Are we running out of major gold mines?

The World Is Running out of Gold Mines—Here’s How Investors Can Play It

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

the world is running out of gold mines, here's how investors can play it

My good friend Pierre Lassonde, cofounder and chairman of Franco-Nevada, doesn’t know how we’ll replace the massive gold deposits of the past 130 years or so. Speaking with the German financial newspaper Finanz und Wirtschaft this month, Pierre says we’re seeing a significant slowdown in the number of large deposits being discovered. Legendary goldfields such as South Africa’s Witwatersrand Basin, Nevada’s Carlin Trend and Australia’s Super Pit—all nearing the end of their lifecycles—could very well be a thing of the past.

Over the medium and long-term, this could lead to a supply-demand imbalance and ultimately put strong upward pressure on the price of gold.

According to Pierre:

If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits. 

So few new large mines are being discovered today, Pierre says, mostly because companies have had to slash exploration budgets in response to lower gold prices. Earlier this year, S&P Global Market Intelligence reported that total exploration budgets for companies involved in mining nonferrous metals fell for the fourth straight year in 2016. Budgets dropped to $6.9 billion, the lowest point in 11 years. Although we’ve seen an increase in spending so far this year, it still dramatically trails the 2012 heyday.

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

And because it takes seven years on average for a new mine to begin producing—thanks to feasibility studies, project approvals and other impediments—output could recede even more rapidly in the years to come.

“It doesn’t really matter what the gold price will do in the next few years,” Pierre says. “Production is coming off, and that means the upward pressure on the gold price could be very intense.”

Have We Reached Peak Gold?
Frank Holmes standing next to Pierre Lassonde right at Mines and Money London in December 2015

What Pierre is talking about, of course, is the idea of “peak gold.” I wrote about this last year and suggested another factor that could be curtailing new discoveries—namely, the low-hanging fruit has likely already been picked. Gold is both scarce and finite—one of the main reasons why it’s so highly valued—and explorers are now having to dig deeper and venture farther into more extreme environments to find economically viable deposits.

Other factors contributing to the decline include tougher regulations and higher production costs. And unlike with the oil industry, no “fracking” method has been invented yet to extract gold from hard-to-reach areas, though Barrick—the world’s largest producer by output—has been experimenting with sensors at its Cortez project in Nevada.

Take a look at how drastically annual output has fallen in South Africa, once the world’s top gold-producing country by far. In the 1880s, it was the discovery of gold in South Africa’s prolific Witwatersrand Basin—responsible for more than 40 percent of all gold ever mined in human history, if you can believe it—that helped transform Johannesburg into one of the world’s largest and most populous cities. Today, South Africa’s economy is the most advanced and stable in Sub-Saharan Africa, all thanks to the yellow metal.

In 1970, miners dug up more than 1,000 metric tons—an unfathomably large amount. Since then, production has steadily dropped. No longer in the top spot, South Africa produced only 167.1 tons in 2016, an 83 percent plunge from the 1970 peak. Meanwhile, miners in the notorious Mponeng mine—already the world’s deepest at 2.5 miles—continue to follow veins even deeper into the earth at greater and greater expense.

South Africa's gold output has been in steady decline for more than 45 years
click to enlarge

Australia could soon be seeing a similar downturn over the next four decades. A first-of-its-kind study conducted by MinEx Consulting and released this month, shows that Australia’s gold production is expected to see a significant drop between now and 2057. By then, all but four of the 71 currently operating mines in the country will be exhausted. Most of these will close in the next couple of decades. Any additional production will be dependent on new exploration success, which will become increasingly difficult if companies don’t invest in exploration and if the Australian government doesn’t relax rules in the mining space.

MinEx estimates that “for the Australian gold industry to maintain production at current levels in the longer term, it will either need to double the amount spent on exploration or double its discovery performance.”

To be fair, large discoveries haven’t disappeared entirely. Back in March it was reported that Shandong Gold Group, China’s second-largest producer, uncovered a deposit in eastern China containing between 380 and 550 metric tons of the yellow metal. If true, this would make it the country’s largest ever by amount. The mine has an estimated lifespan of 40 years once operations begin.

In addition, Kitco reports this month that Toronto-based Seabridge Gold recently stumbled upon a significant goldfield in northern British Columbia. The find appeared, coincidentally, after a glacier retreated. It’s estimated to contain a whopping 780 metric tons.

“There’s no question that as glaciers retreat, more ground will become available for exploration and more discoveries could be made in that part of the world,” Seabridge CEO Rudi Fronk told Kitco.

The company already has the permits to begin mining.

Seabridge gold is up 15 percent for the three month period
click to enlarge

Exploration Budgets Jumped
Gold represents over half of global annual commodities exploration budgets

As I said earlier, we just saw an encouraging spike in the amount spent on exploration. According to S&P Global Market Intelligence, exploration budgets increased in the 12-month period as of September for the first time since 2012. Budgets jumped 14 percent year-over-year to $7.95 billion, with gold explorers leading the way. During this period, gold companies spent around $4 billion on exploration, which is roughly half the value of all nonferrous metals mining budgets.

But because exploration is getting more expensive for reasons addressed earlier, senior producers might very well decide instead to acquire smaller firms with proven, profitable projects.

This could create a lot of value for investors, so I would keep my eyes on juniors that look like targets for takeover. Dealmaking in the Australian mining industry, for example, is showing some growth this year compared to last, according to a September report by accounting firm BDO. Last year, Goldcorp finalized its deal to acquire Vancouver-based junior Kaminak Gold, and in May of this year, El Dorado announced it was taking over Integra Gold for C$590 million. I expect to see even more deals in the coming months.

In the meantime, I agree with my friend Pierre’s “absolute rule” that investors should hold between 5 and 10 percent gold in your portfolio. I would also add gold stocks to the mix, especially overlooked and undervalued names, and rebalance once and twice a year.

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Gold/Silver vs. Bitcoin Comparisons: A No-Brainer… or Brainless?

by: David Smith*

For most of the year, as Bitcoin soared, crashed, and soared again, cryptocurrency vs. physical gold-silver talking heads engaged each other in heated rhetoric about which of these venues is here to stay.

Some of the biggest names in finance, government, and the newsletter analyst space have made comments that – to be charitable – appear less-than-fully informed. Comments like “Even though bitcoin could rise to $100,000, it’s still going to zero!” don’t offer much insight. Some other questionable assumptions:

2017 percent price change comparisons: Relating this year’s gold and silver’s price range to that of bitcoin misses an important point. Yes, bitcoin (BTC) has risen by a much greater percent, but it’s also fallen more. I don’t recall gold dropping 40% this year, which bitcoin has… on a couple of occasions.

Bitcoins

Please note: Bitcoin has no tangible, physical form.

 

Trash-talking gold and silver as “antiquated”: Bitcoin is now considered legal tender in Japan, but at this time, its primary function is for use in the purchase and sale of the 900+ “alt coins” currently available.

Most of these exchange entries in the crypto-space are not really “currencies” at all and will never trade as such.

Rather they are “coins” or “tokens” digitally created and circulated to raise seed money, via initial coin offerings (ICOs) in order to solve some business application in a blockchain-connected manner. Many have no trading volume – possibly because the market is skeptical of their business plan – and have become more or less “dead” coins.

At present, a relative few have an actively trading market. Investors have dropped literally millions of dollars into scores, if not hundreds of entrants which have appeared on the scene like dragon’s teeth, in many cases only to see volume dry up soon thereafter.

At present, digital apparitions can be created and marketed by just about anyone. The following example demonstrates how easy it is (for now), and how gullible some people really are.

Can I interest you in a “Useless Ethereum Token”?

Earlier this year, the “Useless Ethereum Token” (UET) was “announced” online. The “Issuer” wrote:

You are literally giving your money to someone on the Internet and getting completely useless tokens in return. There are no ‘whitepapers,’ no ‘products’, and no ‘experts’. It’s just you, me, your hard-earned Ether, and my shopping list.

You would think this blatantly-stated scam would elicit exactly zero response, yet reportedly, the UET ‘Project” was able to raise more than $60,000!

By the same token, it’s a safe bet that many Venezuelans wish they had traded some of their bolivares fuertes (“strong Bolivar”) notes, rendered worthless over the last few years, for a few ounces of silver – or a single ounce of gold – which could now purchase respectively, six months of food, or a house.

Becoming a victim of “default bias”: We all have a tendency to operate through a lens which uses the past as a default setting.

We keep doing what we know, avoid taking new risks, and resist changing the way we think.

Default bias can cause lost opportunities – whether it involves learning about the blockchain or being hesitant to buy precious metals when they’re in boring “wear you out or scare you out” sideways action (another David Morgan homily)… as they’ve been lately.

Dismissing Bitcoin as “just digital”: Kim Iskyan (Stansberry Churchouse Research) addresses the criticisms leveled at bitcoin and the blockchain. Responding to the charge that it’s “purely digital,” he notes that fully 90% of all the money – or as David Morgan refers to it, “paper promises” – that exist around the world today are not physical either!

Doug Casey is always one to see beyond the next investment valley (or country), and he pegs what most people miss when they argue that bitcoin is “bad” for the future of precious metals. As he said,

When people buy these cryptocurrencies, even if they know nothing about hard money, economics, or monetary theory, they inevitably ask themselves, “Hmm, Bitcoin or the dollar?” They’re both currencies. Then they start asking questions about the nature of the dollar…the nature of inflation… and whether the dollar has any real value, what’s going to happen to it, and why.

People start asking themselves these questions – which wouldn’t have occurred to them otherwise… and it’s going to make them very suspicious of the dollar. It’s going to get a lot of people thinking about money and economics in a way they never thought about it before. And this will inevitably lead them to gold…

What I am doing: In addition to staying very active in metals and miners, I have placed “small money” into several coins and tokens having viable business models in hopes of making an asymmetric profit.

Gold Bull Market 1970s vs. 2000 to date

In spite of the current turmoil, I remain steadfast in the belief that the next few years will see gold and silver trading several times higher than their nominal 2011 prices of $1,900 and near $50 respectively. The blockchain is here to stay. As for bitcoin, only time will tell.

We may even see digital coins and tokens backed by precious metal. But these changes in the crypto space will not replace them. Indeed, gold and silver will almost certainly – to the surprise of many bitcoin bulls – markedly increase demand.

I plan to continue holding the majority of my investible funds in gold and silver. How about you?

The Top Six Things You Should Know About Royalty Companies Now

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

franco nevada royalty companies big truck

While in New York last week, I had the privilege of seeing many colleagues face-to-face. It’s always a pleasure for me to be able to talk gold with industry friends and experts. One stop during my trip that I thoroughly enjoyed was to chat with Pimm Fox and Lisa Abramowicz on Bloomberg Radio. Our discussion was dynamic as always and I shared with them my outlook for gold in the second half of the year, along with the opportunities I continue to see with royalty names.

discussing gold with lisa abramowicz and pimm fox at bloomberg radio

I still find it curious that many investors don’t realize what a significant role royalty and streaming companies play in the mining business.

Last year I wrote about some of my favorite royalty names, and how I came to know about this business model in the gold mining industry early in my career. If you haven’t read that blog post, I encourage you to go back and explore the groundbreaking work done by Seymour Schulich and Pierre Lassonde, the two founders of Franco-Nevada.

I think that now is a good time to take another look at royalty companies. Here are the top six things I believe investors should know about this specialized sector.

1. What Is a Royalty Company?

Royalty companies, sometimes called streaming companies, serve a special role in the mining industry. Developing a mine property to start producing gold or other precious metal is an expensive, often time-consuming process. Infrastructure needs to be built out, permits applied for, laborers hired and more.

