UPDATE: Brexit in the balance.  Gold surges.  Silver may begin to fly

With the Fed decision not to increase interest rates at its latest meeting, in part because of uncertainties over the possible effects of a UK Brexit vote on the global economy, and UK polling seeing Brexit as a more than distinct possibility, gold surged thought the $1,300 level Wednesday and Thursday morning.  At one point it reached $1,315 – its highest level for almost 2 years.  And silver also has begun to move again too – some would say not before time.  It reached over $17.70 and while it has already exceeded that level earlier this year it tends to be much more volatile in its price movements than gold, and a continuing gold price increase could well see silver shoot up as the Gold: Silver ratio tends to come down when gold rises.  It is currently at 74.2 (still a historically high level) and a fall below 70 and a gold price at $1,310 would see silver around a dollar higher which would certainly give some heart to the long suffering silver investor.

However both gold and silver then came down with a bang, supposedly due to rumours of a postponement of the UK referendum to decide whether or not to leave the European Union following the shooting and tragic death of a very well liked (on both sides of the political spectrum) female Member of Parliament, Jo Cox.  To us here in the UK the idea of a referendum postponement over such an issue is hugely unlikely.  The rumour probably came about because as a mark of respect referendum campaigning was suspended for two days.  See: Rumours on Brexit referendum postponement misguided

But regardless, the big money which appears to have been trying to cap rises in the gold price took this as a major opportunity to bring down the price, with gold falling at one stage to below $1,280 and silver back to the $17.20s.  However the factors which drove gold through $1,300 remain in place and we wouldn’t be surprised to see it regain this kind of level, or move higher, if polls continue to show the Brexit option in the lead.

On the possibility of the UK electorate voting to leave the European Union, I would like to think I had been one of the earlier commentators noting the strong underswell of anti-European Union feeling in the country when all the polls were then predicting a comfortable Remain vote.  I had also been suggesting that UK investors in particular should look to investing in gold as a wealth protector given that if the UK referendum, now only a week away, should result in a Leave vote – the Brexit option – there would be a knee-jerk reaction knocking the pound sterling down sharply against the dollar (perhaps only temporarily so – these things tend to be overdone), while the gold price would likely rise on fears of considerable further economic disruption within the Eurozone and, perhaps, globally – a point now being made by Janet Yellen in her statement on the FOMC meeting deliberations this week.

So what are the chances of a Brexit vote next Thursday?  The UK establishment, which is for maintaining the status quo has really been firing its big guns in a last ditch attempt to ward off separation.  British Chancellor George Osborne has promised an emergency budget likely to raise taxes and cut public spending  should a Brexit vote take place, although whether he would be able to get such measures through a divided Parliament is somewhat less certain.  The whole Remain campaign has revolved around fears of the economic consequences of a Brexit vote, dismissed as scaremongering by those who want the UK to leave.

The Brexiteers on the other hand dismiss much of the presumed economic consequences put forward by the Remain camp as hugely over-exaggerated and have largely based their campaign on the perhaps more emotive issues of regained sovereignty and the cessation of uncontrolled immigration from EU member states which has become significant with poorer countries joining the EU, and more in the pipeline.  It does seem that there may be a growing number of people prepared to put up with some adverse economic consequences in order to regain these controls.

In short it pretty well boils down to head versus heart.  A trade-off between the economic argument which mostly suggests remain and the sovereignty one which suggests leave.  The latest polls suggest the Leave camp may be winning, but overall it is too close to call and could go either way.

A Brexit (Leave) vote would likely give a big boost to the gold price as it suggests a longish period of geopolitical uncertainty as Europe tries to get to grips with the decision, given it would give heart to the already growing anti-EU sentiment in countries like France, Spain and Italy in particular.  A remain vote might cap the gold price for a time – even bring it down a few pegs – but in our view gold’s fundamentals remain strong and it would be unlikely to do  lasting damage.

The above is an edited and updated version of  one first published by me on info.sharpspixley,com precious metals news site

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SPDR gold ETF takes gold price to overhead resistance

Gold Today –Gold closed in New York at $1,274.40 on Friday, rising in Shanghai, as you see below and in London at the opening on Monday morning to over $1,280.

The $: € moved from $1.1268 to $1.1299 over the weekend. The dollar index is standing at 94.50 up from 94.20.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  06  13

2016  06  08

SHAU

SHAU

270.31

263.94

271.99

264.66

Dollar equivalent @ $1: 6.5860

$1: 6.5756

  $1,276.58

$1,248.47

$1,284.52

$1,251.88

Shanghai has set the pace for London and New York at the start of the week, rising a full $10 over New York’s close. London is holding it there.

The Yuan continues to weaken, as expected, while the Japanese Yen is being sought as a place to escape the dollar, the pound sterling and the euro.

LBMA price setting:  $1,284.10 up from Friday 10th June’s $1,266.60.

The gold price in the euro was set at €1,139.60 up from Friday’s €1,120.98

Ahead of New York’s opening, the gold price was trading at $1,285.80 and in the euro at €1,141.82.

Silver Today –The silver price closed in New York on Friday at $17.30, up from Thursday’s $17.05 a rise of 25 cents. Ahead of New York’s opening the silver price stood at $17.37.

Price Drivers

The Yen appears to be the currency haven of choice for money escaping a weakening euro, a slightly stronger dollar, a falling Yuan and a much weaker pound. Gold is attracting ongoing attention from U.S. investors rising to above overhead resistance this morning. We are waiting to see if it can hold above $1,280.

While we are sure you have been overwhelmed by the endless discussion on “Brexit” the next fortnight is going to see it increase heavily. While we have been fed polls that indicated a close result between the ‘in’ side and the ‘out’ side, current polls point to an exit. It seems that, as in the U.S. the politicians have misunderstood the electorate, focusing on the financial aspects of the issue and not on the immigration policies that have affected the electorate the most.

The financial aspects of the issue are extremely important and could prove devastating, in the short-term, for the U.K. We can remember the time when the U.K. underestimated the moves by the U.S. to cut the link between gold and the dollar. It was 1971 and the ‘Dollar Premium’ was ushered in. The author of this report was appointed a currency dealer to handle the ‘new currency’ at the time. Maybe his skills will be needed again? We believe the capital that has already left the U.K. is close to, if not above, 100 billion pounds.

The markets are currently being positioned for either eventualities, but with the greatest downside coming from the exit result. The influence on financial markets of the polls is strong, but we still expect to see major moves in them, if the U.K. votes for the exit.

We do expect all financial markets to be volatile ahead of the vote and more so when the situation is set against a global scene that had already produced disaster warnings from bodies like the IMF and the World Bank as well as from names such as Greenspan and Mervyn King, ex-head of the Bank of England. We have focused on the vote and its potential impact on markets, but we have not factored in a potentially devastating set of ‘ripple’ effects!

The scene is gold positive and consequently silver positive.

Gold ETFs – On Friday the holdings of the SPDR & gold Trust rose as 6.535 tonnes was purchased into the gold ETF, leaving its holdings at 893.918. No purchases or sales were made in the Gold Trust, leaving its holding at 196.90 tonnes.

These purchases are sufficient to move the gold price in the U.S. as we saw and see now. Just remember that none of this demand can be met out of Chinese production or arbitrage out of China. It all comes out of London and any new supply left that is routed through London.

Silver –We are seeing the pause we forecast last week in silver prices as it continues to mark time in a tight trading range ar0und $17.35. It should make a strong move shortly, either way.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

When the market understands the data, we’ll see the price of gold and silver finally take off. – St Angelo

Mike Gleason of Moneymetals.com interviews Steve St. Angelo of the SRSrocco Report. (Transcript)

Steve shares his top-notch research on some alarming trend changes in silver supply and explains how and why the debt bubble is eventually going to burst and why he believes gold and silver will be the assets to own when it all unravels.

 

Steve St. Angelo

Mike Gleason: It is my privilege now to welcome in Steve St. Angelo of The SRSrocco Report. Steve is an independent researcher and investor who follows the precious metals and energies markets like few others, and has one of the very best content based websites in our entire industry. Steve, welcome back, it’s good to talk to you again.

Steve St Angelo: Yeah Mike, looking forward to the conversation.

Mike Gleason: To start out here, Steve, it’s been several months since we spoke last, so give me your take on the action in the metals here this year, specifically what’s driving the recent pullback from the late April highs in gold and silver.

