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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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
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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

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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
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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
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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
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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
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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.

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.

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
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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

 

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.

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.

Another Positive Year Ahead for Gold, Says the World Gold Council

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

Another Positive Year Ahead for Gold, Says the World Gold Council

In a year when the S&P 500 hit all-time highs, gold also held strong, finishing 2017 up 13.5 percent, according to the World Gold Council. Gold’s annual gain was the largest since 2010, outperforming all major asset classes other than stocks. Contributing to this gain was a weaker U.S. dollar, stock indices hitting new highs and geopolitical instability, all of which fueled uncertainty. Investors continued to add gold to their portfolios to manage risk exposure, with gold-backed ETFs seeing $8.2 billion of inflows last year.

gold outperformed major asset classes in 2017
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The World Gold Council (WGC) recently released its annual outlook on the yellow metal identifying four key market trends it believes will support positive gold performance in 2018, and we agree. Below I summarize the report for you and add some of my own thoughts on gold’s trajectory.

Key Trends Influencing Gold in 2018

1. A year of synchronized global economic growth
Economies are on the rise with global growth increasing in 2017 and on track to continue the trend this year. China and India, two of the world’s largest consumers of gold, will see their economies and incomes grow due to the implementation of new economic policies. WGC research shows that as incomes rise, the demand for gold jewelry and gold-containing technology tends to rise as well. Investment and consumer demand for the yellow metal results in a lower correlation to other mainstream financial assets, such as stocks, making it an effective portfolio diversifier.

there's a positive relationship between gold demand and wealth
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2. Shrinking balance sheets and rising interest rates
Expectations are for the Federal Reserve to raise interest rates three times this year and shrink its balance sheet by allowing $50 billion in Treasuries and mortgage-backed securities to mature each month. Over the past decade, central banks pumped trillions into the global economy and cut interest rates, allowing asset values to break records and market volatility to reach record lows.

With these banks reining in expansionary policies in 2018 and hiking rates as global debt increases, market volatility may go up again, making gold a more attractive asset. According to WGC research, when real rates are between zero and 4 percent, gold’s returns are positive and its volatility and correlation with other mainstream financial assets are below long-run averages.

3. Frothy asset prices
As the WGC points out, not only did asset prices hit multi-year highs around the world in 2017, but the S&P is still sitting at an all-time high. This rosy environment saw investors seeking out additional risks, hoping for additional returns. A continued search for yield has “fueled rampant asset price growth elsewhere,” the report explains. This includes exposure to lower quality companies in the credit markets as well as investments in China.

Although the bull market could very well continue throughout 2018, some analysts and investors alike are understandably cautious about just how much risk exposure to continue taking on. That’s where gold comes in. As you can see in the chart below, the price of the yellow metal tends to increase during periods of systemic risk. Should global financial markets correct, investors could benefit from having an exposure to gold in their portfolio. Historically, gold has reduced losses during periods of distress or instability in the markets.

the gold price tends to increase in periods of systematic risk
click to enlarge

4. Greater market transparency, efficiency, and access 
Financial markets have become more transparent and efficient over the past decade, with new products broadening access for all kinds of investors. Last year the London Bullion Market Association launched a trade-data reporting initiative and the London Metal Exchange launched a suite of exchange-traded contracts intending to improve price transparency, according to the WGC.

In fact, momentum is building in India to develop a national spot exchange to make the market less complicated and fragmented. In addition, more progress in gold investing might be seen in Russia this year with the current 18 percent VAT on gold bars possibly being lifted. More easily accessible gold-backed investment vehicles should lead to more gold investors and transactions worldwide.

Now Could Be a Good Time to Add Gold to Your Portfolio

World Gold Council’s Chief Market Strategist, John Reade, said in his 2018 outlook for gold that, “Over the long run, income growth has been the most important driver of gold demand. And we believe the outlook here is encouraging.”

We couldn’t agree more. Gold has historically helped to improve portfolio risk-adjusted returns. It is a mainstream asset as liquid as other financial securities and its correlation to major asset classes has been low in both expansionary and recessionary periods, as the WGC points out.

I’ve always advocated a 10 percent weighting in gold in a portfolio – with 5 percent in bullion or jewelry and 5 percent in gold stocks or well managed gold mutual funds and ETFs. If you’re interested to learn more about gold, I encourage you to sign up for my blog, Frank Talk. Happy Investing!

Gold market consolidates as U.S. Government shuts down

By Stefan Gleason*

The gold market has been mired in a four-and-a-half year basing pattern. The rally that began late last year has taken prices up toward a major resistance zone. It’s make or break time!

Gold - Jan. 19, 2018 (Chart)

Also on the cusp of a potentially big move is the bond market.

Bonds haven’t been making headlines like the stock market, but where the bond market heads next could be crucial for stocks as well as metals (not to mention housing and lending).

The 30-year Treasury bond is forming a potential head and shoulders top. A sustained break below the major support line would confirm a new bear market in bonds. Lower bond prices would mean rising long-term interest rates – a potential precursor to rising inflation rates.

Bonds - Jan. 19, 2018 (Chart)

The government shutdown doesn’t do anything to inspire confidence in the creditworthiness of the U.S. Treasury.

Although no immediate threat of default exists, brinksmanship could escalate in future showdowns.

The government shutdown of 2011 caused the U.S. to suffer its first ever credit rating downgrade.

Senate Democrats pulled this latest political stunt over DACA – a controversial amnesty program for children of illegal immigrants. DACA affects very few Americans directly. It barely registers as a line item in the $4.1 trillion federal budget. Yet it caused the government to lock up and threatens to lead to a constitutional crisis down the road.

The investing implications of gridlock, dysfunction, and chaos in Washington aren’t immediately clear. Past shutdowns have seen volatility pick up, but neither equity nor precious metals markets have shown any consistent tendency to trade in a particular direction during or following shutdowns.

According to Bank of America Merrill Lynch analysts, when gold prices and bond yields are both rising in tandem, that spells danger for the stock market. The Black Monday crash of 1987, for example, was preceded by rising gold prices and bond yields in the months leading up to that fateful October.