A royalty company serves as a specialized financier that helps fund exploration and production projects for cash-strapped mining companies. In return, it receives royalties on whatever the project produces, or rights to a “stream,” an agreed-upon amount of gold, silver or other precious metal.

bhow does the royalty and streaming financial work
click to enlarge

2. Many Gold Royalty Companies Have Still Been Outperforming Gold

When looking over the last 12 months, many of the royalty companies have outperformed gold. While this is indeed remarkable, it is important to remember that royalty companies do have a robust business model. Their ability to generate revenue in times when the gold (or other precious metal) price is both rising and falling is what makes them attractive.

royalty companies outperformed gold
click to enlarge

3. Remember Real Interest Rates

There’s no question that the gold price is volatile, and in any given 12-month rolling period, historically it’s not unusual for the price of the yellow metal to fluctuate up or down by 20 percent. It’s important for investors to remember that gold historically shares a strong inverse relationship with real interest rates. You can see in the chart that as rates rise, the price of gold falls, and vice versa.

gold historically shares an inverse relationship with real rates
click to enlarge

This is another reason why I like the royalty model. Since royalty companies set fixed, lower-than-market prices for mining output, they can better manage the volatility that is inherent in the gold market. For example, Wheaton Precious Metals’ 19 agreements in 2016 entitled the company to buy silver at an average price of $4.42 an ounce and gold at $391 an ounce.

4. Speaking of Revenue

Last time I wrote about these companies, I shared with you that the three big royalty names boast impressive sales per employee. This is still true. Take a look at the 12-month revenue per employee of Franco-Nevada, Royal Gold and Wheaton Precious Metals. Wheaton has only around 30 employees, but has one of the highest rates in the world, generating $25.8 million per employee. By comparison, Newmont, which employs around 30,000 people, generated $310,000 per employee during the same period. Barrick also falls short by comparison.

royalty companies have greater revenue per employee model than procedures
click to enlarge

5. Friendly to Shareholders

Paying dividends is important to investors, as it reflects the health of a company in terms of its cash flow and profits. Even more favorable in the eyes of investors is a company that is growing its dividends. Between 2012 and 2017, royalty companies had a combined annual dividend growth rate of 17 percent. Compare that to 11 percent growth for the S&P 500 Index, and as low as negative 23 and negative 32 percent for global and North American precious metal miners.

royalty companies dividend rates have been growing
click to enlarge

In fact, 2017 marks Franco-Nevada’s 10th straight year of dividend increases since the company went public in 2007.

6. Less Reliance on Debt

Royalty companies are better allocators of capital than some of the biggest gold miners. Take a look at Newmont Mining, which has a 43 percent debt-to-equity ratio, and Barrick has a massive 91 percent. By comparison, many of the royalty companies have much lower debt, and Franco-Nevada has zero debt. This history of profitability and fiscal discipline is one of the main reasons I find royalty companies so attractive.

royalty companies have less debt
click to enlarge

 

The Commodity Cycle: What It Means for Precious Metals Prices

By Stefan Gleason*

The cycle for any commodity follows the same basic pattern…

When prices are low, production falls. As new supplies diminish, the market tightens and prices move higher. The higher prices incentivize producers to invest in production capacity and increase output. Eventually, the market becomes oversupplied, prices fall, and the cycle starts all over again.

Of course, this is a simplified model of what drives commodity cycles. Booms and busts can be amplified and extended by speculators, by unexpected shifts in demand, or even by interventions from central banks and governments.

Regardless of the causes, commodity markets will always be cyclical in nature. Commodities as a group can be pressured upward or downward by extrinsic forces such as monetary inflation or credit contraction.

However, any individual commodity – whether oil, corn, copper, gold, silver, platinum, or palladium – may be in its own particular stage within the commodity cycle at any given time.

As a resource investor, it’s important to have some idea of whether you’re investing in a commodity at a time in the cycle when it’s favorable to do so. Some technical analysts ascribe four-year cycles to some markets, longer duration cycles to others, and shorter-term cycles that operate within longer-term cycles. The reality is that cycles can’t be counted on to run their course within any prescribed time frame.

There are historical patterns and tendencies, to be sure. Gold, for example, tends to be less correlated to swings in the economy than oil and industrial commodities. Gold can remain in a major trend for years or even decades.

Gold prices crashed from $850/oz in 1980 to $300/oz in 1982. It wasn’t until 2002 that gold crossed above the $300 level for the final time. The new gold bull market rose out of a 20-year base and reached a cyclical high of $1,900 in 2011. A four-year downturn followed, and since 2016 a new cyclical upturn appears to be taking shape.

Commodities Are Moving into a Diminishing Supply Phase

Chart reading is always a tenuous undertaking, but when combined with supply and demand fundamentals, it can help investors identify favorable times to be a buyer or seller. Right now it appears that gold, silver, oil, and other commodities are transitioning one by one into a period in the commodity cycle of diminishing supply.

Oil Market

In the case of crude oil, which is the most economically important and most widely followed commodity, the major storyline in recent months has been a supply glut.

North American shale production has swelled inventories in the U.S. But oil prices have been quietly advancing.

What does the market know that isn’t showing up in all the seemingly bearish headlines for oil? The longer-term supply outlook actually augers for shortfalls… and much higher prices. According to the International Energy Agency (IEA), new oil discoveries in 2016 sunk to their lowest number in decades.

The oil industry slashed spending on developing new supplies in response to low prices. ExxonMobil, for one, cut its capital expenditures by 26% ($10 billion) in 2016.

The IEA warns that in order to offset recent declines and meet rising global demand, the oil industry needs to develop 18 billion new barrels every year between 2017 and 2025. Oil’s recent price range in the mid $40s to mid $50s per barrel doesn’t seem to be incentivizing the necessary new production capacity. Higher prices appear to be in store over the next few years.

Mining Is an Energy-Intensive Business

Higher energy costs would mean higher production costs for the gold and silver mining industry. Mines are already having to process more and more tons of earth to extract ounces of valuable metals.

According to metals analyst Steve St. Angelo, “The global silver mining industry will continue to process more ore to produce the same or less silver in the future. While the cost of energy has declined over the past few years, falling ore grades will continue to put pressure on the silver mining industry going forward.”

Mine Operators

Physical precious metals are, in a very real sense, a form of stored energy. Think of all the energy inputs required to move the earth, to separate relatively tiny quantities of precious metals from tons upon tons of rock and dirt, to refine the raw ore into pure gold, silver, platinum, or palladium, and finally to mint the precious metal into bullion products.

All those energy inputs are represented in the value that markets impute to precious metals. Trends in prices will reflect trends in production costs. And production costs will rise as it becomes harder and more energy intensive to mine metals.

A position in physical gold and silver should be viewed as a core long-term holding. However, there are some times in the commodity cycle that are more favorable than others for buying.

There are times when you may even want to sell a portion of your position. Right now, the cycle appears to be in the early stages of turning bullish for commodity prices – making it a favorable time to be taking out long positions in hard assets.

 Stefan Gleason

The Blockchain: A Gold and Silver Launchpad?

By David Smith*

Central governments around the globe have waged, against their own citizens, a virtual “War on Cash.” Efforts by Sweden to become “cash-free;” progressive “downsizing” of Eurozone currency units; a currency recall in India that affected 1.3 billion people; solemn talk about eliminating $100 and even $50 bills in the U.S. – all in the supposed fight against “drug dealing and tax evasion.”

US 100 Dollar Bill

Will Ben Be Going Bye Bye?

It’s really about people control.

The War on Cash goes hand in hand with the imposition of onerous taxation levels, negative interest rates, and destruction of what little privacy we have left.

Historically, nations backed their paper currencies with gold and/or silver. Today – without a single one doing so – it might seem, as some naysayers have observed, that gold is at best a “barbarous relic;” at worst, just a “pet rock.” And yet…

The War on Cash has unleashed a hydra. From the invention less than a decade ago of the “cryptocurrency” Bitcoin, to its present-day evolution, a change of monumental significance is underway.

The Foundation Is the Blockchain

Satoshi Nakamoto is credited with the creation of Bitcoin and as part of its implementation, devised the first blockchain database. By definition, a blockchain “allows connected computers to talk to each other, rather than through a central server. Using a ‘consensus mechanism’ the connected computers on the network stay in sync and agree with each other.” Every data entry references an earlier one, agreeing with the entire chain. (Summary from an essay by Peter van Valkenburgh.)

Three years ago, David Morgan aired his views in an essay titled, “My Two Bits about Bitcoin.” The technology was complex, relatively slow, and looked to become unwieldy. This was 15 months before the debut of a process that now holds the potential to turn night into day for just about any kind of online commercial transaction… and could spark a revolution for the use of “digital gold and silver.”

The key (for now) is Ethereum. Ethereum is a computing platform – and a cryptocurrency… that runs smart contracts – applications that run exactly as programmed without the possibility of downtime, censorship, fraud, or third-party interference (ethereum.org).

The Potential and the Promise

Acceptance of gold and silver as a store of value and medium of exchange most likely pre-dates recorded history. Then someone (the Chinese?) got the bright idea to create a paper substitute exchangeable for, but still backed by, precious metal.

American Gold Buffalo

In Venezuela, one ounce of gold
buys a house.

This worked swimmingly until they decided to print unlimited amounts of what David Morgan at The Morgan Report has so famously termed “paper promises.” These promises are never fully honored, causing the eventual decline of a circulated currency’s purchasing power to zero.

The original promise of value is accepted in good faith, but when that promise is broken through devaluation, faith evaporates, along with the value of the once-supported currency. For proof of this today, look no further than Venezuela.

Digital Metal Data Points

A number of firms work to merge cryptocurrencies with physical gold and silver. The weakness of purely digital money is that it is unbacked by anything tangible. It only works for people who have electricity and are connected to the Internet. Physical gold and silver don’t rely upon the grid and can never be “hacked.”

Cryptocurrencies such as Bitcoin cost almost nothing to transfer around the globe and they promise to be easy to transact with (akin to using a credit card). If those digital tokens can be anchored to tangible gold and silver bars, they could be more compelling as a store of value.

As you read the following passage in italics from an interview with Beautyon, editor of bitcoin-think, conducted on lfb.org., try substituting the term “digital metals” wherever you see “bitcoin.” Doing so shows the potential, the promise, and very possibly – eventual reality – for the evolving union of digital metals with physical gold and silver.

Bitcoin will succeed. There is nothing any government can do to stop it… No amount of time can put the Bitcoin genie back in the bottle…. (it) is good money, and all the State can produce is bad money… Bitcoin means the final death of government fiat money. It means the end of Big Government. It means an era of unprecedented prosperity, as savings once again become the source of investment.

Will the Promise Be Honored?

The keys to the argument are that when a person purchases digital metal, it must be stored in a secure location, in physical form of a stated purity, immediately available to its designated owner upon demand. It is not being loaned to others. The price is transparent, accurate, and available globally.

Bitcoin

Even though this is a nice image,
remember that Bitcoin itself is intangible.

The “authorities” have always sought, and will continue to try to control, peoples’ activities. But to the extent that investable physical gold and silver are removed from the control of exchanges and government coffers, and placed under “supervision” of the individual, the ability to manipulate the price and physical supply will deteriorate.

This, I believe, is the potential that digital metal represents. It will operate on a decentralized, secure, transparent platform. The blockchain and the portal through which it flows could be Ethereum or a similar protocol.

And if the “promise” is not honored? Then the concept of digital metal will be dispatched to irrelevance in the dustbin of history, as other experiments which have toyed with its essence have been. But pass or fail, no amount of digital tinkering will be able to stunt demand for gold and silver. Rather, the result will have simply been to introduce millions of new holders to the virtues of physical precious metals ownership.