Steve St Angelo: Well I think what the number one factor that caused the big jump in not only physical, but also ETF, mostly gold ETF demand was the big crash in the market, the big correction, 2,000 points (in the DOW). What was interesting about this, this time around, there was like 364 tons that flowed into gold ETFs just in the first quarter. You’ve got to go back all the way to 2009, during the first quarter 2009, when the DOW was crashing to like 6,600, I believe 50 tons went into gold ETF that quarter, because investors were scared to death. Well it only fell 2,000 points Mike, and investors flocked into the gold ETF like the world was falling apart.  On a regular, let’s say, 10 or 15% correction. So this time around, investors were very worried that this was going to be the big one.

Well it didn’t happen. By the time April came around, the markets recovered and sentiment has changed. Another thing that is on the back of gold and silver prices is the huge commercial short positions. They have increased to record highs as of a week or 2 ago, so investors are looking at that. Now what we needed to do was break through $1,300 gold, and $18 silver. That may have pushed a lot more stress on the commercials. We almost got there, but it seems as if that was the line that commercial banks used, and we had some huge $2, $3 billion gold knockdowns in a few minutes on several days, and that did it. And so this is where we’re at now, and so sentiment is much lower because we didn’t get passed those $1,300 gold and $18 silver marks. Now we’re waiting to see how these commercial shorts play out and what happens going forward. That’s how I see the market right now.

Mike Gleason: Definitely want to talk to you a lot about the supply side of things. You cover that so closely and have so much great content on that. You recently broke down the massive increase in demand for the Silver Eagles and Silver Maple Leafs and pointed out that the combined annual silver mine production between the U.S. and Canada is short of all the ounces needed each year to mint these 2 coins, which is a big shift from 10 or 15 years ago. Talk about this here, Steve, what did you learn in your research and what conclusion did you draw there? Because this is a very interesting development in the supply/demand dynamic here in North America.

Steve St Angelo: I do think it’s important for your readers to understand, we need to focus more on the mid to long term fundamentals, because fundamentals always win out in the end, even with market manipulation. And we’ll get into that towards the latter part of the interview. In 2001, U.S. and Canada was producing a little more than 95 million ounces of silver, and Maples and Silver Eagle sales were like 9 million, so it was less than 10% of overall production. Like you said, 2015, mine supply was 47 million. It fell by half, but just the demand from Silver Eagles and Maples, it was 81 million last year. It was like 33, 34 million ounces more than the Canadian and U.S. mine supply.

Back in 2001, they had extra silver they could use for industrial purposes, jewelry, silverware, but now they have to import 33 million ounces of silver just to cover the U.S. Eagle and Maple Leaf programs. That’s phenomenal. So it’s the ongoing trends that we’re looking at. The North Americans, for some reason, they like to collect silver coins, where in Asia, or let’s say India, it’s more silver bar. So we’re seeing a lot more coins, even rounds, being purchased by North Americans. That’s what’s driving the investment market. I think going forward, we’re going to see much higher, I would say maybe 90 million ounces of combined U.S. Eagle and Silver Maples this year. And I think production will be about the same, so it’s going to be maybe another 7, 8 million deficit just for that. That’s huge, Mike.

Mike Gleason: Yeah, and one of the things I found really interesting was the report you did recently highlighting how global investment demand for physical silver bullion products has gone from being a mere 8% of what industrial demand was 10 years ago to now half of what global industrial demand is. And we’re not seeing a big drop off in industrial demand, necessarily, although it is down a bit. Who knows, Steve, at this rate, we could soon see more silver production needed for investment purposes than is needed for industrial applications. That’s truly mind boggling based on where we’ve been. What are your thoughts here?

Steve St Angelo: If we look at 2005, 6 and 7, investment demand, which is physical bar and coin, was 8%, for each of those years, 8%. Then 2008 came around and things changed. What happened? We had the first collapse of the U.S. banking and housing market. I call it the first because the second one is still on its way. They’re doing everything they can to keep that from happening, but they can’t do it forever. In 2008, it jumped to 29% that year. And now, GFMS has recently included, in their data, privately (minted) rounds and bars. They did not include that before. They couldn’t get a good figure. What they did is they included it this year in their 2016 world silver survey for 2015 data. It really jumped, I think, 40 to 50 million ounces of silver bar and coin demand last year. So they actually had to revise their figures for 2014, 13 and so on. And so that is what really pushed up investment demand, which is now 50% of industrial demand.

Now here’s the thing: the reason why we got off of the silver standard back in the 60s, was silver became too valuable to use in currency. It’s really that’s what happened, because we were using so much in industry, we couldn’t do both. We couldn’t have silver coinage and (silver needed for) industry, as well as jewelry and silverware. There just wasn’t enough silver. What they did is they took it out of the coin, because it would actually push up the price of the coin too. Now we’ve been using industry, which has been devouring silver, and half of it is gone forever. Now I do see, at some point in time, if we just had a doubling of last year, it would surpass, if we had a doubling of silver investment where institutions really came in, like investors were worried in the first quarter this year. Once we get a big crash in the markets, just a doubling from the almost 300 million ounces of bar and coin last year, to 600; it would surpass industrial demand, and because silver and gold are real money. So I do see, at some point, the demand will really surge and I don’t think they will be with the supply, Mike.

Mike Gleason: Furthering the point here, you’ve been following the supply deficit in silver for a long while, and I want to get your comments on the Thomson Reuters statistics on global silver supply and demand here, Steve. You recently reported on a revision that makes the deficit in supply worldwide much larger than originally published. So the market has been able to run for more than a decade with this persistent shortage, yet prices, while quite a bit higher than 10 or 15 years ago, they’ve been lower for the last 5 years. So what gives there?

Steve St Angelo: In just a few months, let’s say 6 months, they revised a little more than a billion ounce deficit since 2004 to almost to 1.3 billion ounce deficit. So it was a little less than 300 million ounces they added to the deficit. Now I’ve had an email exchange with the head GFMS silver analyst and I asked, I said, “I’ve heard that there were deficits early in the 1980s and 1990s.” They sent me the actual supply/demand and deficits since 1975. And if I look at all of them, there were surpluses in the 80s, and there were surpluses especially in the 90s when investors dumped a lot of bar on the market in the middle of the decade, because they thought prices would recover, but they never did. So there were surpluses in the 80s, surpluses in the 90s, and it turned out to be about 1.6 billion ounces. That’s from both of those decades.

Well guess what? From 2000 to 2015, it’s been a 1.6 billion ounce deficit. So in all actuality, this last 15 years we’ve been living on the surpluses of the market in the last 2 decades prior. So why hasn’t that impacted price? Well because the market is rigged. The market is totally rigged. Why is the DOW going up when we’re getting the worst fundamental data coming out? It is a very strange market, but unfortunately, just like Bear Stearns, Bear Stearns was a company that imploded, and so did Lehman Brothers, in no time. But the fundamentals, to understand that they were weak and that they weren’t worth their stock price and that they were bankrupt, that was known probably 2, 3 years before if you really understood the data.

And this is the issue we’re dealing with now. Silver and gold are undervalued because the market really doesn’t understand the data. When the market understands the data, and when the real fundamentals kick in, it will be reverse Lehman Brothers, reverse Bear Stearns, and that’s when we’ll see the price of gold and silver finally take off.

Mike Gleason: Obviously with the increase in investment demand here, we’re seeing a lot of metal flow over to the East, maybe leaving weak hands in the West, going to strong hands in the East. And that metal’s likely not to come back anytime soon, so maybe there are more products going into investors’ hands, but they’re not going to necessarily be willing to give that up unless we see significantly higher prices. I have to think that that’s going to be a big part of this as well, is that in order to draw that product back on to the market, if somebody’s going to sell it at a profit, they’re going to need to see significantly higher prices before they do that, because we are seeing a lot of metal go into very strong hands. Do you see it the same way?

Steve St Angelo: Oh yes, and we have to remember, look what happened in 2011, when the average annual price of silver was over $35, even though we had high silver scrap supply come into the market. It was about 240 million ounces, that was it, that’s all that came on the market was 240 million ounces and it was all absorbed. So even if the price doubled to $100, if we saw that price, I actually think we could see less scrap. Because here’s the issue: when people have a gold coin, and when Americans bought a lot of gold jewelry in the late 1990s and early 2000s, they bought a lot of gold jewelry because the price of gold was low and things were going good for them back then. So Americans used it for adornment and bragging purposes, where Indians use it for a nest egg. It’s like their retirement, their wealth. Where Americans use it to show that they’ve got a nice gold ring. People will take that gold, and they will get it pawned, because it’s worth the effort to go to the pawn shop and get $500 or $800 for it.