The U.S. stock market and economy have been fueled by easy money for the past several years and are now extremely leveraged. Margin debt balances are at record levels. And despite recent strength in employment and GDP numbers, the U.S. government is headed for trillion-dollar deficits. A rise in borrowing costs threatens to unwind leverage in the equity markets and hit Uncle Sam with huge increases in debt servicing costs.

Rising bond yields (falling bond prices), rising stock markets, and rising precious metals rarely co-exist together for long. One or more of these trends can be expected to soon break the other way. If gold rallies above resistance and bond prices fall through support in the days ahead, then stock market bulls will have cause for concern.

Rickards: Gold only place to go in coming financial panic

In the latest podcast from Mike Gleason* of  Money Metals Exchange Jim Rickards  warns of a huge financial crash ahead and that gold and precious metals will provide the only real way of protecting one’s wealth.

Listen to the Podcast Audio: Click Here or read the transcript below:

Mike Gleason: It is my great privilege now to be joined by James Rickards. Mr. Rickards is Editor of Strategic Intelligence, a monthly newsletter and Director of the James Rickards Project, an inquiry into the complex dynamics of geopolitics and global capital. He’s also the author of several bestselling books including The Death of Money, Currency Wars, The New Case for Gold and The Road to Ruin. In addition to his achievements as a writer and author, Jim is also a portfolio manager, lawyer and renowned economic commentator, having been interviewed by CNBC, the BBC, Bloomberg, Fox News and CNN, just to name a few. And we’re happy to have him back on the Money Metals Podcast.

Jim, thanks for coming on with us again today. We really appreciate your time as always and, how are you?

Jim Rickards: I’m doing great Mike, great to be with you. Thank you.

Mike Gleason: Well Jim, I figure a good place to start here is with one of your most recent books. We want to get your take on the state of the world economy. In your book titled The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, you make some very interesting comments. Now while the financial media is talking about booming stock markets and accelerating GDP growth, you aren’t quite as optimistic. We both know that most of the growth we’ve seen in recent years has been built with huge amounts of central bank stimulus and the fundamental problems that drove the last financial crisis have hardly been resolved. In fact, you think the next financial catastrophe isn’t too far away and many among the elite are getting ready for it. If you can, briefly lay out some of what you’ve been seeing.

Jim Rickards: Sure Mike, you touched on two different threads. One is, let’s call it the short to intermediate term, which is how’s the economy doing? What would the forecast be for the year ahead? What do I think about stocks and so forth? That’s one part of the analysis, but the other one is a little bigger and a little deeper, which is what about another major financial crisis, a liquidity crisis, global financial panic and what would the response function be to that.

Let me separate. They’re related because, I mean the point I always make is that there’s a difference between a business cycle recession and a financial panic. They’re two different things. They can go together, but they don’t have to. For example, October 29, 1987, the Stock Market fell 22% in one day. In today’s Dow terms that would be the equivalent of 5,000 Dow points, so we’re at 26,000 or whatever, as we speak, a 22% drop would take it down about 5,000 points. You and I both know that if the Dow Jones fell 500 points that would be all anybody would hear about or talk about. Well, imagine 5,000 points. Well, that actually happened in percentage terms in October 1987. So, that’s a financial panic, but there was no recession. The economy was fine and we pulled out of that in a couple of days. Actually, after the panic, it wasn’t such a bad time to buy and stocks rallied back. Then, for example in 1990, you had a normal business cycle recession. Unemployment went up. There were some defaults and all that, but there was no financial panic.

In 2008, you had both. You had a recession that began in 2007 and lasted until 2009 and you had a financial panic that reached a peak in September-October 2008 with Lehman and AIG, so they’re separate things. They can run together. Let’s separate them and talk about the business cycle. I’m not as optimistic on the economy right now. I know there’s a lot of hoopla. We just had the big Trump Tax Bill and the Stock Market’s reaching all-time highs. I mean, I read the tape. I get all that, but there are a lot headwinds in this economy. There’s good evidence that the Fed is over-tightening.

Remember the Fed is doing two things at once that they’ve never done before. They’re raising rates. I mean, they’ve done that many times, but they’re raising rates, but at the same time, they’re reducing their balance sheet. This is the opposite of QE. I’m sure a lot of listeners are familiar with QE, Quantitative Easing, which is money printing. That’s all it is. And they do it by buying bonds. Then when they pay for the bonds from the dealers, they do it with money that comes out of thin air. That’s how they expand the money supply. Well, they did that starting in 2008 all the way through until 2013, and then they tapered it off and the taper was over by the end of 2014, but they were still buying bonds. So, that was six years of bond buying. They expanded their balance sheet from $800 billion to $4.4 trillion.

Well, now they’re putting that in reverse. They grabbed the gear and they shifted it into reverse and they’re actually not dumping bonds. They’re not going to sell a single bond, but what happens is, when bonds mature, the Treasury just sends you the money, so if you bought a five-year bond five years ago and it matures today, the Treasury just sends you the money. Well, when you send money to the Fed, the money disappears. It’s the opposite of money printing. So, the Feds are actually destroying money, actually reducing the money supply, so they’re raising rates and destroying money at the same time. It’s a double whammy of tightening and I don’t believe the U.S. economy’s nearly as strong as the Fed believes. They rely on what’s called the “Phillips Curve,” which says unemployment’s low, that’s a constraint and wages are going to go up and inflation is right around the corner. And that’s part of the reason they’re tightening, but there are a lot of flaws in that theory.

First of all, the basic Phillips Curve theory is junk. It’s just not true. We saw that in the late ’70s when we had sky high unemployment and sky-high inflation at the same time. We’ve also seen it recently when we’ve had low unemployment and disinflation at the same time. So, you start by saying the Phillips Curve is junk, but even if you thought there was something to it, there’s so many problems with it in terms of labor force participation demographics, debt deleveraging, technology, et cetera, that it just doesn’t apply under the current circumstances.

So, the Feds are tightening for the wrong reason. They are tightening at the wrong time and there’s a lot of evidence that a lot of the growth in the fourth quarter was consumption driven, but that was debt driven. People charged up their credit cards, consumer debt spiked. The savings rate is near a very long-term low. It doesn’t look sustainable, so lots of reasons to think that the Fed’s going to overdo it, get it wrong, tighten, throw the economy either into a recession or very low growth with disinflation, so I’m just not buying the inflation “happy days are here again” story.

