECB, European Central Bank gets out of their QE. They’ll be ending QE by the end of this year.

So then you’ll have only the Bank of Japan in the bond buying business. So, yields are going up … and I’ll let you in after this one more comment … if the yield on a 10-year note goes from 2.8 … and don’t forget … it was 1.4. Now it’s 2.88 or 2.9, it’s going to go to 4.5 very quickly in my opinion. Probably by the end of this year, unless we have a recession and a stock market collapse.

Where do you think junk bonds will be? The average yield on junk bonds is 5%… a little bit over 5%. So, junk bond yields are going to spike. That means that prices are going to plummet. And my god, you’re talking about a complete blow-up of the income market across the spectrum, especially in the riskiest part of it. Just like subprime mortgages. So buckle your seat belts, the low-volatility regime is dead and gone.

Mike Gleason: The housing market is a very big part of the economy and that’s tied to the 10-year and it’s likely to get crushed. And honestly that’s just the most direct example, but honestly there is so much in our financial world, as you just alluded to, that’s dictated by that treasury note. So, if people are ever wondering why you talk so much about these bond rates it’s because it’s so vitally important, isn’t it Michael?

Michael Pento: Absolutely. You have not only junk bonds, you’ve got collateralized bonds, you’ve got collateralized loan obligations, leverage loans, private equity deals … you have the risk-free rate of return, sovereign debt, taken to 1.4% and that was in the summer of 2016. So, let’s just say, that if I’m correct, it goes to 4.4%. So, the 10-year note goes from 1.4 to 4.4 just at 300 basis point increase in yields leads to a 24% plunge in your principle.

So, if you lose a quarter of your net worth that you have in bonds in the risk-free treasury, imagine what your loss will be in leverage loans, COOs, junk bonds, muni bonds, equities, real estate, REITS, I mean you could go on and on. Everything is based off of that risk-free rate of return, which by the way, if hedge fund’s rate was 0% for almost 9 years, and a German bund into 0.7%, it was negative for many years, people in corporations in Europe were floating debt with a negative yield, so you had the biggest bond bubble in history that’s slamming into the hugest gargantuan increase in debt in history. And when those things meet, it’s an awful deadly cocktail.

So, like I said, buckle your seat belts because this is going to be one hell of a year coming up. It already has been and it’s only going to intensify.

Mike Gleason: Now with that said, there are some that argue that the Fed will not let yields move that high, they simply cannot. Officials there know well what will happen to growth and to the federal budget if rates should rise so do you think the Fed will intervene and can they continue to keep rates capped indefinitely?

Michael Pento: Well if you listen to the new Fed chair Jerome Powell, testifying yesterday saying he’s so ebullient and upbeat about the stock market and the economy. I don’t know what he’s looking at, I mean we had two quarters in a row at 3%, now the 4th quarter came in at 2.5%.

If you listen to the Atlanta Fed, they started Q1 at 4.5% now it’s down to 2.6%. So I don’t know where the excitement is about GDP. I don’t know where it’s coming from. You mentioned housing, if you look at pending home sales it’s 4.7% down. It was announced this morning. All the other data on all prices is heading south, including existing home sales and new home sales. And that’s only when we had a slight uptick in interest rates.

People talk about how beneficial the tax cuts are, but they forgot about the other side of the equation which is rising rates. Rising debt service costs are erasing any and all benefits that’s coming from the tax plan. So, what we’re seeing now in the economy is a sugar high, an adrenalin shot. But going towards the end of this year I fully expect the economy to fall out of bed.

And Jerome Powell who is still upbeat on the stock market and the economy, he’s going to have to change his tune. But what happens when you change your tune, is the Fed is going to have to admit, Mike, that they had the mistake. In other words, their 9 year experiment in Quantitative Easings, and huge increase in the size of the balance sheet, failed to rescue the economy. And instead of being able to ever normalize interest rates … this is why this watershed epiphany is going to be so hard for the Fed to admit … they’re going to have to admit that all of their manipulations failed to provide viable and sustainable economic growth.