Unintended Consequences

Global governments, having previously removed metals’ backing from the currencies they print, now attempt to force their citizens into holding only digital paper currency “wealth.” How ironic it will be, if by these very actions, the ultimate effect turns out to be the unleashing of new demand waves for digital metal – redeemable for physical gold and silver.

Last week, Stewart Thomson of Graceland Updates predicted the following:

“Going forwards, India-China operated digital gold wrapped in blockchain technology will be the undisputed currency of the world gold community, a 3-billion-person-strong titanic force…. This is the beginning of the end for world gold price manipulation, and you can take that to the bank.”

 

Inauguration Day: Gold still consolidating around $1,200

Gold Today –New York closed at $1,201.50 on the 19th January after closing at $1,205.60 on the 18th January. London opened at $1,202.45 today.

 Overall the dollar is weaker against global currencies today. Before London’s opening:

         The $: € was weaker at $1.0679: €1 from $1.0652: €1 yesterday.

         The Dollar index was weaker at 100.97 from 101.20 yesterday. 

         The Yen was stronger at 114.73: $1 from yesterday’s 114.80 against the dollar. 

         The Yuan was almost unchanged at 6.8765: $1, from 6.8767: $1, yesterday. 

         The Pound Sterling was stronger at $1.2355: £1 from yesterday’s $1.2302: £1.

 Yuan Gold Fix
Trade Date Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    1    20

     2017    1    19

      2017    1    18

SHAU

SHAU

SHAU

/

268.36

271.53

/

268.26

271.12

$ equivalent 1oz @  $1: 6.8765

      $1: 6.8767

$1: 6.8425

  /

$1,213.80

$1,234.28

/

$1,213.35

$1,232.41

Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle Eat eastward metric measurements are used against 0.9999 quality gold. [Please note that the 0.5% difference in price can be accounted for by the higher quality of Shanghai’s gold on which their gold price is based over London’s ‘good delivery’ standard of 0.995.]

Shanghai consolidated yesterday pulling back 3 Yuan or just over 1% with the Yuan a tiny bit stronger against the dollar. The fall does not indicate any more than a healthy correction.

Does this express a loss of pricing power? New York is at a $7 discount to Shanghai and London a narrowing of over $14. It would appear so [but only on a daily basis]. But Shanghai could drive prices tomorrow. We have to allow for corrections where demand on a daily basis [because prices have run too high?] pulls back and supply dominates for the short time it happens, before demand comes back at lower levels.

Some may feel that because London is the main physical market in the developed world it supplies China exclusively. Yes, the world’s main bullion banks are based in London, but they operate in both centers. Their hold over supply is far less than most believe. For instance the Rand Refinery in Johannesburg South Africa will sell to any buyer including the Chinese directly. It does not have exclusive agreements with the world’s main banks, as it had in 1974 with the three main Swiss Banks [the ‘pool’]. Shanghai buys from Switzerland and directly from producers/refineries. Hence we do not accept that London is the sole supplier of Shanghai. Add to that the profitability of the arbitrage trade which will smooth out price differentials. But because Shanghai is by far the largest physical gold market in the world, it does have pricing power normally.  We will see that in the next week/month.

LBMA price setting:  The LBMA gold price setting was at $1,199.10 this morning against yesterday’s $1,203.35. 

The gold price in the euro was set lower at €1,127.93 after yesterday’s €1,129.06 as the dollar weakened.

Ahead of the opening of New York the gold price was trading at $1,200.00 and in the euro at €1,128.77.  At the same time, the silver price was trading at $16.90. 

Silver Today –Silver closed at $17.00 at New York’s close yesterday from $17.08 on the 18th January. 

Price Drivers

On Inauguration Day we see President Trump take the reins. In addition, with the Republicans in the majority in both Congress and the Senate, government, at last is in a position to do something, without the opposition blocking it. The expectations are high, likely too high.

The U.S. economy is healthy so we are open to what the Fed also says as to interest rates. We don’t think they will change rates as they will want to see how the new President will move forward on respecting the economy. Only then will they act, or not.

The U.S. based gold ETFs continue to be relatively static after some buying recently. Exchange rates continue to have a major impact on the gold prices with China playing a strange game. All know that the Yuan should fall and the PBoC is targeting certain types of capital outflow, which do not benefit either the Yuan or the Chinese economy [such as wealth exiting China] but are still intervening in the Yuan exchange rate.

With such blocks on capital outflows, Chinese investors are favoring gold, which is a protection against a falling exchange rate of the Yuan. With gold such a strategic asset the government has encouraged Chinese investors to buy gold hence we do not believe that they have placed restraints on imports of gold.

Gold ETFs – Yesterday, in New York, there were no purchases or sales into or from the SPDR gold ETF (GLD) or the Gold Trustb  (IAU), leaving their respective holdings at 807.96 tonnes and 198.75 tonnes. 

Since January 4th 2016, 205.83 tonnes of gold has been added to the SPDR gold ETF and to the Gold Trust. 

 Julian D.W. Phillips: GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance 

Precious metals outlook 2017

By Clint Siegner*

Precious metals had a wild ride in 2016, launching higher in the first half of the year and then falling much of the way back to earth in the second half. Our outlook for 2017 hinges on some of the drivers that figured prominently in last year’s trading. There are also a couple of new wrinkles.

Europe

We’ll start with some fundamentals that metals investors have become well acquainted with in recent years. The troubles plaguing Europe seem to be forgotten, but they certainly aren’t gone. The question is whether or not officials in Europe will be able to keep the wheels on in 2017.

Several major European banks remain in jeopardy, plagued by bad debts, too much leverage, and mounting legal expenses. Germany’s Deutsche Bank (DB) was often in the headlines last year as its share prices made all-time lows. Deutsche Bank paid out $60 million to settle charges of manipulating the gold market.

Tattered EU Flag

In addition, regulators in the U.S. had proposed a crushing $14 billion fine related to the bank’s marketing of dodgy mortgage backed securities prior to the 2008 financial crisis.

Since then share prices have recovered significantly. The bank agreed last month to a settlement of just over $7 billion, roughly half the amount originally proposed but still a hefty penalty. The bank’s loan book still looks ugly and its exposure to risky derivatives remains a wild card.

The recent failure of Italy’s third largest bank – Monte dei Paschi – may put the spotlight back on the European banking sector. Particularly if other institutions, such as Deutsche Bank, have been aggressively selling credit default swaps they will now have to pay out on.

Investors grappled with the Brexit referendum in 2016. This year they will find out if Britain’s vote to leave the EU will actually get implemented. Negotiations around the departure are expected to commence in May.

Italians are going to select a new government shortly and there are elections coming up in Germany, France, and the Netherlands in the months ahead. Anti-European Union forces are making real headway in the polls.

This year looks pivotal for the EU, the euro as its currency, and its banks. Turmoil there will boost safe haven buying in precious metals and the U.S. dollar. Alternatively, should the establishment and the banks weather the storm, metal prices could suffer, at least in terms of euros. Right now, turmoil in Europe looks like the better bet.

The Fed

Once again markets enter a new year in thrall to Janet Yellen and the rest of the Federal Open Market Committee. Like last year, we just had one rate hike. Officials are telegraphing three to four additional hikes in the coming 12 months.

Last time around the stock market suffered stimulus withdrawals. Fed officials threw in the towel and reversed course almost immediately. We can expect officials are watching equity prices carefully now. If the S&P 500 keeps powering ahead, they’ll have the cover they need to deliver rate increases.

United States Federal Reserve System

If, on the other hand, we find out that markets are still addicted to low rates and officials can’t tolerate the pain of a withdrawal it will be bad news for the dollar and good news for metals.

A Donald Trump Presidency

The election of Donald Trump is what makes this year different. Many people are optimistic about the prospects for a major infrastructure program, tax cuts, and less regulation. Investors are ready to take on risk. Since the election, they have been mostly getting out of safe haven assets such as bonds and gold, while paying top dollar for stocks.

The rub is that Trump has yet to assume office. The expectations are high and, frankly, something has to give. Trump might deliver a big infrastructure program and some tax relief. However, that would spell trouble for the current dollar rally as people anticipate ballooning deficits and borrowing.

Or, Trump may find his proposed measures are easier said than done. Republicans control Congress, but there is no certainty they will accept big spending increases and even higher deficits. If optimism bumps up against a bleaker political reality, it’ll be bad news for investors playing the Trump rally.

Conclusion

2016 closed with investors positioning for smooth sailing and economic growth. They may get it but a number of things will have to go right. If they don’t, jettisoning safe haven assets to buy stocks at record high valuations won’t look like a very good idea.

How did gold and silver really do in 2016 and where are they headed this year?

Musings on what is likely to happen with precious metals in the year ahead and a look at how they actually performed in 2016 – very much a year of two halves.  Precious metals behaved really strongly up to the July 4th Independence Day holiday in the USA – but from there it was virtually all downhill for gold and silver, with big sales out of the Gold ETFs to accompany, or some would say drive, the price downturn.  This article was published on sharpspixley.com and, in the context of the timing of the price downturn should perhaps be read in conjunction with an article I published on seekingalpha.com; GLD Drops 158 Tonnes Since Independence Day and another published on the same site which also included some stock picks: 2017 Predictions – Gold, Silver, PGMs, The Dollar, Markets and Geopolitics…

Gold is, as usual, somewhat unpredictable.  Its performance in 2016 will have been very much dependent on the performance of your local currency vis-à-vis the US dollar.  Even in the latter the actual year-end price is also dependent on location and timing.  For example year-end prices in US dollars in Shanghai, London and New York were sharply different – respectively US$1,185, US$1,159 and US$1,151 based on the SGE final benchmark price for the year, the final LBMA gold price setting in 2016 and the final New York spot price.

We can’t view SGE comparisons for the full year as it only commenced announcing its benchmark prices back in April, but from the final LBMA price for 2015 to that in 2016, gold rose 9.1% over the year.  In terms of New York prices gold rose a slightly smaller 8.5% over the year. On the other hand in Russian rubles the gold price FELL by 10.6% over the year as the ruble appreciated against the dollar after a very sharp fall in 2014/15.  On the other hand, in the Pound Sterling, the UK gold price rose 22.5% over the year!  The Brexit vote effect!

But, as far as the media is concerned it tends to be the US dollar price which is the only one which matters so let’s look at the prospects for the gold price in the year ahead in US dollars – and for the other precious metals as well.

While global geopolitics and economics all have an effect on the dollar price of gold, it will almost certainly be the US itself and the impact on it of the Trump Presidency’s policies which will be the primary gold price drivers.  If President Trump is perhaps as unpredictable as his performance through the runup to the election suggests then we could see some major domestic and foreign policy upsets in relation to what has gone before.  Trump’s stated policies on the US economy have proved popular with Wall Street, but may well not fly – at least not nearly as quickly as the general public might expect, or even at all.  This could all see a reversal in the seemingly inexorable advance of general equities and an about-turn by the Fed in terms of interest rate rises, both of which would likely see a boost in the gold price.  Indeed general equities could crash given that they look to be overbought and in most cases earnings don’t look sufficient to justify the high prices currently prevailing.  At some stage the stock price bubble will surely burst.  Some ‘experts’ are predicting a crash of epic proportions – perhaps 80% -but although this is indeed possible we reckon that if there is a major correction ahead it will be more in the order of 50% as in the 2008/9 crash when the Dow fell around 55% at one time.

Should an equities market crash of this magnitude occur again, similarly to 2008 the gold price could be brought down sharply too as funds and investment houses struggle for liquidity and a fall to $1,000 or thereabouts wouldn’t be out of the question but again, as in 2008/09, gold would likely recover far faster than equities and then go from strength to strength as its safe haven role would become paramount again.  Where gold might end 2017 therefore could be a matter of timing.  If equities don’t crash, but perhaps correct by say 10-15%, then gold could well hit the $1,400 mark during the year.  If there is a major equities crash and it happens early in the year, gold could still hit the $1,400 mark – and steam on upwards in 2018, but if there is an equities market crash, and it peaks in the final quarter of the year then gold could well end the period in a much weaker position – but still steam ahead in 2018.