There’s also good reason to believe that the Tax Bill will not be as stimulative as people expect. All that’s truly going on is the running up the deficit by another trillion dollars and we’re already way into the danger zone and then that’s actually a drag on growth. So, there’s a good reason to think the economy is going to slow, that by itself would take the wind out of the Stock Market and close it at the potentially very serious Stock Market correction, at least 10%, maybe as much as 20%. We’re talking about going down as I say 5,000 or 6,000 points on the Dow before the end of the year, so that’s one scenario.

The scenario I talk about in my book really involves a financial panic. Now, the thing there is that these are not that rare. I already mentioned the one, really two-day panic in 1987, but in 1994 you had the Mexico Tequila Crisis. In 1997, you had the Asian Peninsula Crisis. In 1998, you had the Russia Long-Term Capital Management Crisis. In 2000, you had the dot.com meltdown. In 2007, the mortgage meltdown. In 2008, the financial panic. These things happen every five, six, seven years, not like clockwork, but that’s a typical tempo for these kinds of meltdowns and it’s been nine years since the last one. So, nobody should be surprised if it happens tomorrow. I’m not predicting it will happen tomorrow. I’m just saying nobody should be surprised if it does, whether it’s tomorrow, or next month or next year, or even a year and a half from now, don’t think for one minute that we’re living in a world free of financial panics.

By the way, these two things could happen together. You could have a slowdown that leads to a financial crisis, a replay of 2008. But here’s the difference and this is really the point of your question, Mike. In 1998, we had a financial panic and Wall Street got together and bailed out the Hedge Fund Long Term Capital Management. In 2008, we had a financial panic and the Central Banks got together and bailed out Wall Street, so each bailout gets bigger than the one before it. In the next panic, whether it’s this year or next year, who’s going to bail out the Central Banks. In other words, each panic’s bigger than the one before. Each response is bigger than the one before going down this chronological sequence.

The next one is going to be the biggest of all. It’s going to be bigger than the Central Banks and you’re only going to have one place to turn. If you had to get global liquidity right now, the Fed’s at that one and half percent in terms of the target Fed funds rate, so they most they could cut is one and a half percent to get back to zero. There’s good evidence that to get the U.S. economy out of a recession, you have to cut interest rates three or four percent. Well, how can you cut them three percent when you’re only at one and a quarter, one and a half percent. Well, the answer is you can’t, so then what’d you do? Well, then you go to QE, but they already did that.

They haven’t unwound the QE. They started to and that’s what I mentioned, but they haven’t unwound it. The balance sheet is still around four trillion dollars, so what’d going to go to eight trillion, twelve trillion? I mean, some people would say, “Yeah, what’s the problem.” Those are the modern, monetary theorists, Stephanie Calvin, Paul McCulley, Warren Mosler. There’re a bunch of them that think that there’s no limit in the amount of money the Fed can print, but there is a limit. It’s not a legal limit. Legally the Fed could do it, but there’s a psychological limit. There’s an invisible competence boundary that you cross when people just say “You know what, I’m out of here. Get me out of dollars. Get me into gold, silver, fine art, land. Whatever. Crypto-currencies, if you like. Whatever it might be but get me into something other than dollars because I’ve lost confidence in the dollar.” And we’ve seen that before also.

So, putting that all together, in the next financial panic and nobody should be surprised if it happens tomorrow, it’s going to be bigger than the Central Banks. They’re going to have to turn to the IMF for liquidity. The IMF has a printing press also, that’s the International Monetary Fund. They can print this world money called the Special Drawing Right of the SDR, so yeah, they can pull trillions of SDRs worth trillions of dollars. One SDR is worth about $1.50. They could pull trillions of SDRs out of thin air and pass them around, but here’s the point and I spoke to Tim Geithner about this, former Secretary of the Treasury. It takes time.

The last time they did this … and by the way, it went completely unnoticed, the panic was in ’08 and in August and September of 2009, the IMF did issue SDRs to help with global liquidity, but that was almost a year after the panic. The point is, the IMF is slow and clunky. It’s not the fire department. I mean, they might be like a construction crew that can come in and put in a new foundation, but they’re not the fire department that can help you when the building’s burning down.

So, what they’re going to have to do is what I call Ice 9. They’re going to have to freeze the system. First, starting with money market funds, then bank accounts, then stock exchanges, they might reprogram the ATMs to let you have $300 a day for gas and groceries. They’ll say, “well, why do you need more than $300 a day to get some food and gas in your car? Why do you need more than that? We can’t let you take all your money out of the bank. We can’t let you take your money out of the money market funds. We can let you sell your stocks.” And I describe all this in the book in detail with a lot of endnotes. You don’t have to read the endnotes unless you want to, but this is all documented. It’s all publicly available. It’s not some science fiction scenario. This plan is actually in place and I describe how.

Just to wrap up, I expect a weaker economy than the mainstream in 2018. Perhaps, a stock market crashing based on that alone. I also expect another financial panic. It’s impossible to say when, but eight years on, nine years on, I would say sooner than later. And this response function is going to be something that people haven’t seen since the 1930s.

Mike Gleason: Now, let’s talk specifically about gold, safe haven assets, including metals are way of vogue these days, at least among the mainstream public. Now, most investors likely will be flatfooted and probably won’t see the next financial crisis coming just like the one in 2008, until it’s too late. Confidence in the U.S. dollar and the financial system is hard to shake without plenty of good evidence that both are in trouble. We’re even seeing some gold bugs beginning to lose faith. They know that there is plenty of risk out there that you just laid out, but they are growing tired of watching just about everything outperform precious metals. What are you saying these days to people who might be thinking about selling gold and say, joining the party in the stock markets?

