Silver May Be Getting Ready to Shine Again

by: Clint Siegner – Money Metals News Service

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

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

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

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

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

Silver: COT Futures Large Trader Positions Chart

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

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

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

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

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

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

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

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

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

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

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

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

Clint Siegner

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

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

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

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

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

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

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

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

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

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

Gold hit lowest level ytd – will it recover?

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

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

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

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

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

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

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

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

Lawrieongold: Gold/silver articles published on other sites

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

Metals Focus sees strength in Chinese gold demand in 2018

 

SGE gold withdrawals down in Feb but up YTD

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

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

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

Gold on a tear as dollar weakens – silver being left behind

Article first published on the Sharps Pixley website, and lightly edited here, looking at the strong performance of gold over the past week, but also the weakening of the U.S. dollar index.

Since Donald Trump assumed the Presidency of the world’s richest and most powerful nation, the US dollar index (relating the dollar to a basket of other currencies) has fallen by around 11% accounting for much of the increase in the gold price in US dollar terms.  By contrast, the gold price in Euros has actually fallen by 1% over the past year, so what may appear to have been an appreciation in the gold price has been more a reflection of the depreciation in the value of the supposedly mighty US dollar.  It’s only that most people around the world look primarily at movements in the gold price in the US dollar – as we do in the title of this article – that the gold price is seen as actually having advanced.

But gold in US dollar terms does provide a useful benchmark as over time the dollar is probably the world’s most stable currency and is, for most nations, their primary reserve currency in their foreign exchange holdings.

This relationship between gold and the US dollar, with the former providing perhaps the most overt indication of how the greenback is doing vis-à-vis other currencies is the reasoning behind what seems to be an ever-increasing view that the powers-that-be collude to suppress the gold price to hide what is an overall indicator in the decline of the dollar’s purchasing power.

Some put this decline at upwards of 80% since President Nixon severed the convertibility of the dollar for gold to protect US gold reserves. In some sectors of the economy this decline is readily apparent.  Grocery shopping, property prices, salary levels etc.  In others less so, notably transportation and electronics, but in general $100 today would only buy you a fraction of what you could have purchased with $100 in 1971.

But it’s not only the purchasing power of the dollar which has been in decline.  The same is true of virtually any nation’s currency.  All currencies nowadays are fiat in that they have no backing, which is why some economists call for a return to a gold standard.  This is probably impractical without a massive gold price increase and, even then, would probably be overrun very quickly by ever increasing consumer demand for goods and services.

There is also talk of China trying to introduce some kind of gold backing for the renminbi (yuan) at some time in the future thereby leapfrogging the dollar as the world’s go-to currency, but this is probably more a theory than a likely eventuality.  It is seen as the reason China is assumed by many to be building its gold reserves at a far higher rate than it has been reporting, but this may also, if true, be just as support for a future petro-yuan – with the yuan exchangeable for gold – as a very competitive Chinese bid to replace the petrodollar!

So perhaps gold investors should treat the latest rise in the gold price purely as a wealth protection exercise.  That is what gold is good at over time.  If the dollar declines further then gold will rise further, as will all the major precious metals – and most other commodities too.  Changes in prices over  the 47 years since President Nixon stopped dollar convertibility are self evident, but in geographic areas like Europe where currency purchasing power has diminished similarly the imposition of a new currency, and/or the implementation of other changes like decimalisation in the UK, have made direct comparisons that much harder for the peerson in the street to relate to.

But regardless, gold has moved up sharply in dollar terms in the past few days despite mixed economic data out of the USA.  Much of this increase so far seems to have passed silver by and the gold:silver ratio has actually risen a little standing at close to 78 at the time of writing, although silver has been making a bit of a late run ahead of the weekend as have platinum and palladium.

We still stand by our forecast that the gold:silver ratio will come down to 70 or lower during the course of the year which would make silver potentially a better investment than gold if it does follow its historic pattern and rise faster than gold when the latter is on the increase.  At the moment we see no reason to change our forecast for gold to hit $1,425 or thereabouts this year and silver $20.50.  As I stated in the article in which I made these predictions- Precious metals price predictions for 2018 – gold, silver, pgms – I look at these forecasts as being conservative and if the dollar continues to fall and precious metals prices to rise sharply. as they have this past week, then I may see the need to adjust the forecasts – at least in US dollar terms.  However, also bear in mind that gold and silver had a strong start in 2017, but then tended to pull back.  2018 could see a repeat of this pattern, although I don’t see palladium making the kind of gains it did last year.