On Foreign policy there would appear to be, on the face of things, the likelihood of a rapprochement with President Putin’s Russia – if Congress allows this to take place.  The nomination of Rex Tillerson as Trump’s Secretary of State certainly suggests a change of relationships here, although it is yet possible that Tillerson’s nomination may be rejected by the Senate.  Trump may well be trying to take a leaf out of President Ronald Reagan’s book whose positive relationship with Russia’s Mikhail Gorbachev led to the end of the arms race, perestroika and effectively the end of the US/Russian stand-off, which now seems to be being resurrected by the current leaderships of two of the world’s three superpowers.  But while Trump may be heading towards a less hostile relationship with Russia, he also looks as though he may also be stirring up problems ahead with the third major superpower, China.

Domestic and foreign policy uncertainties may form the crux of a gold price resurrection in 2017.  This may already have started in 2016, but big financial sector interventions from around mid-year succeeded in nipping that in the bud – even so gold was up around 8% over the year and silver an even higher 15%.  This was after being up respectively around 25% and 45% immediately after the US independence Day holiday – a turnaround date which saw inflows into the world’s largest gold ETF switch to major outflows (See: GLD Drops 158 Tonnes Since Independence Day).  The referenced article looks at the seemingly pivotal impact of major holidays in the USA seemingly often providing the inflection points for complete changes in investment sentiment with respect to precious metals prices.

Where all the political and economic uncertainties which lie ahead will impact is probably on the strength, or otherwise, of the US dollar.  It is currently riding high, in part due to the US Fed’s 25 basis point interest rate rise and the avowed prospect of two or three more such increases during the year.  But those with even short memories may recollect that the Fed promised the same thing for 2016, but didn’t deliver.  Could it be déjà vu all over again in the immortal words of Yogi Berra!  We doubt the Fed will move until after it sees the initial impact on investment sentiment of the Trump Presidency.  The Fed’s FOMC meetings this year are scheduled for Jan. 31-Feb. 1, March 14-15, May 2-3, June 13-14, July 25-26, Sept. 19-20,. Oct 31-Nov. 1 and Dec. 12-13, thus we doubt any move to raise rates will happen until at least the May meeting, and perhaps not until June unless there’s a huge (and in our view totally unjustified) equities surge immediately following Trump’s accession to the White House.  If Trump’s supposedly business-friendly initiatives run into serious opposition in Congress then the dollar may well suffer.

But, there’s little doubt that dollar strength will be important for the gold price and the prospects of a trade war with China and the unwinding of some other key trade agreements, which Trump appears to wish to implement, could be destabilising for the greenback.  It is also perhaps not in US interests for the dollar to appreciate further – the dollar index (DXY) is currently comfortably above 103 which is a new record having varied between 91 and 103 during 2016, and this may colour the Fed’s thinking on interest rate rises too.  A high dollar makes US exports less competitive (which is why so much US company manufacturing activity has moved offshore), and imports cheaper, which would be a further blow towards trying to balance the nation’s current account.  We suggest that, over the course of the year ahead, the Fed will move surreptitiously to bring the dollar index down to perhaps a level of around 95, which is not conducive to further interest rate rises and which is gold positive.

While gold opened higher in early New Year trade, it rapidly lost ground, falling below the key $1,150 mark in Europe.  It remains to be seen how the US will react once markets open there.  But again, in 2016, it opened the year weaker before surging upwards.  Will this year see a repeat?

If we are correct in our assumptions about gold and we do see something of a repeat of 2016, then silver will do even better.  The gold:silver ratio (GSR) has slipped back to over 72, up from around 66 when silver peaked in mid 2016 (it had started the year near 80 and at one stage had risen to close to 84) but we think that if gold does perform then a GSR of around 65 could be seen again given silver tends to outperform gold in a rising gold scenario – and if gold hits $1,400 then silver could rise to over $21, still a huge way short of the near $50 it hit back in 2011 before a massive price takedown.

So overall a positive view of the gold price in the year ahead and perhaps an even more positive one on silver, BUT if there is a general equities crash as many doom and gloom merchants are predicting (and the uncertainties surrounding the Trump Presidency would perhaps make this even more likely) then booth gold and silver could suffer heavily in the financial fallout.  The comfort here is that would likely not be as intense a fall as the equities market and the recovery would be far quicker.

Inflation Expectations for 2017 Keep the Polish on Gold

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

Inflationary Expectations 2017 Keep Polish Gold

Inflation can be understood as the destruction of a currency’s purchasing power. To combat this, investors, central banks and families have historically stored a portion of their wealth in gold. I call this the Fear Trade.

The Fear Trade continues to be a rational strategy. Since President-elect Donald Trump’s surprise win a month ago, the Turkish lira has plunged against the strengthening U.S. dollar, prompting President Recep Erdogan to urge businesses, citizens and institutions to convert all foreign exchange into either the lira or gold. Most obliged out of patriotism, including the Borsa Istanbul, Turkey’s stock exchange, and the move has helped support the currency from falling further.

Gold Save Turkish Lira
click to enlarge

Venezuela, meanwhile, has dire inflationary problems of its own. Out-of-control socialism has led to an extreme case of “demand-pull inflation,” economists’ term for when demand far outpaces supply. Indeed, the South American country’s food and medicine crisis has only worsened since Hugo Chavez’s autocratic regime and the collapse in oil prices. The bolivar is now so worthless; many shopkeepers don’t even bother counting it, as Bloomberg reports. Instead, they literally weigh bricks of bolivar notes on scales.

“I feel like Pablo Escobar,” one Venezuelan bakery owner joked, referring to the notorious Colombian drug lord, as he surveyed his trash bags brimming with worthless paper money.

Because hyperinflation has destroyed the bolivar, the ailing South American country sold as much as 25 percent of its gold reserves in the first half of 2016 just to make its debt payments. Venezuela’s official holdings now stand at a record low of $7.5 billion.

Trump-Carrier Deal a Case Study in U.S. Inflation

visited Bloomberg TV studio today rates gold

The U.S. is not likely to experience out-of-control hyperinflation anytime soon, as the dollar continues to surge on bets that Trump’s proposals of lower taxes, streamlined regulations and infrastructure spending will boost economic growth. But I do believe the market is underestimating inflationary pressures here in the U.S. starting next year.

As I explained to Scarlet Fu and Julie Hyman on Bloomberg TV last week, inflation we might soon see is largely caused by rising production costs, which is different from the situation in Turkey and Venezuela.

Nevertheless, it still serves as a positive gold catalyst for 2017.

Consider Trump’s recent Carrier deal—the one that saved, by his own estimate, 1,100 jobs from being shipped to Mexico. We should applaud Trump and Vice President-elect Mike Pence for looking out for American workers, but it’s important to acknowledge the effect such interventionist efforts will have on consumer prices.

Trumps jobs Carrier indicative protectionist policies

As I see it, the Carrier deal is indicative of the sort of trade protectionism that could spur inflation to levels unseen in more than 30 years. The Indiana-based air conditioner manufacturer has already announced it will likely need to raise prices as much as 5 percent to offset what it would have saved by moving south of the border.

We can expect the same price inflation for all consumer goods, from iPhones to Nikes, if production is brought back home. That’s just the reality of it. Prices will go up, especially if Trump succeeds at levying a 35 percent tariff on American goods that are built overseas but imported back into the U.S. The extra cost will simply be passed on to consumers.

What’s more, Trump has been very critical of free trade agreements, threatening to tear them up after blaming them—NAFTA, specifically—for the loss of American jobs and stagnant wage growth. There’s some truth to this. But trade agreements have also helped restrain inflation over the past three decades. This is what has allowed prices for flat-screen, plasma TVs to come down so dramatically and become affordable for most Americans.

International Trade Deals Slowed Inflation
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In its 2014 assessment of NAFTA, the Peterson Institute for International Economics (PIIE) calculated that for every job that could be linked to free trade, “the gains to the U.S. economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households.”

Additional tariffs and the inability to import cheaper goods are inflationary pressures that could result in a deeper negative real rate environment. And as I’ve pointed out many times before, negative real rates have a real positive effect on gold, as the two are inversely correlated.

Inverse Correlation Between Gold Real Fed Funds Rate
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Macquarie research shows that last year, ahead of the December rate hike, gold retreated about 18 percent from its year-to-date high. Afterward, it gained 26 percent in the first half of 2016. The decline so far this year has been about 15 percent from its year-to-date high. Gold, according to Macquarie, is setting up for another rally in a fashion similar to last year.

Central Bank Demand Could Accelerate on Growing Federal Debt

The U.S. government is currently saddled with $19.9 trillion in public debt. Since 2008, federal debt growth has exceeded gross domestic product (GDP) growth. And according to a Credit Suisse report last week, Trump’s tax proposal, coupled with deficit spending, could cause federal debt to grow even faster than under current policy.

After analyzing projections from a number of agencies and think tanks, Credit Suisse “estimates a federal debt-to-GDP of 92 percent by 2026, including a GDP growth offset from the lower tax tailwind, and 107 percent excluding the GDP growth offset.”

Higher US Budget Deficits Debt Spur Banks Increase Gold Buying
click to enlarge

The U.S. dollar accounts for about 64 percent of central banks’ foreign exchange reserves. With the potential for higher U.S. budget deficits and debt risking dollar strength, central banks around the globecould be motivated to increase their gold holdings, says Credit Suisse.

Waiting for Mean Reversion

As I mentioned last week, gold is looking oversold in the short term and long term, down more than two standard deviations over the last 20 trading days. Statistically, when gold has done this, a return to the mean has often followed. This has been an attractive entry point for investors seeking the sort of diversification benefits gold and gold stocks have offered.

In a note to investors last week, ETF Securities highlighted these diversification benefits, writing that a gold allocation has “historically increased portfolio efficiency—lowering risk while increasing return—compared to a diversified portfolio without an allocation to precious metals.”

As always, I recommend a 10 percent weighting: 5 percent in gold bullion, 5 percent in gold stocks, then rebalance every year.

2017: Gold and Silver’s Year of “Public Recognition”

By David Smith*

During the fourth quarter 2015, share price declines of the precious metals mining companies tapered off once the last of the weak hands gave up and sold their positions to stronger, forward-looking investors.

Endeavour Silver Weekly Chart

Endeavour Silver Weekly Chart

If you go to a free chart service like stockcharts.com, you can choose any number of mining stocks and look at their January 19 daily price action. On this date – for most of the top and second-tier companies – the last intraday price plunge took place. For purpose of example only, we have chosen Endeavour Silver.

Notice how the price made a new low, then moved up into the preceding day’s/week’s range to close on a strong note for the session. It’s likely this low print will not be touched again during the current bull run.

What Have Physical Gold and Silver Been Doing?

Silver has risen more than 40% so far this year; gold is up almost 20%. Dozens, if not scores, of mining stocks rose several times as much (as expected). In fact, Jim Flanagan, who keeps track of the size and duration of first leg bull market runs across many asset classes, had the following to say about this year’s multi-month mining stock rise:

The 175% Advance in Gold Stocks in 5 Months, 22 Days Now Places Us As the 11th Greatest 1st Leg Up in Any Bull Market in Any of the Tangible Assets During the Past 150 Years. In Other Words, It Is the Elite of the Elite.

A few resource sector newsletter writers got their subscribers onto “the right side of the trade” early this spring, but a number of others either jumped out too early at the first sign of a “correction” (of which there have been 6), or sat out the entire year, waiting for what they hoped would be a low-risk entry point.