Jim Rickards: Well, let me spend some time on that, but just to say a kind word about the people you’re describing. Look, gold just finished a four-year plus bear market. It lasted from August 2011 to December 2015. In that bear market, gold went down about 45% peak to trough, and if you use the about $240 price from 1999 and just scale that up to $1,900 and then back down again to $1,050, which is where it was in December 2015, that was a 50% retracement. And by the way, my friend Jim Rogers, one of the greatest commodities traders in history, co-founder of the Quantum Fund with George Soros, a legendary commodities trader, he said to me … and he has a lot of gold. He expects gold to go much higher, as do I, but he said, Jim, “Nothing goes from here to there.” Meaning, he’s reaching way up to the sky up into outer space. He says, “Nothing goes from here to there without a 50% retracement along the way.”

And I think that was very good advice. Well, okay, but we’ve had the 50% retracement. That’s behind us. We’re in a new bull market now. There was a bull market from August 1971 to January 1980 and gold went up over 2,000%. From January 1980 to August 1999, there was a very long, 20-year grind it down bear market, and gold went down about 70%. Then you had a new bull market that lasted from August 1999 to August 2011 and in that 12-year bull market, gold went up over 700%. Then you had another bear market from August 2011 to December 2015 and as I said, gold went down 45%. We’re in a new bull market. It started in December 2015.

Now, here are the facts, gold goes up and down. It’s volatile and we know there’s manipulation. People get discouraged and they buy gold and then some hedge fund or China comes along in the gold futures market and slams the price down. “Oh, gee, why did I buy it?” I get all that. I understand the discouragement. I understand how difficult it is to watch stocks go up and Bitcoin go up and I’m sitting here with gold and it just seems to be going sideways, but it’s not true. In 2016, gold went up over 8%. In 2017, gold went up over 13%. So far in 2018, gold is up 3%. You take the entire period from the bottom of the last bear market to the beginning of the bull market, December 2015 to today, gold is up over 25%. It’s been one of the best performing asset classes of all the major asset classes. It’s not crazy like Bitcoin, but Bitcoin’s collapsing, which I also predicted some time ago.

So, the truth of the matter is 2016-2017 are the first back-to-back years of gold gaining since 2011-2012, although at that point, it was already off the top. It’s more a statistical anomaly that gold went up in the year 2011. Yeah, it did, but it was way down, way off the peak in September of that year. But now we have two back-to-back years of gold going up very significantly. We’re in year three, 2018, is year three of this bull market. It’s off to a very nice start. The fundamentals are good. Their technicals are good. The supply and demand situation is good. We haven’t even gotten into other potential catalysts, including War with North Korea, loss of confidence in the dollar, financial panic. Even a normal business cycle recession or if inflation gets out of control, there’s just a whole list of things that are going to drive gold higher.

And the last point I want to make, Mike, is that gold is doing this performance against headwinds. The Fed has been raising rates. When you raise nominal rates and you tighten real rates, that’s normally a very difficult environment for gold and yet, gold’s going up anyway. Can you imagine what’s going to happen when the Fed has to back off… because right now, as I said, they’re over-tightening. When this economy slows, and that data starts rolling in later in the first quarter and early second quarter of 2018, the Fed’s going to do what they call “pause.” It doesn’t mean they’re going cut rates. That’s somewhere down the road, but they pause, which means that they …

Right now, they’re like clockwork. They’re going to raise every March, June, September, December – 25 basis points each time, boom, boom, boom, boom like clockwork. But, every now and then they don’t. They skip. They pause. Well, if your expectation is they’re going to raise and then they don’t, they pause, that’s a form of ease. It’s ease relative to expectations. That’s what’s going to happen later this year. All of a sudden, this headwind’s going to turn into a tailwind and gold’s going to get an even bigger boost. I see it going to $1,400 over the course of this year, perhaps higher. My long-term forecast for gold, of course, is $10,000 an ounce, but that’s … and I’m not backing away from that. That’s just simple math. That’s the implied noninflationary price of gold if you need to use gold to restore confidence in a monetary system in a financial panic or liquidity crisis where people have lost confidence. That’s not some made up number. That number is actually fairly easy to calculate, but you don’t go there overnight. You got to get to $2,000 and $5,000 before you get to $10,000.

I think right now, we’re in a new bull market. It’s going to run for years. We’ve got that momentum. We’re off the bottom, but people are always most discouraged at the bottom, right? Well, that’s the time you should buy. It’s just human nature. I’m not faulting anyone. I’m not criticizing anyone, it’s just human nature to say, “Oh man, I’m so beaten down. I’m so sick of this. I’m so tired of this.” Well, that’s usually the time to buy and guess what, it is.

*Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.

For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage

by: David Smith*

Two years ago in this space, I penned an essay discussing how Americans – and other countries that are “dollarized” – where the local currency is either the USD or pegged to it – had a significant advantage when it came to getting the most for their money when exchanging dollars for precious metals.

Lately I looked into this issue again and the good news for Americans is – it’s still a good deal. In relation to a lot of other folks, even better than before! But the bad news is that this might not be the case much longer…

The Cando Disadvantage

The Canadian Dollar is known in the trade as a “Cando”. In 2008 it traded at US$1.10, which meant that at the time, Canadians could buy 10% more metal than Americans. In 2012 it had a high of US$1.01. In 2016 it bottomed at US$0.58 (ouch!), and today still trades at about 80 cents on the dollar. As the chart shows, Canadians get about 20% less gold and silver for their money than their southern neighbors (us).

Canadian Dollar vs US Dollar 01/12/2018 (Chart)

Courtesy stockcharts.com

Zim and Ven, racing for the bottom.

Then there’s the perennial currency basket case Zimbabwe – now entering its second hyperinflationary blowout in just the last couple of decades. Zim is currently playing touch and go with Venezuela to see if the latter’s “bolivar fuerte” (strong bolivar), transacted by the pound on a produce scale rather than from a wallet, will incinerate itself first.

Zimbabwe Banknotes

Zim’s previous “Paper Promise”- Angling for a rematch?

Bolivar Fuerte

Back in the day when the term “strong bolivar” meant something…

Fall in the Value of the Venezeulan Bolívar (Chart)

But not now… (Courtesy Sources listed)

Emerging Markets Purchasing Power Disadvantage

Buyers in Emerging Markets, in which gold prices are making new highs relative to their own fiat paper, are also paying more for their stash. Nevertheless demand there is rising as well – which as previously noted – is an important “tell” regarding the health and durability of the ongoing bull market. This is because even when facing a less advantageous exchange rate, emerging market gold customers are still solidly on the buy.