For those interested in my precious metals stock price forecasts for the year ahead do look at a series of articles i have published on Seekingalpha.com.  

The terms and conditions for publication of articles on Seeking Alpha prevent me from posting them here, but follow the links to read them on that site.

Gold, Silver, Platinum, Palladium – Price And Stock Forecasts/Recommendations For 2018

Precious Metals Stock Performance And Recommendations Update

Top Silver Stock Suggestions For The Year Ahead

 

Dollar being allowed to fall; Gold rising

A pre-New Year article published on the Sharps Pixley website – and since posting gold has moved up further and the US dollar fallen some more.  The original article – shown below, also pointed to a disappointing performance by silver at the time, but since it was written silver has also picked up nicely and the Gold:Silver ratio come back to below 77.

Dollar being allowed to fall; Gold up; Silver disappoints so far

Original article published December 29th on Sharps Pixley website

As the final trading session of the year is already under way in Europe and has just begun in North America, precious metals are trending higher, but most of the increase is due to the gradual decline in the dollar index (DXY).  Since end 2016 the DXY has been allowed to drop from 102.65 on December 29th last year to 92.29 as I write on December 29th this year.  That is a fall of around 10%.  Again as I write, the gold price in the US dollar is up around 12% over the full year after its recent rally.  Silver, on the other hand, is only up a little over 4% over the same period – a particularly disappointing experience for the silver investor given that historically silver tends to outperform gold in a rising gold market.

Silver though is, or should be, somewhat anomalous vis-a-vis gold as it is much more of an industrial metal, although its performance as such may not be the real reason it has underperformed its sibling precious metal in 2017.  Silver is a much smaller market than gold and its price can thus be even more subject to futures trading patterns where big money is involved.  Silver followers reckon the price is being manipulated in a major way on the futures markets and point to the huge short positions taken in the metal by the big bullion banks and traders as being key to the price patterns.  These big shorts do not relate easily to some huge accumulations of physical metal by the same big banks that dominate these short positions – a point being made continuously by silver analyst Ted Butler (probably the world’s No. 1 expert on this anomalous situation) who reckons the activity in the silver markets by the big players – notably by JP Morgan – is, in effect, a criminal activity to which the market regulators continue to turn a blind eye.

Of course gold bulls also see the gold market as being manipulated too by many of the same players as in the silver market.  But here the motivation, if the gold price is indeed being held down, may be in support of governments and the dollar given the huge global debt position.  The gold price is considered by many as a bellwether for the state of the economy and a big rise in gold could be seen as a huge fall in confidence in global economic management.  That does not suit the big money and the markets, let alone government policies.  Whether there is collusion between major governments/central banks and the bullion banks to keep the gold price suppressed remains arguable, although there is considerable evidence to suggest that this has indeed been policy in the past and thus probably still is the case today.

The big question today is whether gold will indeed stay back above $1,300 on the year’s final trading day and what will happen when trading resumes in the New Year.  Silver could also possibly break back up through $17 and as I write gold has indeed breached $1,300 and silver looks well placed to break out above $17. These price advances have survived the New York market open and whether they will survive the full trading period at these levels remains to be seen, but the force is certainly with them at the moment.  Gold at $1,300 and silver at $17 would put the gold:silver ratio (GSR) at 76.5 which is certainly not unreasonable given that the GSR has ranged between  around 67.7 and 79.4 over the past year.  Indeed we have gone on record as suggesting the GSR will come down to 70 during the year.  Some feel this is a very conservative prediction.

Platinum is also moving up along with the other precious metals apart from palladium which has come off a few dollars.  We think there’s a good chance that platinum will be back at a higher price than palladium by the end of 2018, although I have received a recent email from former Stillwater CEO, Frank McAllister, who would strongly disagree having published a paper back in 2012 that palladium and platinum should at least be on a par with each other.  He further suggested that the demand for palladium in the autocatalyst sector could well drive its price ahead of platinum.  He has certainly been correct in this viewpoint.

