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

 

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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.

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  • 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.

Will the Gold Bull be Back after the Summer is Over

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

Donald Trump accepting the Republican nomination for president this week

Looking more Las Vegas casino than Oval Office, the stage Donald Trump delivered his nomination acceptance speech from Thursday was all gold, from the stairs to the podium, completely befitting of his showman-like style. Whether you support or oppose Trump, it’s time to face reality. This is really happening, and we should all brace ourselves for what will surely be one of America’s messiest, ugliest general election seasons.

Only time will tell which candidate will be triumphant in November, but in the meantime, one of the winners might very well be gold, which has traditionally attracted investors in times of political and economic uncertainty. In the United Kingdom, which voted one month ago to leave the European Union, gold dealers are seeing “unprecedented” demand, especially from first-time buyers. Some investors are reportedly even converting 40 to 50 percent of their net worth into bullion, though that’s not advisable. (I always suggest a 10 percent weighting, diversified in physical gold and gold mining stocks.) In Japan, where government bond yields have fallen below zero and faith in Abenomics is flagging, gold sales are soaring.

It’s not unreasonable to expect the same here in the U.S. between now and November (and beyond).

Strong U.S. Dollar and Treasury Yields Weighing on Gold

More so than the upcoming election, gold prices are being driven by U.S. dollar action, interest rates and low-to-negative bond yields around the world. (Between $11 trillion and $13 trillion worth of global sovereign debt currently carries a negative yield.) Right now the yellow metal is in correction mode on a strengthening dollar and rising two-year and 10-year Treasury yields, both of which share an inverse relationship with gold.

Gold Corrects on Rise of 10-Year Treasury Yield
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It’s also worth mentioning that the summer months have historically been among the weakest. By contrast, some of the highest gold returns of the year have occurred in September, when the Love Trade heats up in India in anticipation of Diwali and the wedding season.

Gold's Average Monthly Gains and Losses, 1975 - 2013
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For the past several trading days, gold demand had also been overshadowed by a hot equities market, with many stocks hitting 52-week highs. Both the S&P 500 Index and Dow Jones Industrial Average closed at all-time highs, twice in the latter’s case. The CNN Fear & Greed Index, which measures investor sentiment, is currently in “Extreme Greed” mode, at more than a two-year high.

Markets in Extreme Greed Mode

With gold taking a breather, now might be a good buying opportunity. Since 1970 there have been only four major gold bull markets, and the consensus among analysts right now is that we’re in the early stages of a new one, with end-of-year forecasts in the $1,400 an ounce range.

Learn more about what’s driving gold.

Rumors of Brexit’s Negative Impact Have Been Greatly Exaggerated

Despite gold’s correction, the metal got a boost last Thursday courtesy of Mario Draghi. The European Central Bank (ECB) president, as expected, announced that euro area interest rates and asset purchases would remain unchanged as economic ramifications of the Brexit referendum continue to be assessed.

Speaking of Brexit, Draghi noted that markets have met the volatility and uncertainty in the month following the U.K. referendum with “encouraging resilience.” Like many others, he had predicted that Brexit would dramatically stunt euro growth, but as we’ve already seen, such claims are overdone. In a note released last week, securities trading firm KCG wrote that June 24, the day following the British referendum, “was no repeat of August 24,” a reference to the “flash crash” that struck equities last summer and led to ETF mispricing.

Last week, the International Monetary Fund (IMF) trimmed 0.1 percent from its global economic growth forecast for the year, singling out Brexit fallout as the culprit. Curiously, though, the organization sees the U.K. growing faster than both Germany and France this year and next. This disconnect prompted U.K. Independence Party MP Douglas Carswell to label the IMF as “clowns” with “serious credibility problems.”

IMF Sees the U.K. Growing Faster Than Germany and France, Despite Brexit
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Following Draghi’s statement, gold prices immediately popped in Thursday morning trading, effectively hitting the pause button on the correction. On Friday, though, prices continued to slide, contributing to gold’s second straight week of losses.

The next hurdle to be cleared is a U.S. interest rate hike. Expectations that rates will go up in September have wobbled back and forth since Brexit, but in recent days, it’s been reported that Federal Reserve officials feel confident enough to raise them at least once before the end of the year. Gold will face additional pressure if rates are allowed to rise, but if the Fed chooses to stand pat, it could serve as another catalyst for a price surge.

 

Silver: The Rip Van Winkle metal – Chris Martenson

Mike Gleason* of Moneymetals.com interviews Chris Martenson

Chris comments on geo-politics, geo-economics and on whether one should invest in gold and silver.

Chris Martenson

Mike Gleason: It is my privilege now to be joined by Dr. Chris Martenson of PeakProsperity.com and author of the book, Prosper: How to Prepare for the Future and Create a World Worth Inheriting.

Chris is a commentator on a range of important topics such as global economics, financial markets, governmental policy, precious metals, and the importance of preparedness, among other things. It’s great, as always, to have him with us. Chris, welcome back, and thanks for joining us again.

Chris Martenson: Mike, it’s a real pleasure to be here with you and your listeners.

Mike Gleason: Well it’s been a number of months since we’ve had you on last, far too long by the way, and there has been a ton of things going on in the financial world of late. I’ll get right to it here. For starters, what did you make of the Brexit decision last month? Is this potentially the beginning of some meaningful opposition to the ongoing drive for a world government? Or was this just a one-off event?

Chris Martenson: No, this was not a one-off event, this was a continuation of a pattern that we’ve been talking about at Peak Prosperity for a while. We thought that there were three scenarios for the future. One of them we called fragmentation. I think this is the beginning of it, and fragmentation has its roots in a growing wealth gap. It happens when you have a stagnant to shrinking economic pie that is increasingly seized by the elites who are tone deaf.

And when they do that, people get cranky, and this is the first form of crankiness we’ve seen break out. Austria is next, we are going to see the sweep across Europe, I believe. People have seen that austerity is just a punishment by the bankers upon the average people for the sins of the banker. It feels unfair because it is.

I think Brexit as a political statement is just the beginning, and of course the powers that be are going to do everything they can to paint this as a mistake and punish the wrong people again.

Mike Gleason: What about the banking system, despite some recovery in the past week or two, the European bank stocks have been getting hit hard. We’re seeing that Italian banks need to bailout, and the share price of Deutsche Bank is signaling that the firm is in real trouble. The IMF just named them the riskiest financial institution in the world.

There is a rally here in share prices, Brexit appears largely forgotten, and Wall Street certainly isn’t acting too worried. Is the concern over European banks overdone? Or might we see a firm like Deutsche Bank actually collapse. And what do you see as the ramifications here in the U.S.?

Chris Martenson: The European banks are absolutely in trouble. I think they are insolvent, that is the step that precedes bankruptcy which is a legal action. Insolvency is just when your assets and your liabilities have a big mismatch. We know that’s the case for the European banking shares. It also explains, Mike, why we are seeing this rally, we call it on Wall Street, but it’s global.

We saw two things. First, we saw a big decline, a scary decline in January, and then this miracle, nipple bottom vault back up to the highs that came out of nowhere. To me, that was a liquification event. Somebody put a lot of liquidity into the system. We know that the central banks are coordinating on this because they are scared of the Franken-markets they’ve created. They cannot even tolerate a few percent decline without freaking out. That should freak ordinary people out, because if they are scared, you should be too.

So they re-liquefied like crazy, and then we had just another post Brexit re-liquification. My evidence, stocks at all-time highs, bonds at all-time highs. Listen, you cannot have that unless there is a lot of liquidity coming from somewhere. People cannot be panicking both into negative interest yielding bonds and stocks at the same time for this to make sense through any other lens than the central banks are absolutely pouring money into these markets.

Mike Gleason: Yeah, it’s certainly been a head scratcher to watch these equities markets, the DOW and the S&P making these all-time highs in the wake of what we’ve seen here recently. That’s a good explanation and I don’t see any other potential for why that’s happened. That’s not sustainable forever, they cannot get away with that forever before without the bubble finally bursting, is that fair to say?

Chris Martenson: That is fair to say. And just for your listeners, I just got back from a major wealth conference. These are people, families, institutions that are managing enormous money… they’re all scratching their heads. I watched these poor fund managers and CIOs, that’s investment officers, attempt to explain all of this. They contorted themselves into pretzels. I got up there and just said, “Look, somebody is dumping money in this market.” A lot of heads started nodding. First wealth conference I’ve been to, Mike, in many years where I was no longer the contrarian in the crowd. That makes me nervous.