But a silver ring doesn’t have an ounce of silver in it. Even if at $100, you’re not going to go down to the coin store, or the jewelry store, and pawn it for like $40. This is the reason why jewelry is not really recycled in silver. Whereas gold jewelry is, because the price is so much higher. So I don’t see a huge increase of supply coming into the market. And even if prices really move higher, and even if it does Mike, I think it’s going to be absorbed. It will be absorbed very rapidly because gold and silver will be the go to assets to own in the future.

Mike Gleason: Certainly, if recycling is not going to necessarily increase substantially with higher prices, then where’s that supply going to come from. We know that mine production, of course it takes a long time for mines to sort of get things ramped back up. A lot of them are shuttering mines right now, going on care maintenance. And it doesn’t just happen immediately to bring those back online as prices rise. I want to talk to you about the DOW-Silver ratio. You’ve been doing some studies on that. What have you learned through that research Steve, the DOW-silver ratio?

Steve St Angelo: Well I think this is important because we don’t realize how out of whack everything is, Mike. Back in 1980, when silver hit $49, and it also hit $49 in May of 2011, 30 something years; the difference was the DOW Jones was 864 points in the first quarter of 1980. It was like, I think it was like the 12 or 13,000 range in 2011. So the DOW Jones silver ratio, 1980, was 25 to 1. And then over the next several decades, it really went high, it was 2,500 in June 2001. So you could buy a hundred times more silver in 2001, compared to the DOW Jones, than you could in 1980. Well when the prices really increased in 2011, it fell to 250 to 1, the DOW Jones to silver ratio fell to 250 to 1. It fell 10 times. Now it’s about 1,000 to 1.

The thing I want your readers to understand is this: as the DOW Jones increased 21 times its value since 1980, U.S. debt has increased 22 times. And the total U.S. retirement market has increased 25 times. So when you figure all those together, all those assets, the DOW Jones and the U.S. retirement market; they all increased almost the same amount as the debt has increased. So all those assets out there are debt assets. They’re not real assets. An asset is something you can sell. Retirement accounts and the DOW Jones are claims on future economic activity. And as I’ve told you about my energy analysis, we’re peaking in U.S. oil production, and it’s just going to get worse from here. So the market has funneled assets from physical assets back in the 1970s and 80s, into paper assets, which are the DOW Jones, which are U.S. treasuries, which are the retirement market, and it’s all backed on debt. There’s no coincidence that all these paper assets have ballooned 20 plus times on the back of U.S. debt increasing 22 times. This is the issue.

And investors don’t realize it, Mike, that they’re invested in claims. They’re not invested in assets. And silver, the average price was $30 in the first quarter of 1980. It’s $16 today. If investors had been putting their money, instead of in a retirement account, which is a Ponzi scheme, and they had put it in gold and silver, the values of gold and silver would have been much higher today. And the retirement market, or the DOW Jones, would have been much less. That’s the problem. This is what’s happened over the past 3 decades.

Mike Gleason: Speaking of energy, you alluded to it there a moment ago, anyone who visits your site, Steve, will see the acronym EROI, which stands for Energy Returned on Invested. I want to explore this with you for a minute here, and have you explain that to our listeners, but before we go any further, I want to read an excerpt from an article you put out this week related to this subject and then I’ll get your comments. You wrote:

“Folks, it won’t matter how much money is floating around in the future as energy production plummets. Who cares if there are trillions of M2 or M3 outstanding,”… and you’re talking about the money supply there…  “When we won’t have enough energy to continue running a system that only can function by a growing energy supply. To base the future value of gold on outstanding currency is folly.

Which is precisely why I label gold and silver as investments. They’re value will surge as most paper and physical asset values collapse. The reevaluation of gold and silver will occur well beyond the collapse of fiat money. They will also rise in value due to the disintegration of most physical and paper assets. This is well beyond the scope of money or insurance.”

So please give us a brief explanation of EROI, in layman’s terms, and then expand on the excerpt I just read and tell us why you believe this is all going to point to much higher gold and silver prices.

Steve St Angelo: Yeah Mike, my analysis is different than most of the precious metals analysis, because they look at the Austrian School of Economics, and they look at the money supply. Jim Sinclair, and even Jim Rickards, they forecast $10,000, $15,000, $20,000, $30,000 gold based upon how much money supply is out there. As you stated in that quote, it won’t matter how much M1 or M2, or M3 is out there if energy production declines. And so we have to remember, the huge debt that we have now is $20 trillion. That’s just public and private. I call that energy debt. The problem we have now, and it’s all based on the energy return on invested, and simply, the energy return on invested means how much energy you put in to get energy out.

And when this country first started getting into producing oil, it was high, it was 100 to 1. So when we put one barrel of energy out, we burned one barrel of energy, we’d get 100 barrels in the market. It has fallen drastically. In the 1920s, 1 barrel found 1,500 barrels. Now it’s 5 to 1. As a matter of fact, ConocoPhillips, because the price is so low, ConocoPhillips is actually excluded exploration, and they’ve stopped all exploration. ConocoPhillips is the third largest oil company in the United States. They’re finding now 5 to 1, but I think that’s even going to fall. The energy return on invested is really declining. The shale oil industry is 5 to 1, where it used to be 100 to 1. In 1970 it was 30 to 1.

So our economy, our modern society, needs something 12 to 1 energy returned on invested, and shale oil isn’t paying the bills. Deep-water is like 10 to 1. We are in big trouble. Let me tell you how much trouble we’re in. The U.S. energy sector is facing $370 billion in debt. And last year, they paid almost $17 billion of their operating profits just to pay the service, the interest on their debt. Not to pay the debt down, just to pay the interest on the debt. Well it was even worse in the first quarter of this year. It was 86% of their profits went just to pay the interest on the debt.

Now yes, the oil price has gone up a little bit, but the reason why the oil price has gone up a little bit is because China is absorbing a lot. They have increased their strategic reserve. The world isn’t consuming all this oil, some of it is being stockpiled at these cheap prices. So I don’t think we’re going to see higher prices. We could see lower prices here, once China finally fills up their reserve. So the thing is, going forward, U.S. oil production is already down almost a million barrels since its high last year. A million is gone, and it’s not coming back. We can’t afford higher oil prices, either. That was a 3, 4 year phenomenon because of 0% interest rates and money printing. It might go on a little bit longer, but the debt now is too high, Mike. This is a problem.

The debt in the energy industry, as I just explained to you, and the debt in the system is too high. It’s $6 of debt to get $1 of GDP. It’s a disaster. Now how long can this go on? It could probably go on a little bit longer, but the fundamentals will kick in, and when those fundamentals kick in, by gosh, if you’re in paper assets, and if you’re in real estate; you’re going to be in trouble. Because paper assets are going to implode, and real estate prices are going to implode because they’re going to be sunk assets, because you can’t run a huge suburban economy on 20, 30, 50% less of the energy you use to running it. That’s going to impact real estate prices.

I’ve been saying this in interviews with you over the past year or 2, but it just gets worse going forward, and investors don’t see this. Most investors don’t see it, but it’s going to make its way, and when it does make its way, again, that’s why I think the best liquid assets to own are physical gold and silver, and they are investments. They will be much more than just money. And that’s how I see it.

Mike Gleason: Yeah it’s a very fascinating outlook and take on everything. That’s one reason why we like to have you on so much. You bring a very unique perspective there, one that a lot of people are not considering and I always enjoy talking to you about that. Well before we let you go, Steve, if you can let our listeners know how they can learn a little bit more about The SRSrocco Report, what they’ll find there, and then any parting words before we close.

Steve St Angelo: At The SRSrocco Report, we put out about 2 or 3 articles, mostly on precious metals, mining and then I include energy, even though, unfortunately, when I do an energy article, the reads are maybe 10%, 15% of the precious metals, but actually it should be the other way around. The energy is the driver. If a person is sick, if they say, “I’m deathly sick. I can’t get out of bed.” You don’t have the energy. You have the flu, it takes you out. You can’t get out of bed. You can’t go to work. You have to have the energy to get out of bed. You have to have the energy in your car, the gasoline, to get you to work. And you have to have the energy that actually runs the whole system. Unfortunately, solar and wind and renewables; they don’t work. They’ll never work. On an individual basis, it’s probably wise to have solar on your home, if the grid goes down, but on large scale, they don’t work. They won’t ever work, unfortunately. I’ve done the math on them.