And then they’re going to have to change course, because as you said, if interest rates rise and rise they must, and we’re paying all this extra interest on this debt. And they’ll say well, we have to cap interest rates from rising, this is a watershed epiphany that they’re very much loathe to admit. Because if you change your tune at 5.25% on a Fed funds rate as they did in 2008, that’s one thing. But if you change your tune when interest rates on the Fed funds rate … the effect on Fed funds rate is 1.4% as it is today … that’s a totally different story. You’re not only going to have to take back your 150 basis points of rate hikes, but then you have to go right back into QE, you have to admit that you can never drain your balance sheet, you have to admit that interest rates can never normalize.

Do you know what that would do to the currency? Do you know what that would do to the price of precious metals? Do you know what that would do to the fate of the stock market and the state of the treasury? So, all these things are going to be loath to admit but they will have to come back into QE as the stock market and the economy plunges. And then it’s game over. I think the faith in fiat currencies goes away and it’s going to end very quickly, and it’s probably going to start by the end of this year.

Mike Gleason: Yeah it’s certainly a hyper-inflationary type of scenario could play out there if all that comes to pass for sure. I was recently watching an interview you did with legendary investor Jim Rodgers, which was really great and very fascinating by the way, and you guys were talking about ETFs and the dangers that those funds may pose the next time equity investors rush for the exits.

You made some really great points. Now back in 2008 the markets were crushed by derivatives – securities so complex that lots of people who were on them didn’t understand what was in them or how they might perform. These days the markets may be at risk from exchange traded funds which are designed to make investing simple.

Please explain why you were so concerned about ETFs and their increasing dominance in the markets, and how a sell-off could be made much worse by the fact that so many people are invested in these things.

Michael Pento: Well you look at what happened with inverse volatility trade. I’m sure you guys are aware of what happened there. So, people were lulled to sleep in the stock market, believing that the only direction that stocks can go is up. Because there was no other alternative. You take yields to 0%, leave them there for 9 years, and of course people are going to go out, way out, along the risk curve.

So, people were actually saying to themselves after a while, hey, why don’t I just short volatility? Well the problem is, when everybody shorts volatility, is that when volatility spikes by 100%, inverse vol goes to zero. And that wiped out billions of dollars of net worth, pretty much in hours. And it’s not exactly the same thing, but that same concept is now in play with the ETF’s spectrum. So, 9 years, 0% interest rates, everybody went into passive ETF funds, by the way Mike, a lot of these funds own very much the same securities. So, Amazon, Facebook, Netflix, Google, Apple, these are all contained in various weightings in all of these passive ETFs. Or much of them.

So what happens is you have passive ETFs ownership, which has gone off the charts, as well as a huge surge, a gargantuan increase, in passive ETFs that are leveraged to the bond market. So you have ETFs that own bonds, that are long bonds, ETFs that are long, high-yield junk, ETFs that are long the same securities. And when everybody hits the exit door at once, as they did with these inverse volatility trades, they will blow up.

So you try to redeem the ETFs. The ETFs in turn have to redeem the underlying securities, which in turn causes the ETF’s value to fall, so it’s a vicious cycle, a downward spiral. And that’s what I’m afraid is going to happen. Because you have globe investors to sleep by 9 years of inculcation that yields can only go down and prices on bonds and equities can only go up. And when that changes, and it could change violently as yields start to rise, then you’re going to have this implosion in pretty much everything … you had bubble in everything, you’re going to have an implosion in everything.

That’s the real danger. I’m not a Cassandra. I was way out in front of the spectrum of all these perma-bulls in 2007 and in the year 2000, I warned about the housing market in 2005 and 2006. So, I have a history of identifying these problems. I have said for the last few years that you cannot construct a healthy, viable economy by taking interest rates to 0 and leaving them there for years.