Mike Gleason: Switching gears here a little bit, what do you make of all of the recent social unrest here in the U.S., Chris? We’ve seen police shootings followed by protests and revenge killings of police officers in a number of cities around the country. Then we’ve got probably the two most polarizing figures ever running for president. The months between now and the November election are sure to be interesting. But there is at least the potential that they could also be very dangerous. What does the recent unrest signal here Chris?

Chris Martenson: I think this is connected to the same factors that I talked about with Brexit. Look, Mike, what’s happening here is that people are getting squeezed. If you believe the inflation numbers go get your head checked or study up on it, because we know we are getting inflation. It’s at least twice as high, maybe three times as high as officially announced. And that’s really hurting people, savers just getting crushed.

We are watching banks get bailed out, we are watching Hillary skate on what are obvious transgressions of the law as it’s written and it’s not a complicated law to understand about mishandling of classified information. She got a pass on that amongst other things. So listen, we’re primates. Fairness and justice are hard wired into us, that’s a thing. People are feeling and seeing the unfairness of this all.

What it comes down to, really, for me, Mike at this stage, is they ran these really interesting experiments back in the 40’s and 50’s. Where they would take a rat and put it in the cage, make it so there is nothing in the cage so it cannot escape, and they shock the floor. The rat hates it but ultimately they figure out how to tolerate it. They curl up in a ball, they’re miserable.

If you put two rats in the cage, what happens is that all of a sudden they are both getting shocked, they are both hated, it’s painful, but now they have somebody to look at and go, “Oh, it’s you.” And they fight. And if they leave them in there long enough, they fight to the death.

What that experiment shows us is that when people – and rats and people are the same this way – if you don’t know where the shocks are coming from, you go to the blame game. That’s what we are starting to see. I believe that police and the people they are policing are actually on the same side of the story, but they don’t know it, so they are looking at each other, they are blaming the wrong parties in the state. The pie is no longer expanding. In fact, the piece of the pie that used to belong to even the upper middle class on down is being rapidly vacuumed out.

All that oxygen is being sucked out of the room by a financial system, not just bankers but a complete financial system that just doesn’t know how to say enough. And it’s vacuuming more and more for itself at ever increasing rates. That’s leaving less and less for everybody else. Guess what? Along comes polarizing figures. One who is representing the status quo, and allows people to default into the denial of saying, “Well, if we just get back to pretending that everything is okay and we shoot for the middle zone and don’t see anything too troubling, things will be okay.” Spoiler alert, they won’t.

And then another guy that’s saying, “Hey, I got an answer for this, and this is troubling and we need to start getting angry about this.” So he’s tapped into the anger side, and I think both of them are missing the mark on this, which is that we have to have a more fundamental substantive discussion about what’s really happening in this country, which is that we have some systems that are run amok and they are going to take us into a really dark territory if we don’t stop them now.

Mike Gleason: For the people who live in these urban areas where there is maybe a little bit more danger in being in an environment where there is a lot of animosity towards police officers. I know you’ve organized your affairs, so you are no longer living in a major metropolitan area, do you have advice for people to maybe consider that type of move given the fact that there could be some real instability in some of these major city centers with all of this violence?

Chris Martenson: Short answer, move. Longer answer, be prepared to move. I do work with people who live in urban areas that they are there for a variety of reasons, they’re not ready to make the move, but they are increasingly having plans for how they would get out of there. Listen, the difficulty of this Mike is this idea of shifting baselines, where if you are a person and you took a person today from my town and you dropped them into Oakland, California they would leave so quickly because it would be like dropping a frog in boiling water. They would jump right out of that.

But for people living there, it’s a little bit violent, but it’s four blocks away, and somebody got shot six blocks away. A month later, it’s two blocks away, but that’s okay, the police responded quickly. Over time, people lose their sense of perspective over what’s happening. So my invitation to people is to really look around and actually see what’s happening, ask yourself if the trend is getting better or worse.

And regardless of whether it’s getting better or worse, is that really where you want to live? A lot of people say the answer is no, but they don’t know what to do next. My invitation is, well, start figuring out what that plan is because there really is no time like the present to begin figuring these things out. It takes time, it just takes time.

Mike Gleason: Changing gears again here. I want to get your thoughts on the Fed. The FOMC meets again next week, they have been punching on interest rate increases. We’ve had mixed economic data, growth below expectations and central bankers everywhere are ramping up stimulus. Janet Yellen and company are finding it exceedingly difficult to tighten. Throw into that that this is an election year. What do you see the FOMC doing between now and the election? Could we see some kind of surprise to the dovish side to help boost the markets and keep the status quo going this November? What are your thoughts there?

Chris Martenson: Yeah, that’s the 85% probability. I’m on record as saying that I thought it was more likely that they were going to lower rates instead of raise rates on their next move, whenever that comes. I said that back in December after that first tiny little wiggle hike. And the reason I said that is because look, you can’t have the United States raising rates while the rest of the world’s rates are going down. That just doesn’t make sense from a variety of logical standpoints. But let’s be clear, the Fed follows, it doesn’t lead.

This is not an aggressive, assertive organization ever since Paul Volcker left. These are not people who have the moxie to run against what the markets want. They’re totally captive to the markets, the markets are clearly saying rates are going down. I don’t think this fed has it in them to do anything other than follow the markets. So since the markets are going down, the best the Fed can do is hold pat. But at some point, honestly, I would put a little bit more money on the wager that said the next surprise would be to the downside not the upside. Especially in an election year.

Mike Gleason: Speaking of following and not leading, I don’t know if you have been following Alan Greenspan and his comments, but now all of a sudden late in life after leaving his Fed chairman post, he is now advocating for a gold standard. It’s quite amazing to hear that come out of that man’s mouth after all these years. Maybe it just goes to the fact that when you are in that position, you’re just following and you’re not making any real leading decisions. What have you made of what Alan Greenspan has had to say in these recent days?

Chris Martenson: Yet another extremely disappointing CYA retirement circuit lap. We’ve seen this a lot, Senators who finally on their retirement day say, “Oh, by the way, Washington is really broken, here is all the ways they are.” Eisenhower on the way out, “Hey, watch out for this military industrial complex.” Yeah thank you, would love to have had those insights while you still could have made some decisions that would have shown that you had the personal fortitude and internal authenticity to have stood up and done what was right.

So for Alan to come out afterwards, I agree with a lot of what he is saying, it’s too little, it’s too late. It doesn’t do anything to resurrect or buff his reputation in my eyes. I think he was the architect that will ultimately end so badly, that his name will be mud if you follow the historical reference, for a long time coming.

Mike Gleason: What is your best guess for what to expect in the markets between now and the election… particularly for the metals? We’ve had an excellent first half of the year in gold and silver, although they have struggled a bit here in the last week or two. So do you see this as maybe a short term pause before the next leg higher? Basically can the metals match the performance in the second half of the year that they had in the first half?

Chris Martenson: Well I still think metals of course, particularly gold given the monetary shenanigans, that’s something that has to be in everybody’s portfolio. It’s your insurance policy, get it there. I really thought that Grant Williams about a year ago had made just to me the quintessential, best gold exposition where his summary was, “nobody cares”.

And his thought was that the west is perfectly happy to sell gold, we’re perfectly happy to sell our paper gold on the COMEX. We’re perfectly happy to see about 1,000 to 1,500 tons a year leave western vaults just for Shanghai alone. So we were okay with that because nobody cared. The Treasury didn’t care. He was talking with fed officials, like, “Yeah, if we lose gold, it’s fine.”

The west is starting to care. This hearkens back again to this wealth conference I was at, big money people, of course I’m always testing the gold waters with them. And more and more people are saying, “Yeah, I’m thinking about gold now.” So we’re starting to see this really show up on the western radars. I think that if I was going to mend Grant’s title, it moves from “nobody cares”, to “some are starting to care.” And that’s a very constructive environment for gold, just from that standpoint.