So in the future, your readers and listeners should continue looking at the fundamentals. And the fundamentals are showing us more people are getting into the metals, even though the price doesn’t show it. And the energy situation, it continues to get worse. And so with the debt now on the system, it’s going to be hard for the establishment to continue business as usual. I don’t know how long this will continue, but each 6 months, each year; it just gets worse. And the best thing to do is to purchase precious metals physically, on an ongoing basis just like your retirement account. Instead of having claims, or IOUs, in an account, it’s better to have stored economic energy in a gold or silver coin or bar in a place of safekeeping. And that’s how I see the thing going forward, Mike.

Mike Gleason: We both agree that we don’t know exactly when the system is going to collapse, but it certainly looks like we’re headed that direction. And it’s probably just a matter of time. It’s all very enlightening stuff. More people need to wake up and recognize what’s going on here, and I think you’re a big part of that Steve. Thanks for all the work that you do there. We appreciate your time as always, and hope you have a great weekend. Look forward to catching up with you again soon.

Steve St Angelo: All right Mike, always a pleasure. Thank you.

Gold and silver futures markets like a rigged casino

By Clint Siegner*

 

A respectable number of Americans hold investments in gold and silver in one form or another. Some hold physical bullion, while others opt for indirect ownership via ETFs or other instruments. A very small minority speculate via the futures markets. But we frequently report on the futures markets – why exactly is that?

Because that is where prices are set. The mint certificates, the ETFs, and the coins in an investor’s safe – all of them – are valued, at least in large part, based on the most recent trade in the nearest delivery month on a futures exchange such as the COMEX. These “spot” prices are the ones scrolling across the bottom of your CNBC screen.

Future Markets

That makes the futures markets a tiny tail wagging a much larger dog.

Too bad. A more corruptible and lopsided mechanism for price discovery has never been devised. The price reported on TV has less to do with physical supply and demand fundamentals and more to do with lining the pockets of the bullion banks, including JPMorgan Chase.

Craig Hemke of TFMetalsReport.com explained in a recent post how the bullion banks fleece futures traders. He contrasted buying a futures contract with something more investors will be more familiar with – buying a stock. The number of shares is limited. When an investor buys shares in Coca-Cola company, they must be paired with another investor who owns actual shares and wants to sell at the prevailing price. That’s straight forward price discovery.

Not so in a futures market such as the COMEX. If an investor buys contracts for gold, they won’t be paired with anyone delivering the actual gold. They are paired with someone who wants to sell contracts, regardless of whether he has any physical gold. These paper contracts are tethered to physical gold in a bullion bank’s vault by the thinnest of threads. Recently the coverage ratio – the number of ounces represented on paper contracts relative to the actual stock of registered gold bars – rose above 500 to 1.

Comext Gold Cover Ratio

The party selling that paper might be another trader with an existing contract. Or, as has been happening more of late, it might be the bullion bank itself. They might just print up a brand new contract for you. Yes, they can actually do that! And as many as they like. All without putting a single additional ounce of actual metal aside to deliver.

Gold and silver are considered precious metals because they are scarce and beautiful. But those features are barely a factor in setting the COMEX “spot” price. In that market, and other futures exchanges, derivatives are traded instead. They neither glisten nor shine and their supply is virtually unlimited. Quite simply, that’s a problem.

But it gets worse. As said above, if you bet on the price of gold by either buying or selling a futures contract, the bookie might just be a bullion banker. He’s now betting against you with an institutional advantage; he completely controls the supply of your contract.

It’s remarkable so many traders are still willing to gamble despite all of the recent evidence that the fix is in. Open interest in silver futures just hit a new all-time record, and gold is not far behind. This despite a barrage of news about bankers rigging markets and cheating clients.

Someday we’ll have more honest price discovery in metals. It will happen when people figure out the game and either abandon the rigged casino altogether or insist on limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals in the physical metal itself may be a step in that direction. In the meantime, stick with physical bullion and understand “spot” prices for what they are.

Prospects for gold and silver brightening by the day

Gold TodayGold closed in New York at $1,273.70 up from Thursday’s $1,268.50. On Monday morning in Asia it rose to $1,280, as the Yuan slipped further against the dollar, before the LBMA price setting in London.

LBMA price setting:  $1,281.00 up from Friday’s $1,275.15.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  16

2016  04  13

SHAU

SHAU

268.68

266.05

269.39

267.51

Dollar equivalent @ $1: 6.5492

+$1: 6.5407

$1,276.02

$1,265.17

$1,279.39

$1,272.11

Once again, Shanghai led the way higher after a lower New York close. The Gold Fixing in Shanghai’s morning was $2.32 higher than New York’s close but again rose at the afternoon Fix to a price close to London’s morning LBMA price setting.

The gold price is still in a tight trading range and still dominated by exchange rates. It remains at a point where a strong move will take place, but whether it is today or later this week remains to be seen.

The dollar index is almost unchanged at 94.53 up from Friday’s 94.33. The dollar is also slightly stronger against the euro at $1.1325 up from Friday’s $1.1348.

The gold price in the euro was set at €1,131.13 up from Friday’s €1,123.68.

Ahead of New York’s opening, the gold price was trading at $1,286.40  and in the euro at €1,135.22.  

Silver Today –The silver price closed in New York on Friday at $17.10 lower than Thursday’s $17.07. Ahead of New York’s opening the silver price stood at $17.33.

Price Drivers

The drivers of the gold and silver markets are primarily exchange rates, which are currently moving against a backdrop of waning global growth. Since 2008 the prime engines trying to bring about a recovery have been central banks using monetary policies. These have produced limited results that, to us, are in the process of losing effectiveness. Their efforts are to be commended particularly considering they were not designed to do the job, just support government when they did the job. But the track record of governments, whether it is the U.S., E.U. or Japan is very poor. Consequently, after 8 years since the credit crunch, recoveries are weak, debt levels higher than in 2008 and prospects for the global economy are uncertain. All of this synthesizes in the monetary system which is in the process of changing to a multi currency system from dollar hegemony. The ruptures these will cause are close now but have yet to be felt fully.

These are the reasons why the prospects for gold and silver are brightening by the day and why institutional investors of note are lauding gold’s qualities. The uptrend in gold and silver has started, but has yet to move into second gear. We are close to that happening now.

Gold ETFs – Friday saw purchases of 5.943 tonnes of gold bought into the SPDR gold ETF and 0.6 of a tonne into the Gold Trust. This leaves their holdings at 851.132 and 198.38 tonnes in the SPDR & Gold Trust, respectively.  

This was a substantial purchase and one that should have moved the gold price more. It was recognized in Shanghai where gold prices did rise. The continuous buying of the shares of gold ETFs this year is significant and starting to be recognized by the large institutions, who are now joining the view that gold has moved to the uptrend after nearly three years of low prices.

Silver – Repeat: The Silver price continues stable and keen to move behind the gold price.

Shanghai leads gold price up, New York brings it back down – again!

Gold TodayGold closed in New York at $1,268.50 down from Wednesday’s $1,277.70. On Friday morning in Asia it rose to $1,274, as the Yuan steadied against a dollar at yesterday’s levels, before the LBMA price setting in London.

LBMA price setting:  $1,275.15 up from Thursday’s $1,268.30.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  13

2016  04  12

SHAU

SHAU

266.05

266.98

267.51

266.50

Dollar equivalent @ $1: 6.5407

$1: 6.5414

$1,265.17

$1,269.45

$1,272.11

$1,267.17

Once again, Shanghai led the way higher after a lower New York close. The Gold Fixing in Shanghai’s morning was $3.60 lower than New York’s close but rose at the afternoon Fix confirming higher demand in Shanghai.

We still need a few days of price disparity to see who’s leading whom.

The gold price is narrowing its trading range but still dominated by exchange rates. It is also possible that both London and New York are not keen to stray far from Shanghai’s trading range either.

With Friday being the busiest day of the week, we will be watching to see if this is so.

Why is Friday the busiest day of the week? It’s because traders don’t just face a risk for one day but for three days, so trim their positions accordingly. For instance, if traders closed short positions and opened long positions to be ready for the weekend, in a market like today’s, where demand and supply are moving into balance, such changes could cause a strong move higher in the gold price and silver prices.

At this point in time the gold price could go either way in a strong move according to the Technical picture, in the very short term.   

The dollar index is almost unchanged at 94.33 up from Thursday’s 93.96. The dollar is also almost unchanged against the euro at $1.1348 up from yesterday’s $1.1409.

The gold price in the euro was set at €1,123.68 up from Thursday’s €1,111.67.