Silver Prices (2011-2016)

Silver Prices (2011-2016)

The World’s Central Banks Are Buying Up Mining Stocks

While there was considerable institutional, individual, and hedge fund buying of both the miners and metals, an unexpected long side category of customer has recently emerged.

Central Bank Net Gold Purchases

Deutsche Bank, Germany’s (and Europe’s) largest bank – otherwise in very poor financial shape – is said to be holding no less than 50 mining sector stocks, with a total market value of over $2 billion. The Swiss National Bank holds 25 stocks at a $1 billion market value. Now Norway’s Central Bank (Norges Bank) has filed notice with U.S. regulators that it too holds securities in 23 mining stocks to the tune of just under $1 billion.

Isn’t it ironic that the very financial entities who have been instrumental in flooding the world with un-backed currencies are now buying mining stocks as insurance for their own financial holdings? (Not to mention that, since 2010, central banks have been net buyers of physical gold!)

Public Recognition Will Kick In above $26 Silver and $1,500 Gold…

In almost every major bull market, the public begins to arrive at the party after the first few innings have been played. This time around we can make a guesstimate as to what price levels are likely to “trigger” a wave (waves?) of physical metals’ buying by newly-informed, recently-committed members of the public.

Note on the weekly silver chart above, the $26 level when touched for the fourth time in 2013 broke down sharply, initiating a further two years of decline. A rule of charting is that broken support becomes resistance to a return move.

Therefore, it is reasonable to expect that $26 will offer a major (initial) impediment to rising prices.

When the $26 level is decisively penetrated on the upside and a base built above it, prices have the potential to accelerate rapidly.

David Morgan and I are working on a book dealing with metals and the mining stocks, titled Second Chance: How to Make, and Keep Big Money During the Coming Gold and Silver Shock-Wave, due out early this fall.

In one chapter, we list in bullet form some of the “indicators” we believe will mark the way for greatly increased public sector precious metals involvement. They include:

  • Upside penetration by gold of horizontal resistance-becomes-support (HSR) levels in hundred dollar increments from $1,500 to and through $1,900.
  • Penetration of and successful base-building by gold (via retesting) above $2,000.
  • Upside penetration by silver of horizontal resistance-becomes-support (HSR) levels in five dollar increments from $25, to and through $45.
  • Penetration of and successful base-building (via retesting) above $50 silver.
  • The leading edge of the public mania wave starts building as these upside layers of resistance are successfully penetrated and turned into support. 2017 is most likely the year during which the public recognition phase gets underway.
  • New all-time nominal highs in gold (>$2,000) and silver (> $50) ushers in even more public involvement, leading to what we believe will be the final and most massive move for the precious metals and associated shares.

As these events are taking place, the effect on availability (as well as on expanding premiums) for physical gold and silver will be profound. As new nominal highs in both gold and silver are printed, several situations begin to develop.

  • Precious metals become more difficult to find as available supplies dry up.
  • More counterfeit bullion and “collector” coins and bars circulate in the market place.
  • The price, first of gold, then silver becomes elevated to the point that fewer people can afford to buy in quantity. The market rations supply and premiums expand sharply.

Late August into September ushered in an intermediate and much needed correction to the year’s blistering uptrend for the metals and miners. If you believe, as we do, that the new bull run for gold and silver has at least several more years to run, then going against your emotions and adding to your position – or starting a new one – is the right thing to do.

Adam Hamilton sums it up well when he demonstrates a key trait which separates those who do well as investors, from the rest, who just hope, plan, and watch. Says Adam:

Buying low is never easy. When selloffs snowball to major levels, there’s always a chance they will cascade even lower. So it’s very challenging psychologically to fight the thundering herd and buy when everyone else is selling. It feels terrible buying into capitulation selloffs, almost nauseating. The only way to build the fortitude necessary to do it is to stay exceptionally informed, which helps frame selloffs in context.

Even after you’ve done the research and decided to participate, buying into price weakness against the herd and contrary to your emotions is not an easy thing to do. But time and again, some of the world’s most successful investors have done just that. You might want to consider joining their ranks.

*David Smith is Senior Analyst for TheMorganReport.com and a regular contributor to MoneyMetals.com. For the past 15 years he has investigated precious metals’ mines and exploration sites in Argentina, Chile, Mexico, Bolivia, China, Canada, and the U.S. He shares his resource sector observations with readers, the media, and North American investment conference attendees.

The War on Cash Is Still Good for Gold

Blog post by Frank Holmes, CEO and Chief Investment Officer of US Global Investors looking at the current much-promoted idea of eventually doing away with cash and its likely effect on the gold market.  Readers are also directed to an article I wrote on the same subject and published on SharpsPixley.com which suggested that thge logic behind the war on cash could also eventually be applied to gold – perhaps leading to gold confiscation.  See:Will the war on cash morph into a war on gold and diamonds

Negative Real Rates Real Positive Influence Gold

The consumer price index (CPI), a measure of inflation, came in hotter than expected Friday, registering 2.3 percent year-over-year in August on expectations of 2.0 percent. With the five-year Treasury yielding 1.19 percent, government bond investors are now receiving a negative real rate of return (because 2.3 minus 1.19 comes out to negative 1.11 percent).

This is highly constructive for the price of gold. As I’ve discussed many times before, the yellow metal has benefited when real rates have fallen below zero. This was the case in September 2011 when gold hit its all-time high of $1,900 per ounce. And last year around this time, the opposite was true—positive real rates were a drag on gold.

Although gold sunk to a two-week low on a strong U.S. dollar and fears over this week’s Federal Reserve meeting, the drivers are firmly in place to push prices higher.

Rogoffs new book calls end paper money

Maybe you’ve heard that a new book out right now is planting propaganda voice in the war on cash. In “The Curse of Cash,” Harvard economics professor Kenneth Rogoff makes the case that nixing paper money—at the very least, larger-denominated bills—“could help more than you might think” in combating criminal activities such as drug trafficking, corruption, extortion and money laundering. It could even prevent the spread of terrorism and discourage illegal immigration, Rogoff argues.

It gets even worse. Central banks, he adds, should have the latitude to drop interest rates below zero during recessions to spur spending. If the Federal Reserve tried this now, of course, many people would likely convert their savings into paper—which at least yields 0 percent—and hoard it in bedroom safes. This is precisely what many Germans have reportedly done, prompting safe manufacturers to scramble to meet demand

But in a world where nothing larger than a $10 bill exists, hoarding cash would be highly impractical. Better to buy that new boat you don’t need!

While we all agree that corruption and terrorism are things that should be stopped, killing cash is the absolute wrong way to go about it.

Instead, perhaps Rogoff should consider “The Curse of No Cash.” Does he not recall what happened in Cyprus just three years ago? The government ransacked citizens’ bank accounts to “fix” its own mistakes and mismanagement. In example after example, people’s rights to save and freely hold cash have been disrupted, with tragic results.

I’ve written about this topic before. In a cashless society, your economic liberty is forever at risk. Every transaction could be monitored, taxed and charged a fee. Capital controls would be crippling, assets could be seized. Just ask the Colombians and Venezuelans

I’m not the only one who disagrees with the ideas in Rogoff’s polemic against money. As of this writing, nearly three quarters of Amazon customers have given the book a rating of two or fewer stars. And in a scathing Wall Street Journal op-ed, respected financial writer James Grant strips away the book’s “technical pretense” to uncover its true motive. Rogoff, he writes, “wants the government to control your money,” which is the extreme form of Keynesian economics.

Gold Has Shined Brightly During Currency Crises

There’s one area where Rogoff and I both agree, though. “As paper currency is phased out,” he writes, “gold prices will rise.” Were cash eliminated and interest rates plunged underwater, gold’s role as a store of value would become even more apparent and demand for the yellow metal would turn red hot, despite its price appreciation.

This has been the case in countless past examples. Rogoff himself cites Indians’ longstanding love of and cultural affinity to gold jewelry as protection against currency uncertainty. For centuries, inhabitants of the Indian subcontinent saw continuous regime change, not to mention imperialist rule by various European forces. During all this time, the one stable and widely accepted currency was gold.

Indian Households Own More Gold Than Top Six Central BanksThe tradition carries on today. A third of Indian gold jewelry demand comes from rural farmers, who annually convert a portion of their crop revenues into the yellow metal. Whether this gold is stored or given to a female family member, perhaps a daughter, before her wedding day, its purpose is twofold: one, as a beautiful heirloom to be worn and passed down to the next generation, and two, as a form of financial security.

It’s estimated that Indian households currently holdmore than 20,000 tonnes of gold. To put that in perspective, 20,000 tonnes is more than the official gold holdings of the U.S., Germany, Italy, France, China and Russia combined.

With speculation strong that a rupee devaluation is imminent, it makes just as much sense now as ever for Indians to have at least some of their wealth in gold. When the rupee unexpectedly dipped to record lows in August 2013, the wealth that prudent Indians had stored in the precious metal was, for the time being, safe.

Indians Gold Jewelry Protect Wealth Against Currency Devaluation
click to enlarge

Although there’s little fear right now that the U.S. dollar is in trouble, I still recommend that investors maintain a 10 percent weighting in gold—5 percent in gold stocks, 5 percent in gold coins and jewelry.

Disappointing U.S. data propelling gold towards $1,350

We have recently speculated as to how the gold price might perform now U.S. execs are back at their desks after holidaying in the summer sunshine.  Precious metals investors will no doubt recall the time in 2011 when the end of the summer holidays precipitated the beginnings of a prolonged period of precious metals price weakness and will have been worried that this year might see something of the same effect given gold and silver’s strong run over the first half of the year, but this year’s price performance has been very different from that of 2011.  Back then the gold price had soared throughout the normally weak July and August months – unsustainably so as it proved.  This year the gold price has been pretty flat to weak in July and August following a Brexit boost in late June.  Many analysts have seen this as consolidation, perhaps ahead of an upturn in the final four months of the year.  Early signs for this look good with the gold price today heading into the mid-$1,340s.  Indeed it has hit $1,350 on the spot market on a couple of occasions before slipping back.

Thus, on the first days of trading after the Labor Day holiday, initial portents for precious metals price performance will have been encouraging for investors, helped by weaker than expected PMI Services data and by a weaker dollar.  Interestingly, like Friday’s nonfarm payroll figures, the latest Services PMI is not actually weak per se – remaining above the all-important 50 level – but was sharply weaker than analysts’ expectations.  The U.S. economy may thus well be growing, but perhaps at a far slower rate than entities like the U.S. Fed would like us to believe.

The net result of the weaker than anticipated US data is for analysts and investors to assume the Fed is unlikely to restart interest rate tightening at the September FOMC meeting in two weeks’ time, for fear of nipping any tentative economic upturn in the bud.  If this assumption is correct – and it may be dangerous to assume that it is, given Fed credibility could be at stake in that it had foreshadowed up to four interest rate hikes in 2016 back in December last – then that effectively rules out any interest rate hike announcement until the December FOMC meeting which takes place December 13-14.  And if US data follows its current weaker than anticipated course then even a December rate hike may be in doubt.  (November is effectively ruled out as a rate increase announcement then would only come about a week before the Presidential Election date scheduled for November 8th.)

Of course the Presidential Election itself could provide yet another huge degree of uncertainty in U.S. markets.  According to the latest CNN poll, Donald Trump and Hillary Clinton are running neck and neck – and the Donald is actually in the lead taking into account those who are most likely to turn out and vote, although the majority still anticipates a Clinton victory.  Voter turnout could be key with neither candidate being popular with the electorate and, if anything, the latest polls show that Clinton is even less popular, or trusted, among registered Democrats than Trump is among Republicans.  As with Brexit, voter turnout may be key and with the two contenders being so unpopular even among their own party supporters, this could be hugely unpredictable.