And the other part, of course, has to be how can gold not be constructive in a negative interest rate environment? People used to always say, “Chris, gold doesn’t yield anything.” And now I get to say, “Well at least it doesn’t yield negative something.” So this is a really positive environment for gold. It’s clear somebody has an interest in not allowing gold to go up. We saw that on Friday late night post Brexit. Somebody put 50,000 new open interest contracts to contain gold at the $1,360 mark. And we don’t know who that was, but we can all guess.

Mike Gleason: At some point you have to think that more and more people will recognize it as a safe haven. You talk about the wealth conference you just went to, about how maybe more and more people are starting to wake up to the idea of owning precious metals as a way to hedge against what may come. Obviously, and I’m talking about physical bullion now, there is not a tremendous amount of it. There’s been so much of it going to the east, and the west does not have a whole lot of precious metal left at this point.

If we did see an increase from say 1% of the general public and going to 3% or 5% of the general public, I have to think there is going to be a difficulty getting your hands on the metal if you wait too long. Is that fair to say?

Chris Martenson: That is fair to say, particularly at the retail level. I think the people who have the big, big money, they have access to vaults that you and I don’t normally have access to. There’s a very different structure for the big 400 ounce and 1,000 ounce bars for gold and silver respectively. But for people who want to buy coins, we saw this in ’08, we saw it in 2011 again when there were big price moves, particularly to the down side in silver where people started to want to get into that market.

And those were almost exclusively people who had already bought silver. This wasn’t new people coming into the market, just people looking for better deals. That alone swamped the retail supply chain, the refineries were maxed out, the mints were maxed out, supplies were tight, and the wait times ballooned out to six and eight weeks in some cases.

So that’s our learning which is that when the metals really do begin to move, your chance as a retail investor to get into that are going to be very, very limited if you wait or the percentages move from whatever it happens to be, 1% or 2%, to 3% or 5%. I think that that will swamp the retail availability for quite a while.

And then, you know what, people are going to be stuck with, and they’re going to say, “Oh there’s a six week wait.” When six weeks comes by, they discover that the price has moved a lot at that point in time. So either you put a lot of money on the line in the hopes of being in line somewhere, or you wait and discover that both the prices and availability have scurried away from you in the meantime. It’ll be hard I think psychologically if not practically for people to acquire what they want. So my motto always is I’d rather be a year early than a day late.

Mike Gleason: Very good advice. In terms of gold versus silver, obviously gold is really just monetary demand that drives that market, but silver is both pushed and pulled from both the industrial demand and the monetary demand. Generally speaking, when we see the metals rising, we’ll see silver outperform, but if we have an economic slowdown, perhaps that could hold silver back a little bit as it gets maybe lumped in with copper and oil and other industrial types of commodities. What are your thoughts there on the potential for silver versus gold going forward?

Chris Martenson: They’re very different words to me. A lot of people say, “Gold and silver” like it’s one word. They are two words to me. Gold is my monetary metal, love it, I have it because I think a monetary crisis is happening. If you have a short term horizon, I like gold better because I think we are having a monetary crisis first before we have a big industrial resurgence.

Silver, primarily Mike I love it as the industrial metal, as something who’s known ore grades are vanishing and deposits are depleting, and we know that it’s being used increasingly for more and more industrial applications. Silver is my Rip Van Winkle metal. I love it. If somebody said, “I need to pick one of these two, 20 years I want to be happy when I wake up.” Silver’s it. It’s a volatile metal that goes up and down, I think it could have a run down if we hit a capital “R” recession or depression across the world… if China blows up or something like that. But barring that, I love silver because of its actual supply and demand characteristics going forward. I think it’s heavily underpriced here.

Mike Gleason: Well as we begin to close here, Chris, what would you say are maybe the top three or four actions that people could be taking right now to become more self-reliant and generally more insulated from the chaos that’s on the horizon?

Chris Martenson: Well if I could just plug my own book here for a minute that I wrote with Adam Taggart called Prosper. What we do there is we specifically talk about steps people can take so that they will be more resilient given certain futures that might arrive. But every one of these steps we advise will make your life better today. So there’s really no way to lose in this story.

What we do is we have eight forms of capital that we like people to focus on. Financial capital, which commonly everybody focuses on only. But what we’ve found, and there’s a great quote, it says, “None are so poor as those who only have money.” If you only have financial capital you are not resilient. So there’s seven other forms of capital we talk about. I’ll just go through a couple.

One is social capital. Not just how many people you know, but how well you know them. Have you had experiences with them? Have you seen them operate under a variety of scenarios so you know really who they are at core? Building that social capital is going to be one of the most important things you can do to build you resilience. And guess what? You’ll know more people and connections are proven to make us happier, more fulfilled people.

Emotional capital, also in the mix. This is very important. It doesn’t do any good to be rich in all sorts of other areas if when a crisis comes you basically fold up your mental shop and shut down. Not good. We already see people doing this with increased rates of suicide, drinking, video game playing, other forms of numbing out because the reality is just not appealing. We think there’s lots of ways to rotate your thinking so that you can be positioned to not just be on the wave of change that’s coming, but the surf it.

There’s great opportunities coming here, but not for people who are going to be feeling the loss of the changes instead of the opportunities in the change. So those are just a couple of examples. Living capital is an example, knowledge capital, time (capital). Things like that. And so this book is our collection of stories and personal experiences with each of these forms of capital, from having worked with thousands of people in our seminars, at our website, Peak Prosperity. For people who are consciously and prudently as adults saying, “Hmm, different future coming, how can I be prepared? More importantly, how can I be resilient so I can increase my quality of life today and be more prepared for tomorrow?”

Mike Gleason: Yeah, it’s truly fantastic stuff. Obviously it was years in the making. You and Adam did a fantastic job, so many practical things in there. Now as we begin to close here Chris, why don’t you talk a little bit about the Peak Prosperity site and then also let people know how they can get their hands on that book if they haven’t already done that.

Chris Martenson: Thanks Mike. Yeah, the site is PeakProsperity.com. And we have a lot of free content there, we have a subscription newsletter for people who like to go a little deeper and maybe have more information. Our site is dedicated to two big things. One is educating, we want people to understand the context of what’s happening so they are not one of those rats getting shocked without an understanding of what the shocks are.

Once you know what the shocks are, then you have information that’s really important, that can help you move when other people are paralyzed or confused. So that’s half the site, the other half is about how we can become more prepared, more resilient… (there’s a) wonderful community of people there. They are very thoughtful. If I could identify us with one word, I would say we are all curious.

This is a life to be lived, it isn’t a dress rehearsal, we are not here hunkering down saying, “Woe is us, bad times coming.” We’re saying, “Big changes coming, now what do we do about it?” So it’s very positive while realistic, if I can put those two words together. And Prosper, the book, available on Amazon. You can come to the website and get that. It’s available pretty much everywhere.

Mike Gleason: Well again, excellent stuff. Thanks so much Chris, and I hope you have a great weekend, enjoy the rest of your summer, and we’ll catch up again soon.

Chris Martenson: Thank Mike. You too, and to all your listeners, have a great weekend and summer.

Mike Gleason: Well that will do it for this week, thanks again to Dr. Chris Martenson ofPeakProsperity.com and author of the book, Prosper: How to Prepare for the Future and Create a World Worth Inheriting. For more information, just go to PeakProsperity.com, check out the extensive site there and the great online community. Or check out the book, which is also available on Amazon. You definitely will not be disappointed.