Ahead of New York’s opening, the gold price was trading at $1,275.8.00 and in the euro at €1,123.81.  At open, as has been the recent pattern, the price was brought back down quite sharply again.

Silver Today –The silver price closed in New York on Wednesday at $17.07 lower than Thursday’s $17.39. Ahead of New York’s opening the silver price stood at $17.12.

Price Drivers

As highlighted by the World Gold Council’s first quarter report demand for shares in the gold Exchange Traded Funds was massive and wiped out all the losses suffered in 2014 and 2015. This represents an about turn in U.S. institutional investor’s views on the gold price. This demand is continuing in the second quarter too.

Indeed, more and more U.S. institutional and private investors are turning to gold and silver now, as the global economy’s prospects dim.

In the E.U. an overall growth rate of 0.5% is being heralded as the first real recovery since 2008, topping the figures seen then. We would suggest that this is somewhat of a myopic view to encourage all, but ignores some broad, global fundamentals. If the markets believe the media ‘spin’ we will see a stronger euro. So far we haven’t!

 

Will the “Brexit” debate affect gold and silver prices? We don’t think so, unless or until it is certain Britain will leave the E.U. If the U.K. does vote to exit, there will be no impact on these prices. If they do, we are being warned of a plunging pound, a U.K. recession and the potential that other countries will leave too. But that is still a month away.

Gold ETFs – Thursday saw another 3.269 tonnes of gold bought into the SPDR gold ETF but nothing into the Gold Trust. This leaves their holdings at 845.189 and 197.78 tonnes in the SPDR & Gold Trust, respectively.  

Silver – The Silver price continues relatively stable and keen to move behind the gold price.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Record Q1 gold demand as ETF purchases continue

 

Gold TodayGold closed in New York at $1,277.70 up from Tuesday’s $1,266.40. On Thursday morning in Asia it fell to $1,272.65, as the Yuan continued to weaken against a dollar that held at yesterday’s levels, before the LBMA price setting in London.

LBMA price setting:  $1,268.30 down from Wednesday’s $1,271.80.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  11

2016  04  11

SHAU

SHAU

266.98

266.31

266.50

267.09

Dollar equivalent @ $1: 6.5414

$1: 6.5377

$1,269.45

$1,266.98

$1,267.17

$1,270.70

The Gold Fixing in Shanghai’s morning was just under $8 lower than New York’s close. London’s opening was higher than Shanghai’s afternoon Fix initially telling us that physical demand in China caused the price to stay at levels of the day before. We need a few days of price disparity to see who’s leading whom.

We are also watchful to see if London stays higher than Shanghai as we do in time expect both higher London prices and much more price volatility as liquidity decreases.

Today, again, sees currency exchange rates more or less the same as yesterday leaving gold to show itself almost independently of currencies. We do need more volatility in the gold price to see this clearly, but the Technical picture is showing a narrowing trading range, as it moves to balance above support.

At this point in time the gold price could go either way in a strong move according to the Technical picture, in the very short term.   

The main news today that may affect the gold price is the Bank of England’s meeting at which they will disclose their view on interest rates. In the U.K. the economic data has been poor, so we do not expect a rate hike. The speech that Mr. Carney gives will impact exchange rates and the gold and silver price, today.

The dollar index is almost unchanged at 93.96 down from Wednesday’s 93.98. The dollar is also almost unchanged against the euro at $1.1409 from yesterday’s $1.1411.

The gold price in the euro was set at €1,111.67 down from Wednesday’s €1,120.47.

Ahead of New York’s opening, the gold price was trading at $1,267.35 and in the euro at €1,112.59, but then rallied on some more disappointing U.S. jobs data.

Silver Today –The silver price closed in New York on Wednesday at $17.39 higher than Wednesday’s $17.10. Ahead of New York’s opening the silver price stood at $17.24.

Price Drivers

In the first quarter of 2016 demand for gold grew 21% to 1,289.8 tonnes, the strongest first quarter on record. U.S. views on the gold price have changed dramatically.

Investment demand out of the U.S. was the main driver as we have highlighted in our newsletters. ETF demand was 364 tonnes came into these funds, which more than reversed the cumulative outflows from 2014 and 2015.

The impact on gold prices gave the gold price its best performance in almost 30 years!

Jewelry demand fell sharply on higher prices and market-specific factors.

Central bank buying slowed. As we commented earlier in the week and in our newsletters, such demand absorbs the ‘slack’ in the market and does not chase prices. Hence they would have held back. Chinese central bank demand would, in particular be affected. Russia and Kazakhstan take local production into their reserves so these do not reach the global market.

Indian consumers hamstrung. Indian demand appeared to be being stifled because of the jeweler’s strike against the imposition of the 1% Excise duty. As we have commented before in our newsletters we are not happy with ‘official’ import figures and ‘official’ demand numbers, because of the well-established, profitable and prevalent smuggling of gold into the country. During the strike we had reports that told us jewelers continued to work, out of sight. Clearly this was with gold bought from smugglers. But such quantities are unquantifiable. With an 11% profit on smuggled gold the volumes by now must be significant.

Gold ETFs – Yesterday saw purchases of 2.674 tonnes of gold bought into the SPDR gold ETF but nothing into the Gold Trust. This leaves their holdings at 841.92 and 197.78 tonnes in the SPDR & Gold Trust, respectively.  

Silver – The Silver price continues stable and keen to move. It is chomping at the bit still.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

 

Gold price slips in NA trading – but gold ETF holdings increasing

Gold TodayGold closed in New York Friday at $1,288.20 up from Thursday’s $1,277.30. On Monday morning in Asia it fell to $1,280.00, as the Yuan continued to weaken against a stronger dollar, before the LBMA price setting in London.

LBMA price setting:  $1,277.75 up from Friday’s $1,2805.25.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  9

2016  04  6

SHAU

SHAU

269.25

267.79

268.27

267.52

Dollar equivalent @ $1: 6.5290

$1: 6.5177

$1,282.68

$1,277.94

$1,278.01

$1,276.65

The Shanghai Gold Fixings today were higher than New York’s close in the morning, but slipped in their afternoon back to around the close in New York, with London around the same level [allowing for the morning’s moves in exchange rates].  

Gold prices have moved only by a little amount, through the three centers, in the tight range of $1,277- $1,280. We continue to expect a strong move, once the gold price moves outside this range. We continue to expect the driving forces behind the gold prices to be exchange rates.

The dollar index is at 94.02 up from Friday’s, at 93.60. The dollar is stronger against the euro at $1.1387 up from $1.1426 on Friday.

The gold price in the euro was set at €1,120.47 up from Thursday’s €1,116.04.

Ahead of New York’s opening, the gold price was trading at $1,274.60 and in the euro at €1,119.34, but slipped further as U.S. trading got under way.  

Silver Today –The silver price closed in New York on Friday at $17.45 higher than Friday’s $17.34. Ahead of New York’s opening the silver price stood at $17.24.

Price Drivers

The jobs numbers from the U.S. last Friday were disappointing. In this environment it is most unlikely that we will see rate hikes anytime soon. Our view was that a maximum of two rate hikes would be seen in 2016. We continue to hold that view but if we are wrong it is more likely that there will be only one, or none. The ‘data’ will dictate how many! What is for sure is that if there is no rate hike in June, U.S. demand for gold will rise again.

China’s reserves of gold rise – China increased its gold reserves by 10.89 tonnes last month. We have come to expect around 21 tonnes a month increases over the last few months. We don’t think there has been a change in policy. As these reserves come mainly in the form of 400 oz bars, they would have to have been bought on the London market. We see China’s policy as taking what’s offered to them by dealers, so as to not chase prices. With the heavy U.S. demand ongoing, it may be that there was little on offer.

On top of that it is becoming clearer that not only is New York very low on physical gold, but London is moving that way. It appears that London is becoming more like COMEX every day, dealing in ‘paper gold’ on contracts that are closed out before they mature. That negates the need for physical gold.  

With Shanghai being a physical gold market, the osmotic pressure from China is on London and is slowly draining gold liquidity there. If this continues, there will come a time when London loses its pricing power and passes it to China. And that may be sooner than we think!

Gold ETFs – Friday saw purchases of 4.754 tonnes of gold bought into the SPDR gold ETF and another 1.05 of a tonne bought into the Gold Trust. This leaves their holdings at 834.194 and 196.43 tonnes in the SPDR & Gold Trust, respectively.  