And also increasing a massive amount of debt… $230 trillion dollars, 330% of GDP. That is the total amount of debt in the globe today. Up $70 trillion dollars since the great recession. While you’ve taken interest rates and deformed the whole risk spectrum, while you’ve increased debt, you’ve also blown up the biggest asset bubble in equities ever. So, we’re now at 150%, 1.5 times. The market cap of equities are now 1.5 times the underlying economy.

That has never before happened in history. It was only reached about that same level in March of 2000. This is a dangerous bubble and it’s going to burst, and you and your investors need to be aware of how dangerous it is. And you should also understand if you’re going to invest, you should have somebody that understands this dynamic now and can at least try to profit from the 3rd, 50%+ plunge in prices since the year 2000.

Mike Gleason: Yeah a very troubling set up for sure. Well as we begin to close here Michael, I wanted to talk to you about gold and silver. They’re often viewed as safe havens, and in the aforementioned scenario you got to think metals would get a boost. But if we go back to the last financial crisis, they did get taken down, gold and silver, they did get taken down with equities although they bounced back much sooner.

However, leading up to the fall of ‘08, we had a pretty hot commodities market that drove metals up in the preceding few years, but this time metals have been languishing a bit and seem cheap compared to everything else. So, what do you see happening in the metals markets this time around during a big stock market crash, if and when we do get one?

Michael Pento: So, you know Mike that I love gold, I think it’s going to be supplanting fiat currencies after the debacle ensues. But I’m underweight gold in the portfolio now. You once talked about 2008, what happened in 2008 don’t forget. If you remember back then we had the BRICs trade going. So people were short dollars and long Brazil, Russia, India, China currencies. So, when people became aware that the stock market globally … and economies globally and real estate market globally … was going to tank, they had to close out that carry trade, which involved buying dollars.

That trade is not prevalent today, so I don’t think gold is going to get hurt the next time this happens. But I’m underweight gold now, precisely, because while the dollar does stand to weaken because of these massive trade deficits … we have huge trade deficits, in fact the last one came out at minus $74 billion dollars for one month of goods and services in the deficit … we also have, and I mentioned it, the massive debt. That’s very negative for the dollar and positive for gold. What we have on the negative side for gold is rising nominal and real interest rates. So that is never good for gold. So, there’s a battle on right now, it’s like this $1,300 to $1,350 kind of battle. You see gold tries to get higher and then you realize well, rising rates are not very good for gold, and then it starts to fall and you realize that hey, a falling dollar is really good for gold, so it’s kind of caught in this trading range of ignominy.

But that all ends when that epiphany, that watershed moment comes from the Federal Reserve that yes, we have to stop draining our balance sheet, and we must reduce the federal funds rate. And then I think, as I said, fiat currencies get flushed down the toilet and there’s going to be a mad rush into gold like you’ve never seen before. Because what’s going to happen is you’re going to have bond prices and equities tanking simultaneously. And people will be fleeing to gold, flocking to gold, in the realization that normalization in the interest rate spectrum, normalization in the economy, is not going to be able to be achieved any time in the near future.

Mike Gleason: It’ll certainly be interesting to see if you could get your hands on it in that sort of a mad rush of retail investors trying to get gold. Right now, we’ve got a lot of access to inventory and it’s on sale still so people should heed that warning.

Well we appreciate it as always Michael, it’s great having you on once again and we always love getting your insights. Now before we let you go, as we always do, please tell people about how they can both read and hear more of your wonderful market commentaries and also learn about your firm and how they could potentially become a client if they want to do that.

Michael Pento: Well thank you. It’s Pento Portfolio Strategies, PentoPort.com. My email address is mpento@pentoport.com. The office number here is 732-772-9500 give us a call, we won’t bite. And please subscribe to my podcast, its only $49.99 a year and it gives you my ideas on a weekly basis, kind of analysis of economics and markets that you won’t find anywhere else.