To listen to the full podcast download the MP3 file here:  DOWNLOAD MP3

 

 

Political Risk Building into the Gold Market? The Holmes SWOT

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

Strengths

  • The best performing precious metal for the week was palladium, up 5.49 percent.  Citigroup forecast that platinum could see a deficit of 172,000 ounces in 2016, but palladium’s deficit could be short by 847,000 ounces, thus the group is more bullish on the later.
  • Esturo Honda, who according to Bloomberg News has emerged as a matchmaker for Prime Minister Shinzo Abe in finding foreign economic experts to offer policy guidance, is opening his ears to Ben Bernanke.  In April, Bernanke noted that helicopter money, in which “the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them,” could work as the strongest tool to overcome deflation, says Honda.
  • Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, says there is political risk building into the gold market, including the Italian referendum and U.S., French and German elections. Blanch adds that in the past, gold used to be driven more by the U.S. dollar and commodity market movements, but “in this day and age, it’s a new world.” He also mentions that one-third of government bonds are yielding negative. The chart below shows that $9.2 trillion of sovereign bonds are trading with negative yields.

swot4
Weaknesses

  • The worst performing precious metal for the week was silver, down -2.97 percent.  With silver generally more volatile than gold, a strong rally in stocks, up 10 of the last 11 days and with new record highs, had investors chasing returns in the broader market.
  • Gold traders and analysts are bearish for the first time in four weeks, reports Bloomberg. The precious metal headed for its first back-to-back weekly decline since May, with gains in equity markets and the dollar hurting prices. David Meger, director of metals trading at High Ridge Futures in Chicago, says that the dollar’s strength continues to pressure most commodities, gold in particular. “Safe-haven demand has been diminishing, obviously with equity markets moving to new record highs,” Meger said.
  • A group of armed men stormed one of Agnico Eagle’s mines in northern Mexico early Tuesday morning, reports the Canadian mining company, injuring a security guard and making off with a haul of gold and silver. Last April a similar situation occurred when armed men entered McEwen Mining’s El Gallo 1 mine in northern Mexico, reports Reuters, even though thefts within mines are “relatively rare in Mexico.”

Opportunities

  • The World Gold Council and the Accounting and Auditing Organization for Islamic Financial Institutions are drafting new standards for investing in gold to comply with Sharia law, reports an Energy and Capital article. If the proposals for the changes (expected in the fourth quarter) are accepted, a flood of new investors could help send gold prices soaring, the article continues. A similar situation took gold prices to $1,900 in 2011 when surging demand came from China following the government’s urge for its citizens to own the yellow metal.
  • With the U.S. presidential election seen as the next big catalyst, Bill Beament of Northern Star Resources believes that gold’s rally is set to endure, reports Bloomberg. He says the overall trend is up and that “the U.S. vote will have more of an impact on bullion than the U.K. referendum.” The IMF also scrapped its forecast for a pickup in global growth, the article continues, yet another positive for gold.
  • Commerzbank raised its year-end gold estimate by $100, reports Bloomberg, to $1,450 an ounce. Similarly, DBS Group Holdings says that gold is in a major bull market and could surge past $1,500 an ounce as “low interest rates buoy demand and the U.S. presidential election looms.” The long-term gold price has been adjusted higher at Numis Securities as well, up to $1,400 an ounce from $1,350 an ounce.  While it’s good to see the street starting to take their price forecast higher for gold, investors should remain disciplined as the late summer can be a seasonally weak period for prices and many of the expected price targets being raised are capitulation moves to higher price levels.

Threats

  • According to data compiled by Bloomberg, investors pulled $793 million out of SPDR Gold Shares last week, the most since November. As Citigroup’s U.S. Economic Surprise Index rose to its highest since January 2015 (a sign of an improving economic outlook), demand for ETFs backed by gold has diminished some. Holdings in gold-backed ETFs around the world fell 3.9 metric tons last week, reports Bloomberg.
  • Sovereign gold bonds issued in India were trading at a 27-percent premium over the fixed price when the bonds were first issued in November, reports LiveMint. Prices of physical gold have risen 23 percent during the same period. According to the article, “Investors get a fixed interest rate of 2.75 percent per annum on these bonds over and above the capital gains that may accrue if the price of gold rises in the spot market.” The gold bonds are part of the government’s gold monetization efforts aimed to “wean the public off physical gold.”
  •  Will gold miners maintain their capital discipline? Bloomberg reports that as the price of gold rises to its best first half of the year in nearly four decades, earnings reports could indicate that miners are preparing to ease in terms of spending. “Historically there’s been a very high correlation, almost a one-to-one correlation, between costs and the gold price, implying that with higher gold prices you will likely see costs rise at the same time,” Josh Wolfson of Dundee Capital Markets said. Wolfson added that a majority of miners structured spending based on the assumption that gold will trade between $1,100 and $1,150 an ounce.  Let’s hope the miners learned something over the prior three painful years of falling gold prices.

Japanese selling yen to buy gold- The Holmes SWOT

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

Strengths

  • The best performing precious metal for the week was palladium, up 4.89 percent. Wage negotiations started this week in South Africa with opening demands including a 15 percent hike for the highest paid employees and a 47 percent hike for the lowest paid. With the threat of possible strikes in South Africa and a 19-percent rise in auto sales in China reported for June, related to tax cuts on auto purchases, we could see further upside in palladium prices.
  • “Gold is the unprintable currency, unlike the yen,” said Itsuo Toshima, former regional manager for the World Gold Council in Tokyo. According to Bloomberg News, Abenomics skeptics are selling the yen to buy this unprintable currency – gold. Individual investors drove a 60 percent jump in sales of the precious metal in June from May at Tanaka Holdings, the operator of Japan’s largest bullion retailer.

swot3

  • Tanaka Holdings announced this week its plan to buy Metalor Technologies International SA, a privately held Swiss precious metals refiner, reports Reuters, expanding into precious metals recovery and refinery in Europe, North America and Asia. The aim is to boost Tanaka’s business as local growth stagnates due to a falling population by expanding their presence in the supply chain. No terms were given yet in the statement.

Weaknesses

  • The worst performing precious metal for the week was gold with a loss of 2.11 percent. At the end of last week, the net long gold futures position on the COMEX had reached an all-time high, when we were in line for a possible correction. Interestingly, gold equities did not fall as much as the gold price over the past week.
  • Gold assets held in the world’s largest ETF backed by the metal, the SPDR Gold Shares fund, dropped the most in three years, reports Bloomberg. Holdings fell 16 metric tons to 965.22 metric tons on Tuesday as U.S. equity markets reached record highs. Following the U.K.’s decision to keep rates at 0.5 percent, gold dropped to a two-week low. The outlook for more central bank stimulus is curbing demand for the metal as a haven, notes Bloomberg, while a decline in demand from jewelers and retailers is also pushing the price lower.
  • Gold was also impacted by a strong U.S. jobs report against signs of risks to the global economy, reports Bloomberg. Payroll data exceeded analysts’ expectations, buoying stocks and other risky assets, the article continues. In related news, SoGen announced Monday that gold producers expanded the hedge book 1.6m ounces in the first quarter, and stood at delta-adjusted 8.7m ounces at March 31. The majority of net hedging in the first quarter came from Newcrest and Polyus Gold.

Opportunities

  • In its Global Gold Outlook this week, RBC Capital Markets increased its gold price assumption from $1,300 to $1,500 in 2017 and 2018, which is 12 percent above the current spot price. Citing one of the key gold price drivers, RBC notes that “a negative real rate of -1.0 percent suggests a $1,546 gold price.” Bank of America agrees that the yellow metal could move higher, stating that gold is headed to $1,500 an ounce, while also pointing out that silver can overshoot $30 an ounce. A combination of a weaker U.S. dollar and previously deferred demand from Asia should support the gold price in the second half of the year, according to a report from Citi analysts.
  • Jeff Gundlach of DoubleLine Capital discussed his investment portfolio with Barron’s this week, the composition of which ZeroHedge broke down as follows: “high-quality bonds, gold, and some cash.” In response to inquiries about what kind of portfolio is he running, Gundlach said the following: “I say it’s one that is outperforming everybody else’s…Most people think this is a dead-money portfolio. They’ve got it wrong. The dead-money portfolio is the S&P 500.”
  • Klondex Mines reported its preliminary quarterly production results this week of 41,436 ounces, according to a statement released by the company. This apparently beat expectations as the stock rose better than 1 percent this week while the averages were down almost 2 percent. Jaguar Mining also reported strong second quarter production this week of 24,222 ounces of gold, a 17 percent increase year-over-year. The company also cited high-grade gold mineralization recently encountered, confirming downward extension at depth at its Turmalina gold mine. Jaguar says the drill results provide potential to upgrade current inferred resources to higher category.