The purchases of the last three business days totaled over 15 tonnes into these two gold ETFs and should continue to have a positive impact on the gold price.  HSBC, the custodian of the SPDR gold ETF has to buy physical gold in London when SPDR shares are bought, but when selling happens, they have a choice of where to sell, London of Shanghai. They cannot buy in Shanghai for U.S. delivery.

Silver – The Silver price continues stable and ready to move. It continues to mark time, waiting for gold to lead the way.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold and Silver steady ahead of a move

Gold TodayGold closed in New York at $1,277.30 yesterday down from $1,279.20 on Wednesday. On Friday morning in Asia it rose slightly to $1,279.10, as the Yuan continued to weaken against a slightly stronger dollar, before the LBMA price setting in London.

LBMA price setting:  $1,280.25 up from Thursday’s $1,275.75.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  6

2016  04  5

SHAU

SHAU

267.79

267.79

267.52

268.02

Dollar equivalent @ $1: 6.5177

$1: 6.5077

$1,277.94

$1,281.12

$1,276.65

$1,281.00

The Shanghai Gold Fixings today were around the close in New York, but New York barely moved the gold price during yesterday, nor did London.  

In all main global gold markets the gold price has settled around the $1,277- $1,280 area a feature that usually precedes a hefty move in the gold price.

All ‘hard’ currencies are relatively steady together and, by extension, against the gold price.

The dollar index is the same today as yesterday, at 93.60. The dollar is barely stronger against the euro at $1.1426 from Thursday’s $1.1431.

The gold price in the euro was set at €1,120.47 up from Thursday’s €1,116.04.

Ahead of New York’s opening, the gold price was trading at $1,280.40 and in the euro at €1,120.75.  

Silver Today –The silver price closed in New York on Wednesday lower at $17.34 the same as yesterday. Ahead of New York’s opening the silver price stood at $17.34.

Price Drivers

The center of attention today is the jobs numbers from the Fed just after the opening in New York. A figure of 200,000 has been priced in so any deviation from that will be seen in the dollar and in gold prices in the dollar, in particular.

Japan – While Mr. Abe has now made it clear that he will use the G-7 meeting to drum up support for acceptance of policies that directly weaken the Yen, contrary to their agreement not to manipulated currencies for international trade competitive reasons.  

Globally equity markets continue to slide as fears of global growth slipping, increase. Gradually Mr. Draghi’s words, to Germany, calling for structural reform by governments, are being seen as necessary, across the world. Monetary policy has shot its bolt and has few tools left to achieve more than it has.  It is time for government to step in and actively promote growth through fiscal policy. As to whether they can, is a question that may still not be answered! One professional comment today was that the global economy is soon, ‘to sink below the icy waves.’ Against this backdrop gold is becoming more and more attractive.

We will be watching the growth of wages in the U.S., as reported by the Fed.

Gold ETFs – Thursday saw purchases of 3.903 of a tonne of gold bought into the SPDR gold ETF and another 0.6 of a tonne bought into the Gold Trust. This leaves their holdings at 829.44 and 195.38 tonnes in the SPDR & Gold Trust, respectively.  

The purchases of yesterday and the day before, appear to have been made on the basis that the next move in gold is higher. These were around 10 tonnes!

Silver – The Silver price is now stable and ready to move. As we said again yesterday, silver, “may well rise much faster soon, as gold recovers and then we expect to see a ‘shunt’ effect on the silver price.”

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold priced by the weak Yuan, silver retreats

Gold TodayGold closed in New York at $1,287.10 yesterday down from $1,290.00 on Friday. On Wednesday morning in Asia it pulled back to $1,281.00, as the Yuan weakened against a slightly stronger dollar, before the LBMA price setting in London.

LBMA price setting:  $1,280.30 down from Tuesday’s $1,296.50.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  4

2016  04  3

SHAU

SHAU

267.79

269.80

268.02

269.06

Dollar equivalent @ $1: 6.5077

$1: 6.4804

$1,279.90

$1,294.94

$1,281.00

$1,291.39

The Shanghai Gold Fixings today showed only a small change in the Yuan gold price as one would have expected.

Why the fall in dollar terms? You will see the value of the Yuan against the U.S. dollar fell 0.25 of a Yuan.  This made all the difference, as it reflected a slightly strengthening dollar or a weakening Yuan, at a time when most other currencies continued strong, overall, against the dollar.

For those following the Technical picture, this is confusing because you are not following just the gold price any more, but the gold price in dollars. The Technical picture of gold in the Yuan is now very different. So is the Technical picture defining the dollar’s moves against gold or gold against the dollar? The same applies to all other currencies where the Technical picture is different.

Please note that China has been keeping the Yuan stable against the dollar recently, while it weakened against all currencies, but now it seems that China is not averse to weakening the Yuan against the dollar [and more against all other currencies]. As reflected in the gold price in the two currencies the gold price is now moving with the Yuan.

The dollar index is higher today, at 93.25 up from Tuesday’s 92.50. The dollar is stronger against the euro at $1.1475 from Tuesday’s $1.1552.

The gold price in the euro was set at €1,115.73 up from Tuesday’s €1,122.32.

Ahead of New York’s opening, the gold price was trading at $1,275.65 and in the euro at €1,111.68.  

Silver Today –The silver price closed in New York on Tuesday lower at $17.43 down 8 cents from Monday’s $17.51. Ahead of New York’s opening the silver price stood at $17.19.

Price Drivers

The influence of exchange rates is now clearly apparent. The gold price in the euro and the dollar has fallen but was relatively stable in the Yuan. This tells us the Yuan price of gold is dominant today. We need to see if this is so in the next days and weeks before we can be conclusive about this, but that is today’s picture.

We would have thought that yesterday’s 20 tonne purchase into GLD would have had a greater impact on the gold price in dollars, but exchange rates are the dominant factor in the gold price today.

Gold ETFs – Tuesday saw no purchases of gold into the SPDR gold ETF but saw a relatively large amount bought into the Gold Trust of 3.01 tonnes. This leaves their holdings at 824.943 and 191.31 tonnes in the SPDR & Gold Trust, respectively.  

While the Gold Trust purchase was a significant amount for the Gold Trust to see, it was not sufficient to overcome the influence of exchange rates, the Yuan dollar rate in particular.

Silver – The Silver price has retreated strongly , but may well rise much faster as soon as gold recovers and then we expect to see a ‘shunt’ effect on the silver price.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold attacks $1,300 again but falls back. Big purchase into GLD

Gold TodayGold closed in New York at $1,290.00 up from $1,268.10 on Thursday. On Monday morning in Asia it rose to $1,300.00, as the dollar weakened heavily and before the LBMA price setting in London.

LBMA price setting:  $1,296.50 up from Friday’s $1,274.50.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  3

2016  04  29

SHAU

SHAU

269.80

265.25

269.06

265.54

Dollar equivalent @ $1: 6.4804

$1: 6.4798

$1,294.94

$1,270.77

$1,291.39

$1,272.11

The Shanghai Gold Fixings today again show a real rise in the price of physical gold as the number of the Yuan in dollars rose [weakened]. But a significant weakening of the dollar helped the gold price rise to $1,300. The rise in the gold price held in London ahead of the LBMA gold price setting.

Once again the gold price has highlighted the strength of gold in all currencies. It also highlighted the weakness of the dollar and helped investors to see more clearly the impact of increased physical demand for gold as well as just how much currency weakness is reflected in the dollar gold price.

The dollar index is lower today, at 92.50 down from Friday’s 93.88. The dollar is weaker against the euro at $1.1552 from Friday’s $1.1400.

The gold price in the euro was set at €1,122.32 up from Friday’s €1,118.18.

Ahead of New York’s opening, the gold price was trading at $1,297.30 and in the euro at €1,123.00.  But after New York opened it failed to hold the $1,290 level

Silver Today –The silver price closed in New York on Friday lower at $17.51 down from Thursday’s $17.60. Ahead of New York’s opening the silver price stood at $17.58, but along with gold retreated after New York opened.

Price Drivers

Once again, we have seen gold rise in all currencies, but in particular in the significant weakening of the U.S. dollar and continuing demand for physical gold globally. The Technical picture for both gold and silver continues to look positive. The gold price will fight a battle with stale bulls around $1,300, but this may not be a long battle.

Quite rightly, Mario Draghi of the E.C.B. scolded Germany’s passing the blame for poor treatment of savers in Germany on low interest rates coming out of the ECB. He stated that long overdue structural reforms need to be taken to release pent-up growth in Germany. In other words he said the finger pointed at the E.C.B. has three fingers pointed back at the German government. With the dollar falling against the euro, growth in the E.U. will weaken as its competitive devaluation is stymied. After 8 years of relative inaction on reforms, now is the time to act. But will they?