Mike Gleason: Yeah it’s truly great stuff. Michael is somebody that I’ve been following for a long time, we always love having his comments here on the podcast, and we certainly appreciate it and look forward to catching up with you again before long. Thanks very much for all you do Michael.

Michael Pento: Thank you, Mike.

Mike Gleason: Well that will wrap it up for this week, thanks again to Michael Pento of Pento Portfolio Strategies. For more information visit PentoPort.com. You can sign up for his email list, listen to his mid-week podcast and get his fantastic marking commentaries on a regular basis. Again, just go to PentoPort.com.

And don’t forget to tune in here next Friday for next Weekly Market Wrap Podcast, until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

Warnings on Risky “Self Storage” Gold & Silver IRAs

by: Clint Siegner*

Bullion investors buy gold and silver as a matter of self-reliance. Physical metals aren’t dependent upon the promises of financial institutions, governments, or other third parties.

This lack of counterparty risk makes precious metals quite different from most conventional assets. There is no possibility of a default or mismanagement which renders them worthless. That is a lot more than can be said of securities such as stocks and bonds.

Gold Retirement Nest Egg

Recently, in the USA,  a few firms promoting “self storage” precious metals IRAs have been trying to exploit the self-reliance streak running through bullion investors in a manner that could cause significant harm.

These firms offer a scheme to circumvent IRS rules which require IRA metals be stored by a third party, and some people are biting. The desire to have possession and control of the metals appears to be outweighing good sense.

The warnings are piling up. Last week, the Industry Council on Tangible Assets issued the latest warning about storing IRA metals at home.

The trouble is rooted in the IRS requirement that assets in your retirement account be held by a third party.

Some firms have begun offering a dangerous work-around. They help investors create an LLC company which they claim will fill the role of the third party. The LLC buys and holds the metals, and the IRA holder manages the LLC.

IRS officials have already signaled that they see the formation of the LLC as a simple fiction to grant control over assets which are supposed to kept at arm’s length. ”Self storage” IRA holders seem likely to find their accounts disqualified, with taxes and penalties due immediately (as an early distribution of the full account balance).

As one expert frames it; “you can own a bakery with your IRA, but you cannot be the baker.” Owning a business with your self-directed IRA is okay. Hiring yourself and paying a salary is a definite no-no. Likewise it is perfectly fine to buy investment real estate, but your IRA cannot purchase your personal residence.

IRA promoters are offering LLC or “checkbook” IRAs despite knowing the program has not been defended successfully in court. It certainly does not have the blessing of the IRS.

In fact, the IRS is explicitly warning people. Forbes reports the agency was asked about ads promoting these types of IRAs: “The IRS cannot comment on claims made by any particular IRA promoter, but the agency warns taxpayers to be wary of anyone claiming that gold held in your IRA can be stored at home or in a safety deposit box.”

IRS Logo

It appears to be only a matter of time before the IRS starts nailing such account holders to the wall. If so, IRA account holders will be faced difficult choice; pay the tax and penalty or hire an attorney and try to defend the scheme in court.

If there is any certainty, it’s that the promoters behind this type of IRA will not be picking up these costs.

Anyone reading the fine print will find they disclaim responsibility, even though they are happy to collect a handsome fee for assisting investors with setup.

More than that, we’ve also noticed that the promoters of the “home storage” IRA scheme also tend to steer investors into rip-off “collectible” coins, especially Proof Gold Eagles and Proof Silver Eagles. These coins are eligible to be held in IRAs but give the dealer a huge profit margin at the expense of the buyer.

It’s telling that a few promoters of these risky “home storage” IRAs are also the bad actors when it comes to what products they promote. They aren’t really looking out for their customers.

There are plenty of great reasons to hold precious metals in an IRA, just be sure to do it right. Find a reputable trustee, such as New Direction IRA, and store the metal in a secure, audited vault that is not connected to the banking system and offers physically segregated accounts, such as Money Metals Depository.

Gold and silver bullion are a great way to reduce counterparty risk. The last thing investors want is to find the IRS is their counterparty!