Additional evidence indicates that we are just now entering the second year of what could become a lengthier – and considerably more powerful than-expected upside run.

Gold vs Emerging Market Currencies

Courtesy allstarcharts.com

We say this in part because of some serious work done by Bob Hoye’s Institutional Advisors along with the Technical observations of Ross Clark They note that for the last 50 years, important lows for gold have taken place on a regular basis, stating, “The most recent (low) was in December 2016, one year after a premature low at 7.2 years in December 2015.”

In a January 2018 public domain post, they stated,

After an initial surge off the cycle lows, the price tends to move methodically higher for the first two years. During that period, we have found that a lower 20-week moving average envelope provides support. This was most recently tested in December 2017… Except for 2002, a trailing one-week stop after the 55th week, kept participants in the market until the first week after the top.

You might want to commit that last part to memory. If the 8-year cycle pattern continues to play itself out, not only could this nascent gold bull have a long ways to run in terms of time and price, but an attentive investor could use the kind of trailing stop-loss discussed, in order to stay with the trend as long as possible, holding onto significant gains before offsetting all or most of their holdings for a good profit.

Now for the Bad News…

The U.S. dollar has been “king of the hill” since its establishment as a backstop for the so-called petrodollar, in an agreement with Saudi Arabia and other oil producing countries as a result of the 1970’s oil spike. That idea was to create a stable and reliable revenue stream for oil exporters. The price of oil was thus set in dollars, in the process establishing the unit of account as the world’s reserve currency. Even so, the petrodollar’s purchasing power is, to some extent, predicated upon the rate of inflation and the value of the dollar on the FOREX.

Things worked well for quite awhile, but in recent years, for a number of reasons, the status quo has been increasingly called into question. A detailed rationale is beyond the scope of this report, but here are a few of the elements:

  • Profligate creation of dollars by the Federal Reserve, many of which have “migrated” offshore, driving down the recipients’ purchasing power.
  • Massive debt growth at all levels of the U.S. body politic – leading inevitably to more dollar creation in an attempt to pay the bill.
  • Unnaturally low interest rates since the 2008 melt-down, obscuring the “signals” given by rates that indicate if a given investment makes “dollars and sense”, leading to soaring mal-investment and speculation.
  • A changing geopolitical landscape, wherein the BRIC countries – Brazil, Russia, India and China (plus others) – have tired of the constraints placed upon them by restrictive U.S. policies.
  • The launch and coming build-out of The New Silk Road from Asia to Europe and the Middle East, encompassing 40 per cent of the world’s population in an economic-financial-political paradigm less-incumbent on the West’s wishes.
  • Lessening dependence on the US dollar as the world’s reserve currency in favor of loans and payments denominated in Chinese yuan, Russian rubles, commodities…and gold.

All these factors and more mean that right now and continuing during the coming years, the U.S. dollar is going to be buying less of just about everything, and that includes precious metals. The key elements of this sea-change as they relate to you?

  • Lower U.S. dollar-denominated gold and silver purchasing power.
  • Increased global demand for these metals, especially in the many countries seeing their local currencies strengthen vis a vis the dollar.
  • Depleting gold reserves due to a lack of big discoveries.
  • Lower head-grades across the board.
  • Increased cost of production due to environmental and “country risk”.

And this…

Weekly Gold with 50 Day Golden Cross (Chart)

Note established 50 day MA (blue line) “Golden Cross”

While just about everything in life is based upon probabilities, the odds right now strongly favor that the next leg of the secular bull run in the metals is underway. Four years of a cyclical bear market 45-50% retracement (2011-15); an 8 month initial bull counter-trend rally (most of 2016); and finally 18 months of retracement and consolidation (mid-2016 to December, 2017) have already taken place.

Taken together, this alignment of factors makes a compelling argument for completing your metals’ acquisition plan in a timely manner. And if you have still have yet to get started… what’s your excuse?

 *About the Author:

Swamp appoints another of its own as new SEC regulator

President Trump was elected to office promising he would ‘drain the swamp’  in other words take the U.S. financial power away from Wall Street and the big banks.  This he has abjectly failed to do, either by design or failure and, if anything the ‘swamp’ is more powerful than ever, and seemingly becoming more so each day.  I used to have a colleague who would sing the praises of the USA as being the least corrupt nation on earth.  In response I would tell her it is one of the most corrupt with money buying political favours and overtly influencing political decision-making (the lobbying system), while the regulatory system is dominated by the very bankers and financiers it should be designed to protect the average American from.  (Fox and henhouse immediately spring to mind.)

So what is the result?  The system is designed to favour the rich and they get richer while the poor, at best, stagnate, with the ‘swamp’ remaining fully in control.  Indeed as Clint Siegner notes in the article below, published initially on the Money Metals Exchange website the regulatory bodies no longer even pay lip service to appointing anyone who might be deemed independent, but pack these bodies with ever more of their own.

Swamp Lives On: Crooked Banks and Captured Regulators

By Clint Siegner*

If officials at the Securities and Exchange Commission (SEC) are bothered by allegations of incompetence and capture by Wall Street’s bankers, it is hard to tell. The Commission recently hired Brett Redfearn to serve as Director of the Division of Trading and Markets. Redfearn left a 13 year stint at JP Morgan to assume a key role in regulating banks, investors and traders.

The SEC, and other regulators such as the CFTC and the Federal Reserve, aren’t worried about appearances. Redfearn looks like yet another fox being sent to guard the henhouse. His appointment undermines confidence even if he intends to serve with integrity.

Instilling confidence ought to be a priority at the SEC. The past decade has been a disaster when it comes to the agency’s credibility.

U.S. Securities and Exchange Commission Seal

To date, not one high level bank executive, has been prosecuted for misdeeds related to the 2008 Financial Crisis. This despite plenty of the shareholders SEC officials are supposed to be protecting having lost their shirts. SEC bureaucrats either bungled or turned a blind eye to Bernie Madoff’s Ponzi scheme.

To cap it off, a high-profile story which broke in 2010 uncovered agency staff and contractors spending an inordinate amount of time watching pornography on the job.