Threats

  • For the first time ever, Germany issued a 10-year bond at a negative interest on Wednesday, selling more than 4.0 billion euros with a yield of minus 0.05 percent, reports the Bundesbank. Negative interest rates in Japan are also present, and seem to be backfiring in a big way, reports Bloomberg. The article reads, “Instead of encouraging spending, people are stashing their cash in safes, with sales of house safes increasing 250 percent over the last year.” What’s even more troublesome, is many elderly Japanese people are purposely committing crimes to end up in prison – a place with free food and health care, since negative rates are eating up their savings.
  • In Brazil, bitcoin seems to be gaining more and more momentum, reports NewsBTC.com. The digital currency trading volumes in Brazil have actually surpassed that of gold in the last six months. “The recent rise in bitcoin prices from about $450 to over $700 before stabilizing at around $650 is attributed to increased demand in the Chinese market, Brexit and other external factors,” the article reads.
  • According to portfolio strategist Martin Roberge of Canaccord, gold could correct in the summer. Roberge noted that gold stocks have outperformed the broader S&P/TSX Composite Index by 71 percent this year, and while this does not mean the bull market is over, he believes this kind of run is usually followed by a “higher risk” phase.

H1 Zinc gains almost match Silver.  Oil and Gas strong too.

While this website primarily covers the precious metals we diverge on occasion into other commodities and in this respect our concentration on price gains in gold and silver in particular have meant we have missed the big recoveries in some other metal and mineral commodity sectors too.  Indeed it took Frank Holmes’ review, and his ‘periodic table’ of H1 commodity performance to show how well some of these have been performing almost as well as silver – still the H1 leader in price gains – over the first half of the year.  In actuality it is almost certainly a case of these commodities being heavily oversold in last year’s big downturns, but it is worth noting that invariably such downturns are overdone with momentum carrying prices down way below levels justified by the true supply/demand equation.

periodic
click to enlarge

The H1 ‘Periodic table’ shown above from U.S. Global Investors shows in no uncertain terms how volatile the sector can be over the years with the top and bottom performers switching around almost on an annual basis.  And what it shows for H1 2016 is that although silver was, as we have noted beforehand, the top performer to date with an H1 price rise of 35%, zinc put on nearly as much at 32%, with oil and gas (hugely oversold last year) knocking gold into only 5th place with respective gains of 30%, 25% and 24.5%.

Zinc does have additional relevance in a focus which is primarily on precious metals as most primary silver producers also mine zinc (and lead) in relatively large quantities as well with the three metals invariably occurring together.  So the rise in zinc prices will have had an additional booster effect on the fortunes of most of the primary silver producers.  Similarly most primary zinc mines will also be producing silver as a byproduct.

Indeed the supply/demand situation for zinc has caused many commodity analysts to tip zinc and zinc miners as having strong investment potential over the past few years, but until this year the metal has not performed as the analysts had predicted.

Their premise had been one on likely major disruptions in the supply/demand balance with two of the world’s biggest zinc mining operations coming to the ends of their profitable lives, and no major new producers coming on line to replace what was assumed would be a significant supply shortfall.  In retrospect the Chinese industrial downturn threw some of the demand parameters into disarray and last year, for instance, zinc was one of the worst performing commodities, falling in price over the year by around 26.5%.

As Holmes pointed out in his accompanying article – Silver Takes the Gold: Commodities Halftime Report 2016  – this dynamic certainly helped   boost the zinc price so far this year. He noted that during the first four months of the year, mine production fell 8.1% from the same time a year earlier due to declines in Australia, India, Peru and Ireland.   The straw which may have finally broken the camel’s back was that Vedanta Resources made its last zinc shipment from its Lisheen Mine in Ireland, which for the last 17 years had produced an average 300,000 tonnes of zinc and 38,000 tonnes of lead concentrate per year.

This has been coupled with an expected increase in the demand the demand for refined zinc expected to increase 3.5% this year. A large percentage of this growth can be attributed to China, which is still investing heavily in infrastructure, even as money supply growth has slowed.  But the other big factor has probably been record automobile sales in the U.S. and China, the world’s largest automobile market, recording the sale of 10.7 million vehicles in the first five months of the year –  an impressive year-over-year increase of 7%.

In terms of oil and natural gas, the other two big gainers this year, as is usually with such market moves they were almost certainly sold down more than they should have been last year as the media and analysts fell over each other to predict further declines – more on momentum perhaps than real supply/demand data.  But, the aforementioned climb in automobile sales coupled with some significant falls in output, have presaged a very strong recovery in crude oil prices.  As Holmes pointed out: “Unplanned production outages in Canada, Nigeria, Iraq and elsewhere removed a collective 3.6 million barrels per day off the market in May alone. Coupled with ongoing declines in the North American rig count—U.S. crude production is now at a two-year low—this helped nudge prices up to levels not seen since July 2015… At the same time, global consumption is expected to increase by 1.5 million barrels a day both this year and next, according to the U.S. Energy Information Administration (EIA), with North America and Asia, particularly China and India, responsible for much of the growth.”

Much as the precious metals complex tends to be dragged up by movement in the gold price, natural gas tends to benefit from movement in crude oil prices which probably accounts for gains here, although again the decline in fracking activity in the U.S. on economic grounds given the low gas prices will not have hindered here.

The other sector worth commenting on here has been a decent rise in pgm prices – of platinum in particular, although palladium, – continually pushed by the analysts as being the likely best performer in the precious metals  complex has continued to underperform relative to its peers.  In H1 platinum was up 14.7% and palladium only 6.5%.  Both should perhaps have been boosted by the strong automobile sales figures in particular, while some supply disruptions in South Africa will also have contributed.  Both metals are expected to see a supply deficit this year, but the pricing situation is continuing to be undermined due to large stocks of both metals being held out there and possible liquidations out of ETfs.

So while precious metals continue to be the focus of much commodity and equity investment interest, it is worth keeping an eye on some of what might be considered the more mundane metals and minerals.  Like the precious metals, many of these have perhaps been oversold in the downturn years and others could be set for similar big rises.  It’s a question of getting one’s timing right to benefit from these gains.  Copper, nickel and lead have been laggards in any pick-up so far this year and coal remains hugely depressed.  Could we see a turnaround in any of these?  At some stage we probably will as low prices impact supply and, in most cases, annual demand continues to grow.  As noted above timing is everything in commodity investment.

Silver Takes the Gold: Commodities Halftime Report 2016

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

Silver Takes the Gold: Commodities Halftime Report 2016

Here we are at the halfway point of the year, less than two months away from the Rio 2016 Olympic Games. As a group, commodities are the top performing asset class, comfortably beating domestic equities, the U.S. dollar and Treasuries.

Commodities, the Top Performer in First Half of 2016

Below is our ever-popular Periodic Table of Commodities Returns, updated to reflect the first half of 2016. Click to see an enlarged version.

The Periodic Table of Commodity Returns
click to enlarge

Commodities’ performance is quite a reversal from the weakness we’ve seen lately, particularly last year, but we shouldn’t expect another 2004 or 2005, when global trade was humming. Conditions are still not ripe for a real takeoff, with manufacturing activity in China and the eurozone struggling to gain momentum.

But there’s hope. Many of the challenges standing in the way of growth were exposed when Britain voted last month to leave the European Union (EU), which I’ve been writing about for the past few weeks. Most recently, I highlighted some of the winners to emerge from Brexit, among them gold investors, U.S. homeowners and British luxury goods makers.

Hopefully we can add global trade to the list. Brexit has brought to light some of the corruption and economic strangulation by regulation that chokes the flow of capital. Last week I had the opportunity to speak with some EU citizens. Their frustration was palpable. The cronyism among the EU’s unelected officials is nothing new, but it’s only worsened over the past decade and a half, they said. The British referendum has encouraged a balanced, intercontinental discussion on the direction Brussels must take now that the corruption and depth of discontent have been exposed for the world to see.

Precious Metals Shine Brightly on Macroeconomic and Geopolitical Concerns

Silver demand had a phenomenal 2015, with retail investment and jewelry fabrication both reaching all-time highs. Led by consumers in the U.S. and India, coin and bar investment soared 24 percent from the previous year, while jewelers gobbled up a record 226.5 million ounces. According to the Silver Institute’s World Silver Survey 2016, metal demand for photovoltaic installation climbed 23 percent in 2015, offsetting some of the losses we continue to see in photographic applications.

Global Demand for Silver Bars Surged 24% in 2015
click to enlarge

Caused by worries of a summer interest rate hike and uptick in the U.S. dollar, gold and silver both stalled in May but have since rallied on the back of Brexit and with government bond yields in freefall. For the first time ever, Switzerland’s entire stock of bonds has fallen below zero, with the 50-year yield plummeting to negative 0.03 percent on July 5.