With the election only two months away we will be seeing probably the most vitriolic, and personally antagonistic, campaign ever which will do nothing for any positive global perceptions on the US political system and could rebound on the economy and markets dependent on who is seen as gaining the upper hand. As someone who awoke on June 24th to hear that UK voters had gone for Brexit, contrary to nearly all the polls, one cannot but help wondering if U.S. voters will be similarly shocked at the Presidential outcome on November 8th.  Whoever is elected, economic uncertainty will undoubtedly come to the fore and that could give a big boost to gold in the final two months of the year – and could see the dollar and the general equities markets take a substantial knock further hamstringing any Fed move to raise interest rates.

As we advised UK investors to invest in gold ahead of the Brexit vote – and those who did were rewarded well with the double whammy of a dive in the value of the pound against the dollar coupled with a rise in the gold price – US investors might also be well advised to buy gold ahead of the Presidential election as financial insurance against an unlikely result causing the dollar to fall and gold to rise (which many will see as effectively the same thing!)

For the  moment, gold still seems to be holding up in the $1,340s and silver at or around just below $20.  After rising to above 71, the Gold:Silver ratio (GSR) has come back down to a little below 68 showing that, as usual silver has been performing better than gold when the latter is looking even just a little stronger.  Should gold breach $1,350, expect the GSR to come down even more and silver could easily hit the mid $20s or higher – still an awful long way off where it rose to up until the big take-down in 2011, but in terms of performance this year has already done well for those invested in it at the beginning of 2016.

This is an updated and edited version of one posted by me on the Sharps Pixley website earlier in the week 

Gold and silver acting strong – David Morgan

Mike Gleason* interviews David Morgan about the recent consolidation in gold and silver prices.  Interestingly David felt there was some strength in the pattern we had seen which could kick in after the Labor Day holiday – a pattern which has already come about.  The interview was conducted last week, ahead of the G20 meeting and the weak economic data which propelled gold and silver upwards before and immediately after, the U.S. holiday.

Mike Gleason: Coming up we’ll hear from David Morgan of The Morgan Report and co-author of the book The Silver Manifesto. David tells us how long he thinks the correction in the metals will last, why he believes this November’s election is less important than you might think and also talks about a key event coming up that could put a lot of pressure on the U.S. dollar. Don’t miss a wonderful interview with our good friend David Morgan.

Well now, for more on the importance of sound money and what’s ahead for the markets, let’s get right to this week’s exclusive interview with the man they call the Silver Guru.

David Morgan

Mike Gleason: It is my privilege now to be joined by our good friend David Morgan of The Morgan Report. David, I hope you’ve been having a good summer and welcome back. It’s always a pleasure to talk to you.

David Morgan: Thank you very much, and yes, I have been having a wonderful summer. Thank you.

Mike Gleason: Well, as we begin here, David, please give us your thoughts on the recent pullback in the metals. We’ve maybe been overdue for a correction for a while now. I know in following your work, you’ve been calling for one, and we’re getting it here. And after a fantastic first six or seven months of the year for gold and silver, we’re finally starting to see some real selling pressure emerge. What is your take… what have you noticed during this mini-correction, and what are some of the reasons for the pullback?

David Morgan: Well, I’ll start with the reasons. In any market, even in a non-manipulated market, which there is probably none. The stock market, bond market, metals markets, futures markets, options… just about everything out there is geared and leveraged and pretty much manipulated by the trading algorithms, and other means, but regardless of that, all markets move up and down. Nothing goes straight up or straight down, and so there are periods where there’s profit-taking, there’s periods where there’s consolidation, that type of thing. So regardless of manipulated or not, all markets ebb and flow.

So the metals markets are no different in that aspect. What we saw in the silver market was over the last two months’ time frame, we peaked out in the spot month around the $20.50 area a couple times, and now we’ve dropped as far as about $18.50, so we’ve had about a $2 drop over the last couple of months. Specifically, the most recent drop’s really over a one month period. I want to be correct on that.

The idea that I’ve had is similar to many others, and we’re kind of overdue for correction as you stated, Mike. So this is actually a healthy thing. The metals stocks certainly have leveraged both directions, so anybody that’s invested in the resource sector, particularly gold and silver stocks, is going to see a multiple percentage-wise on the drop. And some of these stocks actually gave us a clue that the consolidation or the correction was coming, because some of these sold off before the metals actually had started to sell off. What’s interesting, Mike, is that the selloff, even though it’s been a fairly good drop, $2 on a $20 commodity, you’re looking at about 12% or so, hasn’t dropped the commitment of traders… or the open interest, I should say, on the commitment of traders… very much, which means that the bulls and bears are still pretty equal. There’s still a very strongly held commitments to the silver and gold paper paradigm that futures markets more than I would’ve seen in a very, very long time for this kind of a price drop.

So let me restate that. The $2 drop in silver and a correspondingly percentage-wise drop in gold, normally, you would see a pretty good sell off in the open interest. In other words, the shorts would be winning the battle. That is not what I’m seeing at this point in time. We could see something different after the Labor Day holiday. I’m not sure, but right now, these metals for the whole year, and even during this correction, are acting extremely strong.

Mike Gleason: So in your view, it sounds like the correction might not be terribly long lasting. Is that what I’m hearing?

David Morgan: Yes, not long lasting. Maybe another month. There’s a lot of things happening this month, as we’ll talk about later. The August low is habitually seasonality-wise very accurate for gold. You usually get the lowest price in gold in August. We’re doing this in the 1st of September, and September is usually a rebound month, but the seasonalities haven’t worked very well in the metals markets for quite some time, so I don’t put as much credence in them as I used to. However, in the end of the year, you’ve got a rise in the metals, and we haven’t seen that in a while either. I’m just going to let the market dictate, but here’s what I’ll say. The main support on the silver price is around the $17.50 to 17.60 level, so we might see another drop, and I really think that that level, another dollar down, is about as far as these guys are going to be able to push it down.

On the gold side, it’s holding above $1,300 which has fairly good support. Not really strong support, because time-wise, it hasn’t been above that level for a long time during this rally of the last six months. So I believe we’re going to see a huge effort to push gold below the $1,300 level, and we have to just see how it reacts, if it rebounds quickly or not. And of course, more important than that, pretty much at the volume that takes place. In other words, if that causes a large selloff and the algorithms start to move with the shorts and the longs decide to throw in the towel and starts a waterfall decline, then of course, I’ll do an update for The Morgan Report members, show that to them. Right now, it’s too hard to call that. I don’t see that. In fact, my suspicion is that that’s not going to happen. In other words, they’ll push it down below $1,300, but it will pop back up fairly quickly. So it’s very interesting to watch the metals this year.

Mike Gleason: Talking about some of those key events that are coming here over the next month. We’ve got the G20 Meeting coming up. I know you want to comment on that. Also, China’s going to be part of the IMF Special Drawing Rights. I believe it’s October 1st. Comment on those two international events there.

David Morgan: Certainly. I think it’s very important, and this is the big news of the month of September. One is that, I think it’s the 4th and 5th of September, China will be hosting the G20 Meeting for the first time in China. And I think they will be running the meeting pretty much. And at the same time, at the end of the month, I think it’s the 30th of September, the yuan will be weighted at about, I think it’s 10% of the SDR, Special Drawing Rights. So the international currency system run by the IMF, which is really run by the United States and International Monetary Fund, will be embracing the yuan as part of the SDR. And also, you will see a lot of settlement that will take place outside the U.S. dollar.

For example, petroleum historically has been settled in U.S. dollars only, and this has caused a great deal of the banking system throughout the globe to hold dollars so they could make settlements, because everybody buys oil. And now, you’re going to see settlement directly in yuan, which means that this is going to put downward pressure on the dollar, which could be a reason to raise interest rates. This thing about the economy’s great, we need to raise interest rates like we used to have back ten, twenty years ago, is preposterous. Anyone who takes just a cursory look at the real numbers and understands what’s really going on with shows like yours, mine, and many, many others, knows that there’s no way that the recovery has really ever taken place in any substantial way since the 2008 financial crisis. Sure, there’s been pockets here and there, but the overall economic picture’s really just gone sideways or gotten worse.

However, if there’s pressure on the dollar, they could use that meme, that idea, that propaganda, that, “Oh, look at the unemployment. Look at how good we’re doing,” and this type of nonsense, “Well jeez, we really have to raise interest rates,” when actually the reality is that because there is a further weakening of the dollar and there’s negative interest rates throughout the bond market on sovereign debt, but not in the U.S. yet, that it could happen. I’m not saying it will happen, but my thinking is a little different than almost anybody that’s in my peer group on this matter, Mike. Again, I could be wrong, I could be right, but I certainly want to voice it because I want to get people to think, and the only way to keep the dollar strong, let’s say “strong”, would be that it’s got a positive rate of return when all these other sovereign nations with the euro, et cetera, have negative rates, there’s going to be a move for people to hold dollars.

And because China’s coming into the fore, there’s a move to not want to hold dollars, so you’ve got these two forces, sort of bullish the dollar and bearish the dollar. Very interesting times. Lots is happening, and I want to make one more comment and that is, as much as China has taken on the gold market in fiscal form for many, many years and built their reserves probably far higher than what the official report, I do not believe that China is ready to pull the gold card yet. They are just now entering into the global currency system in a meaningful way. They’re very patient and I think they’re more willing just to continue with this paper paradigm. They certainly caught the Keynesian disease years ago that have done the money printing to build out their infrastructure and to certainly boost their economic picture, which is of course distorted at this point just like everywhere else that’s based on the Keynesian model. But nonetheless, I don’t think they’re ready to switch horses to a gold-backed yuan or anything like that any time in the very near future.

Mike Gleason: Certainly going to be interesting to see that push-pull play out there with the dollar. You bring up some good points there about strong dollar versus weak dollar. And I also want to get your thoughts on the election here. We’ve got the election season kicking into high gear. We’ll have the debates here pretty soon. We’re about two months away now from election day. What do you think a Trump victory would mean this November for the markets, primarily the metals since that’s what we’re focusing on here, and also what do you think a Hillary victory would mean?

David Morgan: Well my view is different than a lot of people, but you want my view, my view is it doesn’t matter. My view is that it’s changing captains on the Titanic. My view is that Trump seems to resonate with a lot of conservative thinkers and I think there’s many, many Americans that are just absolutely, totally, and completely disgusted with the political class. I do think that you can make arguments either way, who gets in could move the price and we might get a blip one way or the other depending on who’s elected or should I say, “selected”.

But regardless, I think in the longer term macro picture, it really means very, very little. I think we’re way too far gone on the debt paradigm overall that any one person no matter how well meaning they are, can really turn the boat, turn the ship. The Titanic has hit the iceberg. It’s taking on water, and you might get somebody stronger at the wheel and you might veer off, but it doesn’t really matter. The ship’s going down. That’s my view.

Mike Gleason: Switching gears here a little bit, you’ve always had great advice for people when it comes to getting into precious metals. You’ve written your ten rules of investing in the sector and I know owning the physical metal is first and foremost in your view. So before we get into discussion about mining stocks, which I’ll ask you about in a moment, talk about why you recommend owning the physical bullion before you do anything else.

David Morgan: Well almost anyone that’s in this sector, and that could go from anybody that’s a prepper or as extreme as a survivalist or someone that’s familiar with financial markets and monetary history, everyone understands that we’re at risk at all times, and especially now. We’re in a situation on a global basis we’ve never been in before, which is that the reserve currency of the world is failing, which means you need something outside of the system. You need something that’s not electronic-based, you need something that has no counterparty risk, you need something that’s universally recognized, and you need something of high value that could be used anytime, anywhere by anyone. That of course is gold and/or silver. This has been the case.