Office of Inspector General investigators looked at a 5-year period and found 33 people had violated policy by watching X-rated content on federal computers. During these years, Madoff’s con was reaching its peak and Wall Street banks were busily selling mortgage backed securities stuffed with fraudulent loans to pension funds. You would think leadership there might be embarrassed.

Which brings us back to the appointment of Mr. Redfearn. It demonstrates the SEC remains tone deaf at a minimum, and completely captured at worst.

JP Morgan, Redfearn’s former employer, served as Madoff’s banker and has been involved in a number of questionable affairs. Laurence Kotlikoff from Forbes suggested the bank may be “America’s Most Corrupt.”

Until the SEC and its people prove they actually care about keeping the investment banks and financial insiders honest, they should probably do their hiring somewhere besides Wall Street. Otherwise people will understandably assume federal regulators are there to protect powerful firms under their jurisdiction, and not Americans at large.

*About the Author:

Clint Siegner is a Director at Money Metals Exchange, the U.S. precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

Economic worries positive for gold

Here follows a recent article by Frank Holmes looking at what may be some unrealised factors which could see gold move significantly higher this year and in the future

It’s Time for the Fear Trade to Move Gold Prices

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

best of the year top 5 frank talk posts of 2017

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

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

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

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

Beware the Rate Hike Cycle?

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

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

Will there be a fed rally in 2018
click to enlarge

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

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

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

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

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

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

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

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

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

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

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

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

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

Inflation Could Be a Lot Hotter Than We Realize

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

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

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

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

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

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

Would the real inflation metric please stand up
click to enlarge

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

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

US consumer inflation official vs shadowstats 1980 based alternative
click to enlarge

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

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

Precious Metals Outlook for 2018

By Stefan Gleason*

The first trading days of 2018 are confirming signs of renewed investor interest in the precious metals sector after a long period of malaise.

Gold Bull

Gold and silver markets entered the year with some stealth momentum after quietly posting gains late in 2017. Gold finished the year above $1,300/oz. – its best yearly close since 2012.

Over the past five years, the yellow metal has been basing out in a range between $1,050 and $1,400. A push above $1,400 later this year would therefore be significant.

It would get momentum traders and mainstream financial reporters to take notice.

The alternative investing world was enthralled by Bitcoin in 2017. While we don’t expect a Bitcoin-like mania to take hold in precious metals in 2018, we do expect gold and silver markets to make some noise.

Stimulus to Push Up Commodity Prices Again

Even as the Federal Reserve vows to continue raising its benchmark interest rate and “normalizing” its balance sheet, a flood of new fiat stimulus is set to hit the economy. The recently passed tax cuts will cause hundreds of billions – perhaps eventually trillions – of dollars to be repatriated back to the United States.

For years, many corporations have hoarded business assets overseas in more favorable tax environments. The U.S. had one of the world’s least competitive corporate tax structures. With the corporate rate dropping to 21% in 2018, the U.S. suddenly becomes a much more attractive place in which to set up shop.

The good news is that dollars are coming back home and getting reinvested in capital projects, wage increases, new hiring. The potentially bad side effect is that higher inflation increasingly shows up in consumer prices.

An inflation uptick would likely cause long-term interest rates to rise, which would dig the government’s $20.6 trillion debt hole deeper. (Federal deficits are expected to grow by more than $1 trillion under the GOP’s latest budget, which fails to pair tax cuts with spending cuts.)

The flood of deficit-financed stimulus sets the economy up for a short-lived spurt of gains… followed by longer duration debt and inflation pains. For now investors are still enjoying gains, as reflected by the ongoing strength of the stock market. But inflationary pressures are already building in raw materials markets.

Mining Output Continues to Decline

The supply and demand fundamentals for precious metals are improved in 2018. Low gold and silver prices over the past few years have hurt the mining industry. Although it has continued to operate existing mines – sometimes even at losses – it has slashed exploration and development of new projects. That will means years of stagnating or even declining output ahead.

Miner

Metals Focus projects mining output of gold in 2018 will be 3,239 tonnes, a slight decrease from 2017. Analysts expect a more significant drop could occur in 2019.

A similar pattern is expected to play out in silver, though it’s more difficult to forecast since few primary silver miners exist (most silver comes as a byproduct of base metals mining operations). Demand for silver is also more variable, with investment demand being the biggest wild card.

Commodity markets analysts at TD Securities believe silver may be the metal to own in 2018. According to TD’s 2018 Global Outlook, silver prices should hit $20/oz this year (after finishing 2017 just under $17).

Palladium Is on a Tear

Turning to the platinum group metals, platinum is widely expected to go into a supply deficit this year or next after finishing 2017 at a small surplus. Its sister metal palladium experienced an annual supply deficit of 680,000 ounces last year and growing concerns of shortages, helping drive its big price gains.

Even with palladium prices now touching all-time highs, available supply is still on the wane. HSBC forecasts an expanding palladium deficit in 2018 to more than 1 million ounces.

The growing shortage figures to continue pressuring palladium prices upward. It’s also bullish for platinum. That’s because automakers and other industrial users of palladium now have an incentive to switch to less expensive platinum where possible.

Large-scale substitutions don’t take place immediately. But in 2018, demand drivers could finally start shifting back in favor of platinum.

Platinum, silver, and gold investors who have sat patiently on their positions waiting for them to break through to the upside will be rewarded. It’s a question of whether that happens early in 2018 with the economic stimulus, late in 2018 as a reaction to potential tremors in bond and stock markets, or in 2019 when supply destruction starts to kick in more strongly.

Only “Mr. Market” knows for sure.

While you can still buy gold under $1,400 and silver under $20, they remain (for now) compelling values. Silver looks especially compelling given its cheapness relative to gold and virtually every asset on the planet.


Gold’s best year since 2011

By Clint Siegner*

Metals investors may have missed it given the gloomy sentiment that plagued markets for much of 2017, but gold just finished its best year since 2011.

Perhaps in a year like the one just passed, 13% gains are simply not inspiring. U.S. stocks finished about 25% higher for the year, and crypto-currencies including Bitcoin left all other asset classes in the dust. Bitcoin gained roughly 1,400%.