Switzerland 50-Year Bond Yield
click to enlarge

All-time low yields can also be found in the U.S.—where the 10-year Treasury yield fell nearly 38 percent in the first half—U.K., Canada, Germany, France, Australia, Japan and elsewhere. Roughly $10 trillion worth of global government debt, in fact, now carry low to subzero yields.

This has been highly constructive for gold and silver, as yields and precious metals tend to be inversely related.

What’s more, the rally doesn’t appear to be done, with UBS analysts making the case last week that we’re in the early stages of a new bull run. Credit Suisse sees gold testing the $1,500 an ounce mark as early as the beginning of 2017. As for silver, some forecasters place it at between $25 and $32 an ounce by year’s end.

The risk now is that higher prices are pushing away some potential investors. Today Bloomberg reported that gold imports in India plunged a sizable 52 percent in the first half of 2016, compared to the same period in 2015.

Supply and Demand Rebalancing?

Much of the price appreciation has been driven by a global rebalance in supply and demand. Dismal prices over the last couple of years compelled explorers and producers to cut activity and other capital expenditures, while demand continues to rise.

This dynamic certainly helped  zinc, the best performing industrial metal of 2016 so far. During the first four months of the year, mine production fell 8.1 percent from the same time a year earlier due to declines in Australia, India, Peru and Ireland, according to the International Lead and Zinc Study Group. In January, London-based Vedanta Resources made its last zinc shipment from its Lisheen Mine in Ireland, which for the last 17 years had produced an average 300,000 tonnes of zinc and 38,000 tonnes of lead concentrate per year.

Meanwhile, the demand for refined zinc, used primarily to galvanize steel, is expected to increase 3.5 percent this year. What might surprise you is that a large percentage of this growth can be attributed to China, which is still investing heavily in infrastructure, even as money supply growth has slowed.

This rebalancing has also bolstered crude oil prices, up 73 percent since its 2016 low in February. Unplanned production outages in Canada, Nigeria, Iraq and elsewhere removed a collective 3.6 million barrels per day off the market in May alone. Coupled with ongoing declines in the North American rig count—U.S. crude production is now at a two-year low—this helped nudge prices up to levels not seen since July 2015.

Month-over-month change in global oil supply disruptions
click to enlarge

At the same time, global consumption is expected to increase by 1.5 million barrels a day both this year and next, according to the U.S. Energy Information Administration (EIA), with North America and Asia, particularly China and India, responsible for much of the growth.

Record Automobile Sales Support Commodities

Crude consumption is also being supported by robust automobile sales, which set a six-month record in the U.S. following six straight years of growth. Between January and June, sales reached an all-time high of 8.65 million units, up 1.5 percent from the same period last year. In China, the world’s number one auto market, 10.7 million vehicles were sold in the first five months, an impressive year-over-year increase of 7 percent. Sales of light vehicles, especially motorcycles, have been strong in India.

As you might expect, this has likewise benefited demand for platinum and palladium, both used in the production of autocatalysts. The CPM Group anticipates palladium demand to reach an all-time high this year, up 3 percent from last year, on tightened emissions standards and the purchase of larger cars and trucks in the U.S. on lower fuel costs. (The larger the engine, the more palladium or platinum is needed to reduce emissions.)

Autocatalyst Production Driving Palladium Demand
click to enlarge

Since January, the platinum group metals (PGMs) have increased over a third in price, marking the end of an 18-month bear cycle, according to Metals Focus’ Platinum & Palladium Focus 2016. Fundamentals have improved since last year, when EU growth concerns and Volkswagen’s emissions scandal weighed heavily on investment prospects.

Like zinc, crude and other commodities, the PGMs were supported the last six months by lower output levels, as labor disputes in South Africa—the world’s largest platinum producer and number two largest palladium producing country—disrupted operations.

Stock Markets Erase Brexit Losses: Is the Fallout Already Behind Us? – An American viewpoint

By Clint Siegner*

The UK’s UKIP party leader, Nigel Farage, toiled for 17 years building a movement to lead the United Kingdom out of the European Union. A week ago, he stood in front hundreds of drab bureaucrats in the EU Assembly, most of whom have done little but snicker at his free-market ideals, and declared victory. He told them, quite plausibly, their political union is dying – and good riddance!  – [Editor: He has now resigned leadership of UKIP saying his job is done, but will undoubtedly remain vociferous in his anti-EU views]

UK Independence leader Nigel FarageUK Independence Party leader Nigel Farage

Fans of ‘liberty’ cheered for Farage and for Brexit. And, after the sharp recovery in equity indexes around the world, it looks like stock investors have begun cheering as well. Many say stock market losses sustained in the first couple of trading days were an overreaction. Maybe. Or maybe not.

It is way too early to sound the “all clear” signal, and the real Brexit fallout may still be ahead. The pound sterling is continuing to fall for example.  Here are some other developments that investors should weigh carefully…

Bond markets are not confirming the move higher in stocks. The yield on a U.S. 10-year bond made a new all-time low on Friday at 1.385%. German 10-year Bunds yield -0.12%. That’s right – a negative yield! Bund investors must pay the German government for the “privilege” of lending them funds.

That doesn’t jive with the rally in stocks. There are essentially two groups of people. One is buying stocks aggressively, shouting “Risk On!” The other is loading up on Treasuries and other “low risk” debt as a safe haven. One of these groups is likely to be horribly wrong.

The surge in precious metals prices corroborates the flight to safety we’re seeing in bonds. Bonds and metals may be telling investors something wicked this way comes.

Maybe we’ll see a new bank crisis. All is not well with global banks, and Brexit isn’t helping.

In news that was largely overlooked, EU officials just granted a $150 billion emergency bailout measurefor Italian banks who are drowning in bad debt. Italian officials used the panic around Brexit and fear of a run on their banks to lobby for the special accommodation. Portuguese banks aren’t in much better shape.

Deutsche Bank Collapse

Then there is Germany’s Deutsche Bank (NYSE:DB). Last week the IMF hammered DB in a report labeling the troubled German firm as theriskiest financial institution in the world. DB holds something on the order of $70 trillion dollars in notional value of derivatives exposure. It also carries lots of “non-performing” loans.

And the low-interest-rate regime imposed by European Central bank is suffocating profitability.

Bankers introduced the world to the concept of “systemic risk” when Lehman Brothers collapsed. We discovered banks like to buy and sell derivatives such as Credit Default Swaps, purportedly to hedge risks. Some trader with Bank A buys the diseased bonds of Institution B. Or maybe the trader simply doesn’t like the prospects of B and wouldn’t touch the bonds with a 10-foot pole. Either way he figures B just might default, so A buys insurance in the form of a CDS from Firm C. It works great until B craters and takes C, who has been busily selling a bunch of these swaps to any and all comers, with them.

That’s what happened in 2008. The daisy-chain collapse began with Lehman Brothers and ended when the central bankers and bureaucrats stepped in with your money to make good on the spiraling losses.

There is no telling if Deutsche Bank or some other troubled bank is going to fail and set off a new daisy-chain. We can only say with certainty some smart people seem pretty worried about it. DB shares are trading well below the 2008 crisis lows, and the price of DB credit default swaps have risen dramatically.

EU favorability varies widely in Europe

Much of the Brexit fallout is political and hard for markets to quantify. When Nigel Farage said the European Union is dying, he wasn’t just “Whistling Dixie.” Exit movements all over Europe got a big leg up following the British referendum, but EU favorability has been in decline for some time now. Debt crises and the flood of middle-Eastern refugees have people doubting if an unelected and unaccountable bureaucracy in Brussels will provide the solutions they seek.

Investors should note support for the EU is even lower in France and in Greece than it was in the UK. Spain, Germany, and the Netherlands aren’t far behind. Brexit may well signal the beginning of the end for the EU.

If it turns out Farage is right and the EU dies, markets won’t have much trouble finding the right answer with regard to the value of the euro. It will return to its intrinsic value: zero. In the meantime, we could be in for some wild market action as people on both sides of the political question line up and place their bets.

A Classic Case of Failed Socialism: What’s Next After the Brexit?