So if there were, let’s say, a problem with the banking system where we go to the report that’s for free on TheMorganReport.com, you might go there, give me an email, and a first name. You’ll get the “Riches and Resources Report,” which shows you what happened during the currency crisis of 2000-2001 in Argentina. The film’s name is The Empty ATM, and they did not take your bank accounts. They just basically sealed them, where the money in the bank was held by the bank and they allotted you so much you could take out on a weekly basis no matter who you were, no matter what your account size was, and then they devalued the currency, which is basically stealing from you. So this is what took place.

I say all that to state how emphatic I am, how important it is for people to have real money outside of the system. Those people in Argentina that held some of their wealth in gold and silver circumvented the devaluation and also had readily available, recognizable and cherished real money that they could barter with, which took place all over the country in Argentina during that currency crisis that I just mentioned. So I really, really believe that this could take place in other areas of the world, certainly if you were in Venezuela right now and you had some precious metals, you might not have a smile on your face, but you certainly would be better off than the people that didn’t.

So these are really interesting times and we are in a paradigm that is failing and the powers that be are propaganda, propaganda, propaganda saying and telling everyone through the mainstream media that everything’s fine, go back to sleep, we’ve got it under control, things are wonderful, and that type of thing. When the reality of course, most people can just look out their window and drive down their main street of their town, take a look around and say, “You know, things don’t look as good as they did a decade or two ago.”

Mike Gleason: Are there any products that you prefer over others? For instance, in silver, do you generally recommend coins versus bars or coins over rounds? Does it even matter, or is it just about getting the most ounces for the money, or do you want variety? Give us your thoughts there.

David Morgan: Yeah, in the “Ten Rules of Silver Investing,” I said you should strive to get the most ounces per dollar you want, or whatever currency you have invested, which means first of all, small units. You definitely want to start with small units. You don’t want to have one 100-ounce bar, and that’s your silver holdings, because now you’re in a fix. You’ve got to make one absolutely correct decision when to turn it back into fiat currency or barter with it, whatever. So you want small coins if you have rounds, but if you’re particularly interested in recognizability, for example, and you want a government-stamped coin, you’re willing to pay a slightly higher premium, I have nothing against that.

Also, the constitutional silver or what’s known in the trade as “junk silver”, I think that’s still a good way to go. The bag market is actually fairly tight. So much has been smelted down into bars, there isn’t a lot of it around, actually. Small units. Rounds or recognizable coins are the way to go. I think you can start with silver if you’re modest means. If you have better means than that, I think you certainly should have some gold. You should actually have both if you can afford it.

And I also think moderation’s the key. I think a 10% holding in physical metal is probably more than is sufficient for most people. There are people like me that have a great deal more than that involved, but this is my life’s work. This is something I understand and I understand the risks, and I’ve been with that type of risk environment for a very, very long time. For most people, just a 10% amount in physical, and for those that really want to gain leverage and maybe triple their gains, certainly that’s available, but it’s a situation that demands study and work. And that would be through the Resources Sector, which is what we’ve specialized in for a long time.

Mike Gleason: Leading me right into my next question here, turning to the mining stocks. It’s been an outstanding year for the miners, the recent pullback notwithstanding. Now, if you look at the silver spot price, it’s up more than 35% since the first of the year, but if you look at the mining sector, gosh, David, we’ve got the HUI Gold Stock Index up nearly 100% for the year and the GDX is up over 120% year-to-date even with the big pullback in the last few weeks.

So things are finally starting to look up after a rough very few years for everyone in the Sector with many stocks down 80% of more since the 2011 peak, assuming they even stayed in business, but talk about the miners. What are you looking for here in the second half of the year after a great first half?

David Morgan: I’m actually looking for further gains by the end of the year. I think we’ve still got more work to do in the downside, and as I said earlier in your show, Mike, I think probably another month. I think by the time that the SDR takes place and people, the markets, I should say, understand how much dollar damage is done or not. We’ll have to wait and see. With the yuan being more accepted not only by the SDR but in final settlement rather than having to go to the dollar directly.

As that settles out, I think you’ll see more and more consolidation into the precious metals and more push for them to go to the upside. So it’s a situation that most of the large funds money managers, pensions even, that missed the 2008 bottom in the precious metals during the currency crisis, have woken up early this time and have moved into the paper paradigm of the gold and silver markets, which means that the open interest, as I said earlier on your show, is very, very high relative to what it’s been historically, and these are strong hands.

On top of that, the Shanghai Gold Exchange has a very, very large open interest themselves, and they’re trading from the long side vis-a-vis the commercials or the banking system that trades historically from the short side on the COMEX. So you’ve got big money that got in relatively early in both gold and silver, because they understand that the stock market is too high and they want to be hedged. They have no real philosophical reason to own gold like we just outlined in the last question, but they manage money and they need exposure. And the best way for them to get exposure is to buy it on a leveraged basis on the paper markets. So that’s what’s taking place. With the addition of the Shanghai Gold Exchange ramping up the amount they’ve purchased on paper, and of course, that’s much more physical marked than the COMEX is.

So again, there’s that really strong bull/bear back and forth and so, just to close out, I really don’t see these metals coming down a whole lot more or a whole lot longer, and I think this year is going to be one that people look back on and say, “Jeez, I’m sure glad I bought my metal or bought my mining shares during 2016.” By the way, The Morgan Report comes out this weekend right before the G20 Meeting, and on top of that, we’ve got another company that will be probably putting out mid-month, mid-September, an updated analysis, an appraisal on the mid-tier producers in the gold complex. And this is after it’s made two transformational acquisitions in 2016.

This is the kind of research we do. If you go back another month, we had like four or five speculative situations that are going to show up in these other newsletters that cost like three or four times what ours does. We see that all the time. Not that we certainly haven’t gotten ideas from others, because we have, but it seems that whatever we do our research on seems to be picked up by let’s say a lot of people in the industry. I’ll just leave it at that.

Mike Gleason: Well it’s great stuff as usual, David. We always appreciate hearing your thoughtful analysis here on our podcast, and I’m sure we’ll talk to you again very soon. Now, before we let you go, please tell folks how they can get involved with The Morgan Report, because this is a fantastic time for people to dive deeper into the metals and miners. I think they understood that by listening to our conversation here… it’s especially a good time after this recent pullback and this pause in the upward movement we’ve been having. Please let people know how they can get on your email list and also about some of the other things going on there at The Morgan Report or about the book, The Silver Manifesto.

David Morgan: Certainly. On the book, we’ve gotten great feedback from people. It’s probably one of the best $30 investments that you can make. You can get it on Amazon, you can go toTheSilverManifesto.com and read one chapter for free and get kind of an overview, you can read the reviews on Amazon. There’s a whole chapter on how to pick a mining stock, and we actually spill the beans and show you exactly how we do it. And again, we’ve gotten feedback that’s been extremely positive for those types of people that have the time, energy, and motivation to do their own analysis. We take you through step-by-step, so that’s something you can get out of the book along with a lot of other material.

As far as The Morgan Report, what I actually urge everybody to do is to just go to the website,TheMorganReport.com, and get on our free email list, and get our free “Riches and Resources Report.” In that report, you’re going to get two movies to watch for free. One is The Empty ATM I mentioned earlier and the other one is The Four Horsemen film, which is the end of The Age of Empire, and it’s very, very good thought-provoking types that are interviewed during that paradigm with some solutions to the problems at the end of the film. And that’s just two things you get in that report. You also get ways to accumulate silver and gold over time, you get some insights, and of course, once you’re on the list, you will be appraised of an update every weekend by yours truly, myself and or one of my staff.

Mike Gleason: Yeah, it’s great stuff. I’ve been on your list for an awfully long time. Always enjoy it every weekend we get an email from you, and it’s excellent information. The Silver Manifesto, as you mentioned, is another great resource. We’ve sold about 1,500 on our website, MoneyMetals.com. A lot of people are really enjoying that book and I know you’re doing very well with that in a number of different places and we wish you continued success there.

Well thanks so much. We really appreciate it, and I hope you have a great weekend, enjoy the rest of your summer, and we’ll talk to you again soon. Thanks, David, and take care.

David Morgan: My pleasure. Thank you.

Mike Gleason: Well that will do it for this week. Thanks again to David Morgan, publisher of The Morgan Report. To follow David, just visit TheMorganReport.com. We urge everyone to sign up for the free email list to get his great commentary on a regular basis, and if you haven’t already done so, be sure to pick up a copy of The Silver Manifesto, available at MoneyMetals.com, Amazon, other places where books are sold. It’s almost certainly the best resource on all things silver that you will find anywhere, so be sure to check that out.

And check back here next Friday for our 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

 

Gold Trade Is Not Overcrowded Says UBS – The Holmes SWOT

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

Strengths

  • The best performing precious metal for the week was gold, down slightly by 1.47 percent. Current market conditions make it the perfect time to invest in gold, according to Heather Ferguson, an analyst at Hargreaves Landsown. “There is a fixed amount of this precious metal in the world so central banks are not able to manipulate the gold market like they can with bonds and cash,” Ferguson explains. “In the current environment of quantitative easing and increasingly extreme monetary policy, gold is highly sought after.”
  • UBS says the gold trade is not overcrowded, according to a note this week.  The group believes that Federal Reserve policy decisions relative to the metal are not as straightforward in this environment where global yields are under pressure ahead of a rate hike.
  • Citigroup is also positive on the metal, raising its forecast for the second half of the year. The group cites elevated levels of U.S. election uncertainty and stickiness of ETF and hedge fund flows into gold products, reports Bloomberg.

Weaknesses

  • The worst performing precious metal for the week was platinum with a loss of 3.77 percent. Platinum sold off when precious metals were bear raided on Wednesday, but did not get much of a bounce following Yellen’s speech on Friday.
  • “The past 48 hours have been an interesting period for gold…” writes Steven Knight of Blackwell Global. “As the metal has again seemingly fallen sharply following the liquidation of a $1.5 billion futures position over the course of 60 seconds.” According to Knight, given the amount of gold derivatives floating around, the fairness of the COMEX exchange likely needs an additional level of scrutiny. In addition, the timing of this “flash crash” could potentially be revealing.

holmes 298

  • Goldcorp fell the most in six months, reports Bloomberg, on the back of retreating gold prices and the discovery of a leak at the company’s mine in Mexico. Less-than-stellar news was also reported from Kinross Gold Corp this week, as it suspended operations at a mine in Chile ahead of schedule due to a dispute involving water use (causing 300 workers at the Maricunga mine to be laid off as a result). Lastly, Orezone Gold Corp told investors on Monday that it will likely slash the gold resources at its Bombore project by a staggering 30 percent, reports the National Post.

Opportunities

  • When viewed against the aggregate balance sheet of the “big four” global central banks (Fed, ECB, BoJ and PBOC), the argument can be made if we view gold as a currency, that the metal is worth closer to $1,700 an ounce (versus the spot price of $1,326 an ounce USD), says Deutsche Bank. Over the same period that the aggregate central bank balance sheet expanded 300 percent, the bank continues, global above ground stocks grew by 19 percent in tonnage terms.
  • More than 500 million people are living in a climate of negative central-bank interest rates, according to a study by Standard & Poor’s cited by HSBC this week. This represents around 25 percent of global GDP and is a clear sign of “economic and policy desperation,” – a bullish factor for gold. Francisco Blanch of Bank of America agrees, stating that central banks “are very scared of hiking rates and that is a very good story for gold.”
  • “Although we have seen a significant rally in gold, I think investors should still consider an allocation to the precious metal,” Nick Peters, multi-asset investor at Fidelity, said. He continues by explaining that gold can function as a safe haven during times of market volatility and provide strong countervailing returns to equities.