Inflation Worries? Gold May Be the Solution

By Frank Holmes, CEO and Chief Investment Officer U.S. Global Investors

In its outlook for 2018, Thomson Reuters GFMS analysts see gold prices rising to $1,500 an ounce sometime this year on inflation fears. This would put gold at a level unseen since April 2013.

According to Thomson Reuters, the price appreciation could be driven by “concerns that the United States may pull out of NAFTA,” or the North American Free Trade Agreement. NAFTA, of course, is the trade pact the U.S. shares with Canada and Mexico, its number two and three largest trading partners.

The Trump administration has already imposed tariffs on Canadian softwood lumber, and more recently it set steep tariffs on imported washing machines and solar panels—all of which is inflationary. The same thing goes for the recently-passed tax overhaul, which has prompted some companies such as Walmart and Starbucks to raise their minimum wage.

But if the administration were to withdraw the U.S. from NAFTA, as President Donald Trump has hinted at numerous times, prices on consumer goods and services could become destabilized and begin to surge.

In anticipation of this, investors might want to consider adding to their gold exposure, which has a history of performing well in times of rising inflation.

Gold Has Helped Preserve and Grow Capital in Times of Rising Inflation

The chart below, courtesy of the World Gold Council (WGC), shows that annual gold returns were around 15 percent on average in years when inflation was 3 percent or higher year-over-year, between 1970 and 2017. In real, or inflation-adjusted, terms, returns were closer to 8 percent. This is still higher, though, than average returns in years when inflation was lower.

According to the WGC, “gold returns have outpaced the U.S. consumer price index (CPI) over the long run, due to its many sources of demand. Gold has not just preserved capital, it has helped it grow.”

Having a 5 to 10 percent weighting in gold and gold stocks, then, could help investors minimize their losses in other asset classes.

Dollar Weakness Also Driving Gold Prices

Tariffs and higher wages aren’t the only Fear Trade factors moving gold prices right now. A weaker U.S. dollar, relative to other global currencies, deserves a lot of the credit as well.

For the past several weeks, the greenback has plunged in value, dipping more than 1 percent last Wednesday alone—its biggest one-day pullback in 10 months. This came following Treasury Secretary Steven Mnuchin’s comment at the World Economic Forum in Davos, Switzerland, that a weaker dollar “is good for us as it’s related to trade and opportunities.” The greenback similarly tanked back in April 2017 when President Trump said the dollar is “getting too strong.” Soon after, it fell below its 200-day moving average.

Last Thursday, however, Trump walked back Mnuchin’s (and his own) comment, telling CNBC that the dollar “is going to get stronger and stronger, and ultimately I want to see a strong dollar.”

In any case, the year-long decline has been a short-term tailwind for gold, which is priced in U.S. dollars and, therefore, becomes less expensive for foreign buyers when it sinks. We believe the greenback peaked last January and that we could see further depreciation.

How to Play the Rally

One of the best ways to gain exposure to the gold space, we believe, is with the U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU). The fund provides access to companies engaged in the production of precious metals not only through active means—mining, for instance—but passive means as well. That includes gold and precious metal royalty companies, which provide upfront cash to producers to develop a project. In return, they receive royalties or rights to a “stream,” an agreed-upon amount of gold, silver or other precious metal at a lower-than-market price.

We believe this is a superior business model, which is why 30 percent of GOAU is weighted in gold royalty names. These companies have exposure to precious metals but have managed to remain profitable even when prices are down. Because they’re not directly responsible for building and maintaining mines and other costly infrastructure, huge operating expenses can be avoided. They also hold highly diversified portfolios of mines and other assets, which helps mitigate concentration risk in the event that one of the properties stops producing. As a result, royalty companies have enjoyed a much lower breakeven cost than traditional miners.

Compared to many other companies in the mining space, royalty companies have tended to be better allocators of capital, taking on very little debt and deploying cash reserves only at the most opportune times.