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

Brexit Vote

Defying sentiment polls leading up to last week’s historic Brexit referendum, British voters said “thanks, but no thanks” to excessive EU taxation and regulation, choosing to take back Britain’s sovereignty in financing, budgeting, immigration policy and other areas essential to a nation’s self-identity. It was a momentous victory for the “leave” camp, led by former London mayor Boris Johnson and U.K. Independence Party leader Nigel Farage, who invoked the 1990s sci-fi action film “Independence Day” by declaring June 23 “our independence day” from foreign rule.

As I’ve been saying the last couple of weeks, British citizens and businesses have grown fed up with an avalanche of failed socialist rules and regulations from Brussels, responsible for bringing growth and innovation to a grinding halt. Even if the referendum had gone the other way, it should still have served as a wake-up call to the European Union’s unelected bureaucratic dictators. Euroscepticism and populist movements are gathering momentum in EU countries from Italy to France to Sweden, and the week before last, fiercely independent Switzerland, which voted against joining the EU in the 1990s, finally yanked its membership application for good.

American voters should be paying attention. Many have already pointed out the parallels between the Brexit movement and Donald Trump’s populist campaign for president. This connection was not lost on Trump, who tweeted early Friday morning: “They took their country back, just like we will take America back.”

Britain’s decision to leave exposes the fragility of trade right now and mounting apprehension toward globalization. The EU is mired in tepid growth, and the blame cannot be pinned on immigrants, as some have tried to do. Instead, Brussels’ policies are anti-growth. Moore’s Law says the number of transistors in a microchip doubles every two years. That’s just a fact. American entrepreneurs embrace and indeed push the limits of technological innovation, but “Eurocrats,” to a large extent, seem to be in open opposition to it. This is why many large, successful American tech firms such as Facebook and Google are treated with such hostility in Europe. The bureaucrats are so against growth and prosperity, it wouldn’t surprise me if they tried to do away with Moore’s Law.

A Legendary Day for Gold

Immediately after results were announced, the British pound sterling, one of the world’s reserve currencies, collapsed spectacularly against the dollar, plunging to levels not seen since Margaret Thatcher’s administration. The euro, the world’s only fiat currency without a country, fell more than 2 percent.

Gold, meanwhile, screamed past $1,300 an ounce to hit a two-year high, proving again that the yellow metal is sound money and fervently sought by investors worldwide as a safe haven during times of economic and political uncertainty.

Gold and British Pound Make Huge Moves Following Brexit Referendum
click to enlarge

Uncertainty is indeed the order of the day. As the World Gold Council (WGC) put it on Friday, “It is difficult to find an event to compare this to.” Trading blocs have fractured before, but none as large and significant as the EU. As the world’s fourth most liquid currency, gold saw massive trading volumes. At the Shanghai Gold Exchange, an all-time record amount of gold was traded following the Brexit—the equivalent of 143 tonnes in all.

“We expect to see strong and sustained inflows into the gold market, driven by the intense market uncertainty that now faces the global markets,” the WGC wrote.

The Brexit lifted not just bullion but gold stocks as well, with many of them climbing to fresh highs. Shares of Barrick Gold shot up 10 percent in early-morning trading while Yamana Gold and Newmont Mining both saw gains of over 8 percent.

I’ve always advocated a 10 percent weighting in gold—5 percent in physical gold, 5 percent in gold stocks—with rebalancing done on a quarterly basis. Gold is now up at least one standard deviation for the 60-day period, meaning now might be a good time to take some profits and rebalance. It’s been a spectacular six months!

So What Happens Now?

As I said, global growth is unstable, especially in the EU, and the Brexit will only add to the instability. This will likely continue to be the case in the short and intermediate terms as markets digest the implications of the U.K.’s historic exit.

It should be noted that the country will remain a member of the EU for two more years, during which time the nature of the relationship following the official divorce can be negotiated. These negotiations will take place without David Cameron, who unexpectedly announced early Friday morning that he was stepping down as prime minister.

The results of the referendum also call into question the unity of the kingdom itself. England and Wales both voted to leave the European bloc while Scotland and Northern Ireland were aligned in their desire to remain members.

Gold soars to 2-year high: The Holmes Gold SWOT

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

Strengths
  • The best performing precious metal for the week was palladium, rising 2.24 percent. Palladium surged early in the week, doing just the opposite of gold, when polls indicated British voters were more likely to vote “remain” in the Brexit referendum, thus economic uncertainty would be maintained.
  • However, the palladium price dropped on Friday as gold soared to a two-year high following the U.K.’s vote to exit the European Union, boosting haven demand. According to Bloomberg, U.K. voters backed leaving the EU by 52 percent to 48 percent, causing turmoil across markets and prompting Prime Minister David Cameron to resign.
  • Gold dealers in London say they have never seen anything like it, describing the rush from consumers to sell gold, and many more to buy the precious metal following the U.K.’s vote to exit the EU. “We’re doing 10 times the business we normally do,” said Michael Cooper, commercial director of ATS Bullion Ltd. BullionVault saw its busiest day ever on Friday, reports Bloomberg.
 Weaknesses
  • Despite the surge in gold prices on Friday following the U.K. vote, it was the worst performing precious metal for the week, although still up 1.43 percent. Gold backed ETFs have seen a surge in assets this year as investors have started to discount that political leaders at the central banks around the world have lost their mojo, as you can see in the chart below.

HGS276

  • Gold experienced weakness most of the week, falling for the first four days of the week as polls on the Brexit referendum showed uneven results. Gold tumbled by the most in almost a month as other polls on Monday showed voters tilting toward remaining in the EU.
  • Kinross Gold Corp. temporarily halted mining at its Tasiast mine in Mauritania, reports Bloomberg, after the Ministry of Labor banned some of its expatriate workers from the site due to invalid work permits. The stoppage comes a week after a three-week strike by unionized workers ended at the mine, one Seeking Alpha article points out.
Opportunities
  • According to the median of 12 forecasts in a Bloomberg survey of analysts and traders from New York to Canada, gold prices could reach as high as $1,424 an ounce by year end, reports Bloomberg. “The Brexit referendum lowered the probability for an interest rate hike,” said commodity analyst Thorsten Proettel. Low rates are a boon to gold because it increases the metal’s appeal as a store of value, the article continues..
  • Capital spending by gold producers has been decimated, writes Sean Gilmartin at Bloomberg, which will lead to a long-term decline in the mine supply of the metal. According to UBS, high quality gold equities still offer attractive leverage to gold price upside, and will outperform physical gold in a rising price environment. Other opportunities for the metal come in the mergers and acquisitions space, reports the Financial Review, particularly in the West African-focused gold space driven by strong acquirers out of North America. In an all-share deal, Teranga Gold made an offer to buy Gryphon Minerals, boosting its share price by 22 percent on the news.
  • Hartley’s reports on Burey Gold Limited this week, noting the company’s release of significant drilling results from its maiden RC drilling program in the northern zone of its Giro project. Highlights include 2 meters at 196 grams per ton from 12 meters, and 15 meters at 255.6 grams per ton from 15 meters. Additional results include 33 meters at 6.1 grams per ton from surface and 12 meters at 21.2 grams per ton from 3 meters. Hartley’s writes “These results confirm our opinion that the Giro project has potential to define a company-making asset particularly given these significant high grade results.”
Threats
  • Physical demand for gold out of both India and China was tepid during the first half of the year, reports Bloomberg. Demand was historically weak in India, with the discount averaging $25 an ounce in 1H versus $8 a year ago. Also contributing to the overall weakness was a poor farming year in India, continues the article, yielding less disposable income for Indians to buy gold.
  • Although a vote for Brexit will benefit gold, reports SocGen, other commodities such as copper and oil could suffer. Mark Keenan, SocGen Asia head of commodities, points out that a rising U.S. dollar will depress metals such as copper, and risk aversion may hurt oil.
  • In a note from Sovereign Man this week, the author reflects on how much has changed since the publication started seven years ago. He points out that U.S. government debt soared 70 percent, that the Federal Reserve’s balance sheet more than doubled, and that the U.S. government has been caught red-handed spying on everyone – all in seven years’ time. “We’ve seen an appalling rise in police violence and Civil Asset Forfeiture to the point that the U.S. government now steals more than every thief in America combined,” he continues. Perhaps Donald Trump is right in that Mexico will pay to build a wall on its northern border, which is to keep Americans from crossing illegally into Mexico.

 

Should the platinum:gold ratio be traded as it hits extremes?