Threats

  • The Reserve Bank announced today that sovereign gold bonds issued in February and March can be traded on stock exchanges starting Monday. Four tranches of the bonds have already been issued, with a fifth likely to be issued next month. Sovereign gold bonds provide an alternative to actual gold investing, offering investors a choice to buy bonds worth 2 grams of gold going up to a maximum of 500 grams.  The bonds are denominated in gold and pay 2.75 percent interest in physical gold.
  • Are the positive changes in the gold industry sustainable? This was the point of question from Gold Fields CEO Nick Holland during a keynote presentation on Monday, reports Mineweb.com. Holland points out that not only are companies cutting “fat,” but “muscle” as well. Stay-in-business capital (as a percent of operating expenditure) decreased from 46 percent in 2012 on a per ounce basis, to 26 percent in 2015. How can companies do this? “I believe that they have merely deferred capital that is going to come back, because if you want to sustain the business into the future, you need to spend the money,” Holland said. “That for me is a little bit of a concern.”  The Industry is going to play catch up, which could yield poor capital allocation decisions, particularly if the industry errors on the side of growing production ounces versus growing profitability.
  • In a note from BMO Private Bank this week, Jack Ablin points out that historically, options investors have been able to generate reasonable income by selling options to other investors looking for downside protection and upside opportunity. However, struggling yields have created an “outsized supply of yield-seeking options sellers who collectively outstrip buyers.”  The result is that implied volatility has declined. But just because yields are low, doesn’t mean that actual risk has gone away, the note continues.

New FOMC framework gold positive – the Holmes Gold SWOT

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

Strengths

  • The best performing precious metal for the week was palladium, up 3.57 percent.  Speculators have been piling into platinum and palladium futures, largely based on improved car sales in China, but position sizes are approaching all-time highs for both metals.
  • Gold investment in the first half of the year broke previous levels, as seen in the chart below, with both coin and bar demand, as well as ETF product demand, soaring to record levels. Gold demand will get another boost in India as wedding season starts to heat up, particularly with the metal currently trading at a $40-$50 discount in the country, reports Bloomberg. Bullion traders noted persistent buying by jewelers at domestic markets to meet festive season demand.

aug23SWOT

  • Gold got a boost on Thursday on dollar weakness following the release of the Fed minutes, which showed that U.S. interest rates should stay low. According to futures prices compiled by Bloomberg, the odds of an increase in borrowing costs in December fell to 49 percent from 51 percent a day earlier. “From looking at the data, and looking at the minutes, I don’t think we’re any closer to a rate increase,” Chris Gaffney, president of EverBank World Markets said.

Weaknesses

  • The worst performing precious metal for the week was silver with a 2.05 percent fall, of which most of the losses came on Friday when we had renewed strengthening of the dollar.
  • There have been a number of mixed signals from Federal Reserve policymakers this week, sending gold lower on Friday. The jawboning from these officials include a comment from New York Fed President William Dudley, for example, who reinforced his confidence in a possible rate hike for the second time in a week, reports CNBC.  Bullion for immediate delivery fell 0.5 percent an ounce in London, reports Bloomberg, as other officials say the U.S. is strong enough to warrant an increase in interest rates sooner than markets expected.
  • Gold consumption in China fell during the first half of the year, primarily due to a surge in price by 24.6 percent, reports Bloomberg. The Asian nation did keep its top spot as the world’s leading gold producer, however, for the ninth-straight year. Similarly, as the foreign currency crisis deepens in Venezuela, the country’s international gold reserves slumped 25 percent in the first half of the year as they swapped gold for dollars.

Opportunities

  • According to a piece from SmarterAnalyst.com, the FOMC members see the futility in their tools and announced this week that the Fed is rethinking its monetary stance. President of the St. Louis Fed James Bullard explains that the old model was a long-run equilibrium which averaged past economic variables. The new model, however, includes a set of possible regimes that the economy may visit and are not forecastable. The Fed’s new framework would be positive for gold, the article continues, as it would lower market expectations of interest rate hikes and support the price of the shiny metal. It makes the Fed even more agnostic and less inclined to provide clear guidance.
  • CNBC reports that gold’s relationship with stocks reached an all-time low in the 60 sessions through Wednesday’s close. The correlation between gold futures and the S&P 500 was -0.63, the lowest ever between gold and stocks based on CNBC analysis of Factset data going back to 1984. This could be a reason for many investors to buy gold, as the “two unrelated assets will together have a smaller amount of volatility than two identical assets, all else being equal.”
  • Global central banks dumped a record $335 billion in U.S. debt over the past year, according to an article from Zero Hedge. While the author points out his expectation that Saudi Arabia would be one of the biggest sellers (or other “petrodollar-reliant nations”), China, Japan and Hong Kong were the largest sellers of Treasuries in June.  The largest buyer in June was the Cayman Islands with purchases of $28.3 billion – another name for “hedge funds,” the author states.

Threats

  • As Islamist militants pose a growing threat at mines in Burkina Faso, the government announced plans to deploy more than 3,600 soldiers and police to secure its mines, reports Bloomberg. According to Francois Etienne Ouedraogo, the head of the National Office for Securing Mining, the police and soldiers will be “deployed gradually” at the 18 mine sites in Africa’s fourth-largest gold producer. In a report from the IMF last June, the group said that fragile security is one of the main threats to the nation’s economic outlook.
  • Gold equities have re-rated to historical peaks or above, reports Morgan Stanley, with an average 24 percent upside to spot gold already priced in. Similarly, analysts at UBS believe that mining stocks have priced in the gold bull run, and that the underlying metal provides more upside than the stocks. Despite gold being one of the top performing assets year-to-date, the metal’s 26 percent gain pales in comparison to the 110+ percent average lift across the senior producers, UBS continues.

A piece from All Africa Global Media this week points out that the lethal toll of informal gold mining is on the rise. Although deaths at formal mines have come down (fatalities numbered 77 in 2015, making it the least deadly year on record), “zama-zama” or informal fatalities have gone up. By 2015, the official number of informal mining fatalities reached 124 (a 150 percent increase in reported informal mining deaths from three years prior).

The Olympic Games Reflect Our Love of Gold

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

a gold laurel wreath dating from the 3rd or 4th century BCE

Every child knows Olympic gold medals are for first place, silver for second and bronze for third. But where does this tradition come from?

Like most everything else relating to the Olympics, we can trace the tradition back to the ancient Greeks, who assigned metals (not medals) to different Ages of Man. First among them was the Golden Age, characterized as a peaceful time when humans and gods lived in harmony and food was plentiful. The Greeks believed this to be the pinnacle of our existence, after which it all went downhill. Following that golden period came the Silver Age, when childhood lasted 100 years. Then, the Bronze Age, a time of violence and destruction among warring tribes.

The Greeks weren’t alone in their reverence of gold, of course. It fascinates me that nearly every ancient people, no matter the continent or region, imbued the precious metal with the same degree of sacredness and purity. One of the earliest known metals, gold was valued for its resemblance to the sun, itself worshipped as a powerful deity in many cultures. The ancient Incans, in fact, referred to gold as “sweat of the sun.” When you held a gold nugget, it was believed, you held a piece of the gods themselves.

Michael Phelps showing off his Olympic gold medals on the August 2008 cover of Sports IllustratedAlthough most of us no longer believe gold emerged from the sweat glands of great celestial beings, we nevertheless still hold the metal in very high regard. This is what I often refer to as the Love Trade, the proof of which can be seen all around the globe—from beautiful gold wedding rings in the U.S., to finely crafted bridal jewelry in India, to gold coins given to newborn babies in South Korea. So high is our regard for gold that we reward the world’s most gifted athletes—our modern day Greek gods and goddesses—with a small disk of the stuff.

More or less.

Alas, today’s Olympic gold medals contain only a small trace of the yellow metal. According to Kitco News, they’re about 95 percent silver and 1.2 percent gold, making them worth nearly $570 at current prices. (Of course, the real value is much higher. A gold medal earned by an obscure athlete can go for $10,000 at auction, and the price goes up from there. Jesse Owens’ gold medal, awarded during the 1936 Berlin Games, sold for $1.47 million in 2013.) The last (and only) time medals were 100 percent pure was during the 1912 games in Stockholm.

If this seems disappointing, it’s better than it once was. In ancient Greece, winners weren’t awarded a medal of any kind. Instead, they were crowned with wreaths of olive branches, a tradition that was observed in the first modern Olympics, the 1896 Athens Games. It wasn’t until the 1904 St. Louis Games that the current practice of awarding gold for first, silver for second and bronze for third was standardized.

Gold Has Taken the Gold Compared to Most Major Asset Classes

the first Olympic gold medal was awarded during the 1904 Games in St. LouisBesides the pageantry and superhuman athleticism, fans and viewers are drawn to the competitiveness that’s on display at the Olympic Games. Athletes have trained for countless hours to prepare for their events, often costing their families tens of thousands of dollars in the hopes that they will stand atop the winners’ podium and be awarded the gold medal.

Likewise, many investors, myself included, gain a lot of pleasure (and heartache) watching their favorite asset classes perform in global markets—including gold.

There was much heartache indeed during the recent bear market that sunk gold from its 2011, all-time high of $1,900 an ounce to its trough of $1,053 near the end of 2015. Since the start of the year, however, the yellow metal has rallied more than 26 percent, leading many analysts and brokers— including Paradigm Capital, HSBC, RBC Capital Markets and the World Gold Council (WGC)—to declare this the beginning of a new upcycle, as uncertainty over central bank policy is deepening.

gold has outperformed most asset classes
click to enlarge

According to the WGC, gold has outpaced other major benchmarks and asset classes for both the one-year (horizontal axis) and year-to-date (vertical axis) periods of return. In addition, the metal’s volatility has been fairly comparable to S&P 500 Index stocks. (In the chart above, volatility is represented by the size of the circles.) The Love Trade is still strong globally, but much of gold’s appeal right now stems from investors’ concerns that unconventional monetary policies have not been effective at jumpstarting growth.

Gold is up not just in U.S. dollars. It’s also rising steadily in countries with a major presence in the gold-mining space, including the U.K., Turkey and Russia. Note the huge spike in pound sterling-priced gold following the Brexit vote and subsequent currency drop.

gold returns priced in various currencies
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These Gold Funds Are Built to Compete

That doesn’t mean all gold funds have provided the same level of performance. Like a highly trained Olympian, our Gold and Precious Metals Fund (USERX)and World Precious Minerals Fund (UNWPX) have demonstrated a competitive edge in a cutthroat competitive space.

Check out the stats: According to Morningstar data, the Gold and Precious Metals Fund ranked six out of 73 Equity Precious Metals funds for total return for the one-year period as of June 30, 2016. The fund also ranked seven out of 69 and 35 out of 50 such funds for total return for the five- and 10-year periods.

As for the World Precious Minerals Fund, it ranked two out of 73 Equity Precious Metals funds for the one-year period, 44 out of 69 funds for the five-year period and 47 out of 50 funds for the 10-year period as of June 30.

What’s more, USERX and UNWPX have BOTH been recognized by Morningstar, with USERX earningfour stars overall among 71 Equity Precious Metals funds and UNWPX receiving five stars for the three-year period among the same number of funds.

Morningstar Rating
  Gold and Precious Metals Fund   World Precious Minerals Fund
Overall/71 Overall/71
3-Year/71 3-Year/71
5-Year/69 5-Year/69
10-Year/50 10-Year/50
Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: June 30, 2016

Don’t settle for the bronze! I invite you to explore the performance and holdings of the Gold and Precious Metals Fund and World Precious Minerals Fund.