Die hard gold bugs enter 2018 waiting for crypto-bugs and stock bulls to see the value of precious metals. Fortunately, precious metals have served reliably both as an inflation hedge and as a safe haven for most of recorded history. It looks less and less probable investors will get through another 12 months while ignoring both inflation and market risk simultaneously.

While other markets were finishing 2017 strong, the U.S. dollar ended the year with a whimper. The dollar fell 10%, its worst performance in more than a decade.

That weakness has yet to manifest itself as price inflation in consumer goods and services. It has instead shown up in asset prices.

Consumers have yet to feel their dollars getting weaker, which may explain much about why a traditional inflation hedge like gold isn’t getting a lot of attention. That may change in the months ahead, particularly if President Donald Trump can add his debt-financed infrastructure spending program to the tax cuts recently passed. Both initiatives represent fiscal stimulus for Main Street, and a shift from Wall Street oriented monetary policy including Quantitative Easing.

Fiscal stimulus programs should contribute to more weakness in the dollar, as deficits and borrowing increase. Yes, the Republican led Congress could insist on spending reductions elsewhere to compensate for tax reduction and infrastructure spending, but only the most naive would consider that a genuine likelihood.

Inflated Dollar

If the dollar loses another 10% in the year ahead, metals ought to be significant beneficiaries – even if most aren’t paying attention to that possibility.

The recent strength in precious metals may be signaling that price inflation is on the way.

The Federal Reserve has been raising the Fed funds rate for more than two years, thus far with very little impact on bond yields and interest rates on consumer loans. When dealing with markets as centrally planned as ours are, anything is possible… in the short term.

Yet, in our view, the most likely alternative to inflation as a driving force in markets over the coming months is asset deflation. If investors aren’t talking about rip roaring asset markets at this time next year, they may be talking about bubbles popping instead. There are certainly a number of bubbly markets, and a near total disregard for risk. That is a potent combination.

Either way, don’t expect the metals markets to go unnoticed in 2018.

 *About the Author:  Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

Holmes – 10 Charts That Show Why Gold Is Undervalued Right Now

This article was initially posted on the US Global Investors website on December 26th before the end 2017/1st week 2018 gold price surge and is being reposted here now that people are mostly back at their desks following the New Year holiday.

by Frank Holmes – CEO and Chief Investment Officer US Global Investors

gold is undervalued right now

With the year quickly coming to a close, it might be time to start thinking about rebalancing the gold holdings in your portfolio. That includes bullion, jewelry, gold stocks and well-managed gold funds—all of which I recommend giving a collective 10 percent weighting. Because it’s been such a strong year for stocks—they’ve advanced more than 20 percent as of today—it’s likely that most investors will need to add to their gold exposure to meet that 10 percent weighting as we head into 2018.

Some investors might wonder why they need gold in their portfolios right now. The stock market is still chugging along, and the just-passed tax reform bill is likely to help ratchet up share prices even more. Cryptocurrencies have been hogging the spotlight lately, especially after bitcoin tumbled nearly 30 percent last Friday morning.

While I’m on the subject, inflows into cryptocurrencies have totaled more than $500 billion this year alone. To put that in perspective, the total sum of global equity mutual fund and ETF inflows were around $411 billion as of November 29. What’s more, cryptocurrencies are now doing as much daily trading as the New York Stock Exchange (NYSE), according to Business Insider.

Just think on that. Something is happening here that cannot be ignored or dismissed.

But back to gold. It’s important to remember that the precious metal has historically shared a low-to-negative correlation with many traditional assets such as cash, Treasuries and stocks, both domestic and international. This makes it, I believe, an appealing diversifier in the event of a correction in the capital and forex markets.

Need more reasons to add to your gold holdings? Below are 10 charts that show why the yellow metal is undervalued right now:

1. The gold price has crushed the market so far this century.

gold price has crushed the market 2 to 1 so far this century click to enlarge

Investors are invariably surprised to see this chart whenever I show it at conferences. Believe it or not, since 2000, the gold price has beaten the S&P 500 Index, which has undergone two 40 percent corrections so far this century.

2. Compared to stocks, gold looks like a bargain.

Gold is a bargain right now compared to stocks click to enlarge

As of this month, the gold-to-S&P 500 ratio is at its lowest point in 10 years. For mean reversion to occur, either the gold price needs to appreciate or share prices need to fall. Either way, consider this a once-in-a-decade opportunity.

3. Exploration budgets keep getting slashed.

total nonferrous exploration budgets fell to an 11 year low in 2016 click to enlarge

One of the reasons why gold is so highly valued is for its scarcity. There’s a possibility it could get even scarcer as explorers continue to trim exploration budgets and uncover fewer and fewer large deposits. The time between initial discovery and day one of production is also expanding. This has led many experts in the field to wonder if we’ve finally reached “peak gold.”

4. Gold stocks could be just getting started.

will todays gold stocks track previous bull markets click to enlarge

Last year marked a turnaround in gold prices and gold stocks, and according to analysts at Incrementum Capital Partners, a Swiss financial management firm, they’re just getting warmed up.When charted against past gold bull markets, the present one looks as if it still has a lot of room to run.

5. Is too much money going into equities?

world equities market cap well on its way to 100 trillion dollars click to enlarge

More than $80 trillion sits in global equities right now, a monumental sum that’s likely to surge even more as we venture further into the bull market. Some worry this is a ticking time bomb just waiting to go off. Another correction similar to the one 10 years ago would wipe out trillions of dollars around the world, and it’s then that the investment case for gold would become strongest.

6. Higher debt could mean higher gold prices.

federal debt expected to continue rising click to enlarge

The yellow metal has historically tracked global debt, which stood at $217 trillion as of the first quarter of this year. Looking just at the U.S., debt is expected to continue on an upward trend, driven not just by new, and largely unfunded, spending but also underlying interest. By most estimates, President Donald Trump’s historic tax cuts, although welcome, will contribute to even higher debt as a percent of gross domestic product (GDP).