By Stefan Gleason, President Money Metals Exchange

The gold:silver ratio hit a multi-year high of over 83:1 earlier this year. It has since come down to 73.4:1, as of Friday’s close, as silver has gained strength in this year’s rally. On a historical basis, silver remains a relative bargain compared to gold. The ratio has much further to fall in a major bull market.

Another important ratio is that of gold to platinum. To gauge whether platinum is trading at a premium or discount to gold, we can simply reverse the ratio. This year platinum traded at its deepest discount to gold since 1982. The platinum:gold ratio currently comes in at 0.8:1, meaning an ounce of platinum sells for 80% of what an ounce of gold commands.

Platinum:Gold Ratio, 1980 to Present

Platinum:Gold Ratio from 1980 - Present

As a general rule of thumb, platinum is a great bargain when it sells for less than gold. As the chart shows, the platinum:gold ratio periodically gets drawn back like a magnet to price equilibrium at 1.0. It’s not a law that platinum must return to equilibrium with the gold price or spend more time than not exceeding it. It just happens to be a strong tendency supported by sound fundamental reasons, including platinum’s supply scarcity.

When platinum’s discount gets to a multi-decade extreme, as it is now essentially, then precious metals investors have an incentive not only to favor platinum over gold – but to trade out of gold for platinum.

We certainly don’t recommend giving up a core position in gold. Gold has unique qualities as the ultimate, most recognized form of money. However, for those who have accumulated an outsized position in gold and hold little or no platinum, now may be an opportune time to trade some gold for some platinum.

Let’s take an example to illustrate the potential profit opportunity. You sell 10 ounces of gold (10 x $1,275 = $12,750), then use the proceeds to buy 12 ounces of platinum (12 x $994 = $11,928). In this example, based solely on the latest closing spot prices, you’d still have $822 cash left over. (In the real world, bid/ask spreads, premiums, and small transaction costs would apply.)

Let’s assume you wind up getting an exact even exchange of 10 gold ounces for 12 platinum ounces. Three years later, the ratio has risen from 0.8 to 1.2, around the historical average. Gold now trades at $2,000/oz and platinum 1.2 times that at $2,400. The ten gold ounces you sold would be worth $20,000. The 12 platinum ounces you bought are now worth $28,800. Thus, trading the platinum to gold ratio boosted your precious metals wealth by 44%!

This hypothetical should not be interpreted as a prediction of future price outcomes. It’s merely an illustration of one type of scenario that could play out.

China’s SGE gold withdrawals in April 171 tonnes

The latest announcement from China’s Shanghai Gold Exchange (SGE) shows that  gold withdrawals for April totalled 171.4 tonnes so remain subdued compared with the past couple of years.  For the first four months of the year 687.3 tonnes were withdrawn, very sharply below the 820.6 tonnes at this stage a year earlier (admittedly a record year) – representing a fall of over 19% year on year. However, even at the current lower monthly rate taken out over the full year this would suggest SGE withdrawals remaining at over 2,000 tonnes for the full year  Thus even at a lower level Chinese gold demand as represented by SGE withdrawals – although there are some arguments from top analysts that these overstate the nation’s true absorption of physical gold – do account for a very significant proportion of the world’s newly mined supply of gold – currently around 3,200 tonnes a year.

Indian gold imports have also been low in the first four months – initially due to demand being held back ahead of the late February budget in the hope of a reduction in import duties – and subsequently due to strike action by the jewellery sector disappointed that the duty cuts were not forthcoming.  Thus the recent performance of gold, given what has been a strong downturn in Asian demand, has been all the more remarkable.

To a significant extent growth in Western demand, represented by purchases into the major gold ETFs and strong buying of gold coins and investment bars has been making up a lot of the shortfall from Asia. The biggest of the gold ETFs, SPDR Gold Shares (GLD) for example, has added around 192 tonnes of gold so far this year alone. It is still hugely below its peak, but is currently back at a level last seen in December 2013 with holdings at the end of last week at 834.19 tonnes.  It has put on 30 tonnes since the end of April.  And according to Bloomberg i inflows into all the gold ETFs it follows totalled around 330 tonnes in Q1 alone.  It thus looks as though ETF inflows are taking up any slack represebted by what is very probably a temporary downturn in Asian demand and gold flows.

The other contributor to the strong price performance in terms of logistics rather than just sentiment is that physical gold actually appears to be in relatively short supply with available inventories falling in the USA and the UK, where most is held.  The head of one of Switzerland’s largest gold refineries recently told Jim Rickards of problems in securing sufficient supplies to meet demand.  With new mined gold supply almost certainly plateauing, and possibly even beginning to turn down, demand shortages could be exacerbated further.   A recent analysis by Paul Mylchreest, who many may remember as the author of the sadly missed Thunder Road Report also even suggests that the London Bullion Market may even be in deficit.

 

Q1 gold and silver rally different this time around

A Paper Gold Rally – Physical Yet To Engage

by Ross Norman – CEO Sharps Pixley Ltd.

The key question in our mind is whether a paper rally in gold can be sustained without the significant engagement of the physical community…

During 1Q16, physical demand for gold declined 23.8% compared to 1Q15 according to GFMS (1025 tonnes Vs 781 tonnes) yet gold prices rallied 22% – res ipsa loquitur.

Gold’s gain year-to-date is impressive – not to say exceptional – and gold bugs will heave a sigh of relief that it has behaved as it should in the face of what is clearly a vulnerable, even fragile macroeconomic outlook. However 2014 and 2015 saw similar rallies before momentum fade set in after Q1 in both years and hence not surprisingly confidence remains light, particularly in view of the size able 45% correction since 2011.

2016 is different.

Yes, gold has seen a similar price action, but the drivers are not the same. The key physical gold markets in China and India are comparatively speaking absent and the erstwhile seller – the West – has turned buyer.  This is not a question of geography, but of motivation, form and tenure.

The correction lower from all time highs at $1922 in 2011 were driven by selling across the spectrum of the gold community in the West. European Central banks had already disgorged sizeable chunks of metal under the Washington Accord and then it was instititutional investors selling of ETFs (roughly 1000 tonnes), coupled by speculators on COMEX who sold their long futures positions and the market went into a rare net short position – and then there was cash-for-gold at the retail end – not in itself significant in size, but it underscored the West falling out of love with gold and cashing it in to sustain the consumption binge of the early 2000’s.

Never before was there such an epic movement of bullion from West to East in exchange for fripperies since the days of Marco Polo and the silk road.

This year on COMEX we have seen a battle royal between the longs and the shorts with the former winning out. The short covering has played a key role in taking the market through key technical levels and net longs stand at close to record highs. This should leave gold bulls – especially contrarians like myself – feeling distinctly uncomfortable. Meanwhile ETF flows have risen at record pace adding 330 tonnes in Q1 (compared to just 36 tonnes in Q1 2015). Now it could be argued that ETFs are paper or physical – this is irrelevant – what matters is how they behave and as we saw since 2011 these players can operate with the same short termism as speculators and rapidly reverse their positions. In short neither can be entirely trusted.

Meanwhile Indian buyers are absent as its government behaves as if it was at war with its gold community (and 3,000 years of history) through punitive taxes ; the market remains lacklustre with prices at a 2 1/2 year high in local terms and is not much helped by a poor monsoon and therefore harvest. The Chinese and indeed Russians meanwhile seem content to pick metal up on any price correction (more traditionally the Indian style) and not chasing the market higher – price supportive, but not a driver. GFMS reports that physical purchases for 1Q16 declined in India by nearly 65% compared to 1Q15.

So what has changed. There is growing perception in the West that Cental Banks may indeed be fallible and that the Keynesian experiment may have run its course – in short, the desire for sound money and by extension a growing concern about the increase in debt to resolve financial crisis is gaining currency. If fear is back in vogue then arguably it may less of a sustainable position then the motivation of many Eastern buyers which is simply as long term store of value.

For gold to see a sustained rally it needs to fire on more than one cylinder and physical players need to join the party. This in turn would put bullion onto the radar of institutional investors who are yet to be convinced that it really is an alternative to more traditional asset classes. This could then bring about the price elasticity – or buying on higher prices – that typified the last bull run. Or equally perhaps physical buyers do not turn up to the party in which case the speculators – sometimes described as behaving like 11 year olds high on e-numbers – could get bored and as easily reverse their positions.

 

Time will tell.