But we cannot ‘blame’ an individual factor for lack of growth. The wave of deflation sweeping across the world is catching all nations. We are watching, not a battle to increase inflation [which is rising] but a battle to stave off deflation. Close to zero growth is testament to the progress in that battle.

The nation fighting the hardest battle is Japan. While it is expected to soon intervene in the currency market to weaken the Yen, the agreement of the G-20 not to manipulate currencies seems to have gone by the wayside. It is negated by the concept that the agreement holds, provided it does not cause a weakening of international trade advantages. The Yen has swung from 76 to the dollar to 122 to the dollar and now is strengthening through 108 to the dollar.

With growth in China around 6% we have to note that such growth is the equivalent of adding the entire GDP of Belgium annually to the Chinese economy. Such levels have to drop as the Chinese economy grows.

Gold ETFs – Friday saw huge purchases of 20.803 tonnes of gold into the SPDR gold ETF and 0.75 of a tonne into the Gold Trust. This leaves their holdings at 824.943 and 188.31 tonnes in the SPDR & Gold Trust, respectively.  

This is the largest purchase we have seen into the SPDR gold ETF since the 18 tonne purchase when gold was at $1150 the turning point for gold to the uptrend.

Silver – The Silver price has been marking time while gold rose over the weekend, so we expect to see a ‘shunt’ effect on the silver price today.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Silver Wheaton: The Ultimate Streaming Service

Frank Holmes, CEO and Chief Investment Officer for U.S. Global Investors expounds on the methodology employed by streaming company, Silver Wheaton, which he views as one of the lowest risk ways of investing in the upturn in precious metals stocks:

Silver Wheaton CEO Randy Smallwood (right) with USGI portfolio manager Ralph Aldis

“There’s a healthy appetite for streams right now.”

That’s according to Randy Smallwood, CEO of Silver Wheaton, who stopped by our office last week during his cross-country meet-and-greet with investors.

Randy should know about the appetite for streams. His company had a phenomenal 2015—“the best year we ever had,” he says—highlighted by two successful stream acquisitions, strong production and fully-funded growth. Silver Wheaton stock is up more than 51 percent for the year. And the company just received the Viola R. MacMillan Award, presented by the Prospectors & Developers Association of Canada (PDAC), for “demonstrating leadership in management and financing for the exploration and development of mineral resources.”

We were one of Silver Wheaton’s seed investors in 2004. In the summer of that year, the company was spun off from Wheaton River, a producer that took its name from a stream in the Yukon where one of its mines, the Luismin property, produced silver. It was founded by Ian Telfer, chairman and CEO of Wheaton River, and the company’s then-chief financial officer, Peter Barnes, who later headed up Silver Wheaton management. My friend, the mining financier and philanthropist Frank Giustra, also had a hand in its conception.

As the only pure silver mining company, Silver Wheaton couldn’t have been founded during a more opportune time. The commodities boom was still young. I remember that when the idea for the company was shared with me, what I found most attractive was that it had virtually no competition.Franco-Nevada, which had been acquired by Newmont in 2001, wouldn’t be spun off for three more years. It was a no-brainer to put capital in this new endeavor.

Wheaton River was eventually bought by Goldcorp—the entire story is told at length in the book “Out of Nowhere: The Wheaton River Story”—and today, Silver Wheaton is the world’s largest precious metals streaming company, with a market cap of over $9 billion.

But Wait, What’s a “Stream”?

A “stream,” in case you were wondering, is an agreed-upon amount of gold, silver or other precious metal that a mining company is contractually obligated to deliver to Silver Wheaton in exchange for upfront cash. (The company’s preferred metal is silver because, as Randy puts it, it’s a smaller market and has a higher beta than gold.) The payment generally comes with less onerous terms than traditional financing, which is why miners favor working with Silver Wheaton (or one of the other royalty companies such as Franco-Nevada, Royal Gold and Sandstorm.)

Overview of Royalty and Stream Financial Model
click to enlarge

Streaming allows producers to “take the value of a non-core asset and crystallize that into capital they can invest into their core franchise,” Randy explains in a video prepared for the PDAC awards.

With operating costs mounting and metals still at relatively low—albeit rising—prices, royalty and streaming companies have become an essential source of financing for junior and undercapitalized miners. Between 2009 and 2014, operating and capital costs per ounce of gold rose 50 percent, from $606 to $915 per ounce, according to Dundee Capital.

Gold and Silver at 15-Month Highs

Paradigm Capital estimates that between 80 and 90 percent of global miners’ operating costs are covered when gold reaches $1,250 an ounce. The metal is now at this level—it’s currently at $1,298, up 22 percent so far this year—but as recently as December, prices were floundering at $1,050, which cut deeply into producers’ margins.

Royalty and streaming companies, on the other hand, get by with a materially lower cost of $440 an ounce.

From only 11 stream sales in 2015, miners collectively raised $4.2 billion, which is double the amount they raised in 2013.

These partnerships are a win-win. The miner gets reliable, hassle-free funding to cover part of its exploration and production costs, and the streaming company gets all or part of the output at a fixed, lower-than-market price. A 2004 streaming arrangement made with Primero on the San Dimas mine in Mexico entitles Silver Wheaton to buy all of its silver for an average price of $4.35 an ounce. With spot prices now at more than $17.89 an ounce, up 29 percent year-to-date, the San Dimas property is one of Silver Wheaton’s more lucrative assets. (The mine represents an estimated 15 percent of Silver Wheaton’s entire operating value, according to RBC Capital Markets.)

As part of its contracts, Silver Wheaton gets the added value of optionality on any future discoveries. This is important, since an estimated 70 percent of all silver comes as a byproduct of other mining activity, including gold, zinc, lead and copper. According to Randy, all of Silver Wheaton’s silver is byproduct.

Seventy Percent of Silver Is a Byproduct of Other Mining Activity

click to enlarge

Huge Rewards, Minimal Risk

Investors find royalty companies such as Silver Wheaton attractive for a number of reasons, not least of which is that they have exposure to commodity prices but face few of the risks associated with operating a mine.

They have minimal overhead and carry little to no debt. Franco-Nevada, in fact, added debt for the first time ever last year to buy a stream from Glencore. By year-end, the company had already paid down half this debt, and it plans to tackle the rest this quarter.

Royalty companies also hold a more diversified portfolio of mines and other assets than producers, since acquiring new streams doesn’t require any additional overhead. This helps mitigate concentration risk in the event that one of the properties stops producing for one reason or another.

Royalty Companies Hold a More Diversified Portfolio of Assets

Consequently, margins have historically been huge. Even when the price of gold and gold mining stocks declined in the years following 2011, Franco-Nevada continued to rise because it had the ability to raise capital at a much lower cost than miners. And with precious metals now surging, royalty companies are highly favored, with Paradigm Capital recommending Franco-Nevada, which has “exercised the most buying discipline among the royalty companies,” and the small-cap, highly diversified Sandstorm.

Gold Royalty Company vs. Gold Bullion vs. Gold Miners
click to enlarge

With only around 30 employees, Silver Wheaton has one of the highest sales-per-employee rates in the world. According to FactSet data, the company generates over $23 million per employee per year. Compare that to a large senior producer like Newmont, which generates “only” $200,000 per employee.

Royalty Companies Have a Superior Business Modelclick to enlarge

Royalty companies can often minimize political risk because they don’t normally deal directly with the governments of countries their partners are operating in. This is especially valuable when working with miners that operate in restrictive tax jurisdictions and under governments with high levels of corruption. Silver Wheaton’s contract with Brazilian miner Vale, for instance, stipulates that Vale is solely responsible for paying taxes in Brazil, which are among the highest in Latin America. Vancouver-based Silver Wheaton pays only Canadian taxes.

Political risk is still a thorny issue, however. When government corruption is too pervasive, or the red tape too tortuous, the miner’s corporate guarantee is obviously threatened. In cases such as this, Silver Wheaton can simply elect not to work with the producer, as it had to do recently with an African producer.

A key risk right now is Silver Wheaton’s ongoing legal feud with the Canadian Revenue Agency (CRA), regarding international transactions between 2005 and 2010. Randy says the company might finally be nearing a resolution to the dispute.