7. The Fed’s about to take away the punch bowl.

federal reserve has begun the process of unwinding its 4.5 trillion balance sheet click to enlarge

“My opinion is that business cycles don’t just end accidentally. They end by the Fed. If the Fed tightens enough to induce a recession, that’s the end of the business cycle.” That’s according to MKM Partners’ chief economist Mike Darda, who was referring to the Federal Reserve’s efforts to unwind its $4.5 trillion balance sheet after it bought vast quantities of government bonds and mortgage-backed securities to mitigate the effects of the Great Recession. There’s definitely a huge amount of risk here: Five of the previous six times the Fed has similarly reduced its balance sheet, between 1921 and 2000, ended in recession.

8. Rate hike cycles have rarely ended well.

recessions have historically followed us rate hike cycles click to enlarge

Rate hike cycles also have a mixed record. According to Incrementum research, only three such cycles in the past 100 years have not ended in a recession. Obviously there’s no guarantee that this particular round of tightening will have the same outcome, but if you recognize the risk here, it might be prudent to have as much as 10 percent of your wealth in gold bullion and gold stocks.

9. Trillions of dollars of global bonds are guaranteed to lose money right now.

world central banks still holding interest rates in negative territory click to enlarge

As of May of this year, nearly $10 trillion of bonds around the world were guaranteed to cost investors money, as more and more central banks instituted negative interest rate policies (NIRPs) to spur consumer spending. Instead, it encouraged many savers to yank their cash out of banks and convert it into gold. That’s precisely what households in Germany did, and by 2016, the European country became the world’s biggest investor in the yellow metal.

10. The Love Trade is still driving gold demand.

golds 30 year seasonality patterns click to enlarge

The chart above, based on data provided by Moore Research, shows gold’s 30-year seasonal trading pattern. Although it’s changed over the past few years, the pattern reflects the Love Trade in practice. According to the data, the gold price rallies early in the year as we approach the Chinese New Year, then dips in the summer. After that it surges on massive gold-buying in India during Diwali, in late October and early November. Finally, it ends the year at its highest point during the Indian wedding season, when demand is high. The pattern isn’t always observed exactly how I described, but it happens frequently enough for us to make educated, informed decisions on when to trade the precious metal.

 

Should one invest in gold and silver now? Follow a ‘mind like water’.

by: David Smith*

With sensory input from across the political and economic spectrum of the Internet bombarding us 24/7, it’s understandably difficult to follow through on a decision once made, even if you’ve researched carefully and thought things through beforehand.

Nowhere is this more difficult right now than the decision of whether or not to invest in – or add to – one’s position in the physical gold and silver space.

Not only that, but when you add all the noisy arguments from competing investments which seem to be doing much better while the precious metals slumber, it’s understandable why some long-term information-overloaded investors have decided to sell their metal.

I’d like to suggest that those who hesitate to buy, or worse, decide to sell what they already have are going to experience considerable remorse – and soon.

A potent way to avoid such a struggle and stick with your original decision is to practice developing mizu no kokoro – Japanese for a “mind like water.”

In this state, thinking is minimized, listening/watching emphasized. To get an idea of the clarity that can be achieved, look at the picture below.

I took this photo during a rare moment when all the elements necessary to build such a scene were present. The water is dead calm; the sky is so full of more-or-less stationary cloud formations that it’s difficult to see where one begins and the other ends. At the same time, nothing is distorted. The glassy water “mirrors” the clouds exactly as they look in the sky.

Mind Like Water

Being in the moment mostly involves paying attention.

There’s a lot to be said for “planning your work”; then “working your plan.” At some point you’ve taken your position and set aside money to buy more metal, either at certain intervals or into declining prices.

Then just let things be. Try not to be swayed by counter opinions, even if they seem to make sense. If this is difficult, don’t feel so bad about it. Even the investing greats have to remind themselves from time to time.

Jesse Livermore, one of the greatest speculators who ever lived, wrote a book titled Reminiscences of a Stock Market Operator. Still relevant almost a century later, it stands as one of the half dozen titles any serious investor should read. In it, Livermore made a comment about staying the course that is absolutely germane to our discussion. He said,

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!

It is no trick at all to be right on the market. I’ve known many [traders] who were right at exactly the right time, and began buying or selling stocks when prices were at the very level that should show the greatest profit. And their experience invariably matched mine; that is, they made no real money out of it. Those who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make the big money.

Steve St. Angelo’s excellent world physical silver demand chart shows a powerful 4x increase during the last decade. This “trend in motion” will continue.

World Physical Bar & Coin Demand (Chart)

Realize that the blockchain and gold (+silver) will coexist.

Yes, the current hyperbolic rise in bitcoin may be side-tracking some funds that otherwise would find a home with precious metals (though there has been no major outflow from metals’ ETFs). But in this writer’s view, an even bigger reason is that some long-term holders have developed a level of fatigue waiting for metals to rise while the stock market and bitcoin seem to be on a never-ending run. This, in spite of the fact that gold is actually up around 10% in 2017.

Stewart Thomson’s view, as editor of GU Blockchain , to which I fully subscribe (both literally and figuratively!) is this:

(I will) state adamantly that blockchain will increase demand for gold. Indian investors will seek to put a portion of their huge blockchain profits into physical gold because they are essentially mandated to do so by their Hindu religion. Western investors will do the same when the stock market finally rolls over.

If gold-backed blockchain currency goes mainstream, demand for gold would increase even more significantly, and do so in a sustained way.

Gold Bull Markets 1970 vs 2000 (Chart)

When, not if?

How you can apply “Mind like Water”

Step back from the “noise” (charts, talking financial heads and top-callers) that blurs your vision. Work your plan by continually adding – via dollar cost averaging, regular buying or “taking some money off the table” from other winnings and plowing it into precious metals. Let your mind (and emotions) rest on the picture above and you’ll achieve a level of clarity most others will not. Be right. Sit tight.

Raise your odds of success by keeping in mind the following words from Rick Rule, a man who over several decades, has made a career out of being consistently right – and making big money in the process. He says, “I prefer to ask myself investment questions where the answer begins with when, not if. If the outcome is certain, but the timing is uncertain, my only risk is patience.”

Few eyes are being focused on the powerful base-building action of the metals and miners that has been taking place over the last 18 months. The odds are excellent that we’ll soon see much higher prices, just like we did in 2016. So, be a contrarian. Take your position in gold, silver and possibly some palladium. Then let your mind become like water, as you wait for “when, not if.”