“We do have resource risk. We do have mining production risk,” he says. “But with that risk comes rewards, and I think if we’re selective in terms of our investments, the rewards far outweigh the risks. I think we’ve been really successful making sure we invest in good quality, high-margin mines. We really put a strong focus on mines that are very profitable.”

Enormous gains YTD in major gold and silver stocks

On a day when the gold price, at the time of writing, had temporarily breached the $1300 level, before coming back a little – a rise of 23% since close on December 31 2015 – and with silver up 29% over the same period, after a bit of a slow start, it is interesting to see the massive gains experienced by many of the top gold and silver stocks over the same period.  All prices quoted are in US dollars on US exchanges for comparative purposes, again at the time of writing.

We have also included, top royalty/streaming companies, Franco Nevada in the gold stocks table, and Silver Wheaton in the silver stocks table to show the relative performances of what might be considered safer ways of investing in these two precious metals sectors.

Selected Gold Mining Majors – US$ Quotes

Company U.S. Ticker Price 12/31/2015 Price 5/2/16 gain
Barrick ABX 7.4 19.4 +162%
Newmont NEM 18.0 35.0 +94%
AngloGold AU 7.1 16.9 +138%
Goldcorp GG 11.6 20.14 +74%
Kinross KGC 1.8 5.7 +217%
Gold Fields GFI 2.8 4.7 +46%
Agnico Eagle AEM 26.3 47.8 +82%
Sibanye SBGL 6.1 14.9 +144%
Yamana AUY 1.9 5.2 +174%
Freeport* FCX 6.8 14.1 +107%
Randgold GOLD 61.9 100.2 +62%
Harmony HMY 0.9 3.7 +311%
         
Franco Nevada FNV 45.75 70.4 +54%
         
Gold price   1061 1300 23%

Source: Metals Focus, Company Data

*FCX is primarily a base metals stock (copper) but is one of the world’s largest gold producers so gold has a significant impact on its stock price.

Top Primary silver mining stocks quoted on US Exchanges

Company U.S. Ticker Price 12/31/2015 Price

5/2/2016

Gain
Pan American Silver PAAS 6.50 15.67 141%
Tahoe Resources TAHO 8.67 14.13 63%
Coeur Mining CDE 2.48 8.10 227%
Hecla Mining HL 1.89 4.31 128%
Silver Standard SSRI 5.18 9.39 81%
First Majestic AG 3.27 10.64 225%
         
Silver Wheaton SLW 12.42 20.95 69%
         
Silver price   13.82 17.84 29%
Source:  Metals Focus, Company data

The tables are a great demonstration of the gains that can be made in a rising gold and silver price environment, after a long downturn.  But of course the rises are also vulnerable to any significant gold and silver price downturn to an equal extent.  In investment timing is everything and, given the huge rises seen in some Tier 1 stocks, the tables suggest that they had been hugely oversold when sentiment moved against gold and silver.  The big question is can both stocks and metal prices hold through the Summer doldrums period beginning around now?

Gold and silver prices – looking good to go 

Gold TodayGold closed in New York at $1,268.10 up from $1,247.30 on Thursday. On Friday morning in Asia it rose to $1,275, as the dollar continued to weaken and before the LBMA price setting.

LBMA price setting:  $1,274.50 up from Wednesday’s $1,256.60.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  04  29

2016  04  28

SHAU

SHAU

265.25

260.04

265.54

261.88

Dollar equivalent @ $1: 6.4923

$1: 6.4798

$1,270.77

$1,248.21

$1,272.11

$1,257.04

The Shanghai Gold Fixings today show a real rise in the price of physical gold as the number of the Yuan in dollars rose [weakened] so currency moves were not a factor today. The rise in the gold price has held in London ahead of the LBMA gold price setting.

With China ahead of most of the developed world in time, to see the Yuan gold Fixings ahead of London and New York, leaves China leading the way, not New York leading Shanghai. If this continues, we will see pricing power over gold fall into Shanghai hands, it being the first to respond both to physical demand and to currency moves.

The dollar index is lower today, at 93.88 down from Thursday’s 93.88. The dollar is weaker against the euro at $1.1400 from Thursday’s $1.1345.

The gold price in the euro was set at €1,118.18 up from Thursday’s €1,100.19.

Ahead of New York’s opening, the gold price was trading at $1,278.40 and in the euro at €1,121.40.  

Silver Today –The silver price closed in New York higher at $17.60 on Thursday up from Wednesday’s $17.28. Ahead of New York’s opening the silver price stood at $17.79.

Price Drivers

Today we are seeing gold rise in all currencies, reflecting the fundamental weakening of the dollar and demand for physical gold globally, as seen in rising New York, Shanghai and London prices. The Technical picture for both gold and silver looks positive. The gold price needs to confirm it has broken through $1,270 convincingly, which it appears to be doing right now.

The drop in U.S. GDP to 0.5% annual rate, in the first quarter, in the U.S., helped the dollar to continue falling and brought into question just how sustainable labor growth numbers are. This was a serious slowdown and should be noted as such. Business slashed investment by the steepest amount since the Great Recession. While the media hopes that these numbers can be adjusted to look better and that the rest of the year will see a better performance, hope is not reality.

For gold and silver investors, these numbers emphasize the reality of the falling dollar and the Fed and Treasury’s desire to see a weaker dollar. Make no mistake a weaker dollar will help the U.S. just as much as it will hurt those nations trying to weaken their currencies. This is very gold and silver positive.

We are entering a structural change in the currency world because the U.S. dollar is the pivot of the currency world. Other nations can’t afford to lose international competitiveness and soon will respond by even more action to weaken their currency. We expect the ‘race to the bottom’ to see a gear shift in velocity.

China has begun constructing its Yuan as an alternative pivot in the currency world.

Gold ETFs – Yesterday saw purchases of 1.486 tonnes of gold into the SPDR gold ETF but no change in the Gold Trust. This leaves their holdings at 804.14 and 187.56 tonnes in the SPDR & Gold Trust, respectively.  

Silver – The Technical picture of the silver price looks good and we expect it to outperform gold in the near future.

 

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

 

Dollar down, equities down, gold up, silver up more

Article first published earlier today on news.sharpspixley.com 

There was something of an overnight melt-up in gold, and even more so in silver, which started in after-hours trade in New York, and continued in Asia.  The SGE am gold fix came in at CNY 265.25 per gram and the pm level was CNY 265.54/gram – respectively around $1,273 and $1,275 an ounce and later trade around Asian closing and European opening saw it touch $1,280 before slipping back a few dollars at the time of writing.

Silver continued its recent pattern of moving up faster than gold in percentage terms with the Gold:Silver ratio coming down below 72 – it was hovering around 83 only just over a month ago.  It reached a spot price high of around $17.90 an ounce before it too lost a little ground as European markets opened.

The rise may have been triggered by something of a late sell-off in general equities in the U.S., which continued with Asian markets down sharply overnight, and European bourses opening lower.  The dollar index was also a little lower in continuing fall-out from the Bank of Japan decision not to increase stimulus, and a no-change U.S. Fed position.  There were also some disappointing economic data out of the U.S. with the Q1 advance GDP figure coming in at only 0.5% up year on year, which was below market expectations.

The latest gold price move, if it is sustained, will be yet another blow to the Goldman Sachs call in February to sell gold short.  In retrospect very bad timing by the GS analysts.  Indeed one might consider gold’s performance since that mid-February call doubly remarkable given Goldman’s clout in the financial sector.  At the time of the short gold call it was trading just below $1,240 and indeed did fall back sharply by around $30 in the couple of days following before making something of a recovery.  The current price, near $1,280 puts it close to Goldman’s stop loss level and if momentum is sustained then this could be reached.

Where Goldman has gone wrong is that it had assumed the U.S. Fed would be well into its rising interest rate programme by now with a second increase in place and another couple due.  But currently the consensus among financial analysts in the U.S. is that a second Fed rate rise is unlikely before September at the earliest, if then.  One suspects that the Fed, as last year with its initial increase, may bounce itself into a second rate increase late in the year if only to try and retain some credibility in its forecasting, whether this is truly justifiable or not.

What may be going in Goldman’s favour yet though is that May is now only a couple of days away, and in most years gold tends to weaken May to September – although not always.  It should thus also be remembered that in 2011 when gold hit its plus $1900 peak, it strengthened hugely through June, July and August.  Are we in for a repeat?  At the moment the force is with gold – and even more so with silver.  That can turn around rapidly, of course, but a close above $1,275 this weekend could be taken as a signal of higher moves into the beginning of May – particularly if there is continuing nervousness in general equities.