Ted Butler’s latest theory, is also worthy of comment.  He avers that JP Morgan was in effect given a 10-year carte blanche by the U.S. Government and regulators as a reward for its assumption of the huge Bear Stearns short position in silver, at the government’s prompting, when that bank collapsed in the 2008 financial crisis.  That 10 year period will now be up in 2018 and, if Butler is correct in his suggestion, JP Morgan could now be in a position to reap multi-billion dollar rewards from unwinding some of its silver market activities.  Butler though has been permanently bullish on the silver price and some of his theorising, however well supported in fact, may just be wishful thinking.  BUT – he could also be correct and if he is there could be a run up in the silver price that would at least match that of 2011 when the metal peaked at just short of $50.  Silver investors will certainly be nailing their colours to that mast!  And if silver runs in this manner it could drag gold up with it too.  The tail wagging the dog!

There have been many changes in both the gold and silver markets over the past several years and most would seem to be price supportive – not least the continued flow of bullion from generally weaker hands in the West into stronger hands in the East.  Global gold production has probably peaked –it has certainly at least plateaued – and the year-end figures will be viewed with particular interest when they come in.  We would suspect global gold production in 2017 could be down as much as 1% overall.  It is falling in some countries, although still rising in others, but cutbacks in capital programmes and in exploration spending, particularly by some of the majors, suggest that there could be several years of declining global output, although not at a particularly high rate

Eastern demand appears to be holding up fairly well.  While neither of the two leading consumers – China and India – are importing gold at their past record levels, demand appears to have been increasing in 2017 over that of 2016 and we would expect that trend to continue along with the gradual increase in percentages of their populations falling into the middle class (and potentially gold-buying) categories – a growth that is being echoed around the world.

Geopolitics could also be playing a role here, although the gold price has been showing little sign of any sustained upwards movement with some of the worrying events taking place around the world and President Trump’s seemingly increasingly combative rhetoric which could be considered destabilising.  However we have noted that the passing of major holidays often seems to mark an inflection point in market behaviour and perhaps Christmas 2017 is yet another one of these.  So far the portents for gold and the other precious metals look positive.  It remains to be seen how they play out through the year ahead.

For those interested in a follow up as the first day of 2018 trading has got under way in Asia and Europe, Click on:

 Gold and silver continue rising as dollar and bitcoin slip

Check out Seeking Alpha for my 2018 price predictions for gold, silver, platinum, palladium and precious metals stocks

My latest article on Seeking Alpha looks at the performance of my precious metals stock recommendations of a year ago – over half beat the record growth in the S&P 500, but some would have lost you money as well – and my new set of predictions for the year ahead.  Highlights as follows:

  • Precious metals stock picks made a year ago were mixed, but more than half beat the record growth in the S&P 500.
  • Most of the new 2018 precious metals stock picks are the same as those for 2017, but there are some deletions and additions.
  • Price forecasts for gold, silver, platinum and palladium, the dollar index

For the record looking for higher prices in the year ahead for gold, silver and platinum, but perhaps a fall back in palladium in the second half of  the year as we start seeing reverse substitution by platinum catalysts in the petrol (gasoline) section of autocatalyst manufacture due to the platinum price being lower than that of palladium.

Stock selections are virtually all in stocks which won’t collapse should precious metals not perform as expected.

To read the article on Seeking Alpha click on:

Gold, Silver, Platinum, Palladium – Price And Stock Forecasts/Recommendations For 2018

Six recent posts by Lawrie on sharpspixley.com

I’ve been a little lax about linking here to my articles published on the Sharps Pixley website but here are links to six I have published so far this month.  They look at the gold and silver markets as well as pgms.  Click on the titles to read the full articles.  To keep up with my thoughts on precious metals, and a whole host of other precious metals news stories from around the world, take a regular look at info.sharpspixley.com

Indian gold imports: High but ignore the hype!

13 Jul 2017 – Indian gold imports this year have already surpassed the full year 2016 level, but its probably best to ignore some of the year on year growth media hype given how low the figures were for H1 2016.

Implications for silver of Tahoe’s Escobal shutdown

12 Jul 2017 – Any impact on the supposedly temporary enforced closure of Tahoe Resources’ Escobal mine, the world’s second largest primary silver mine by Guatemala’s supreme court may only have a very limited impact on global silver fundamentals and the metal price.

Palladium closing gap on platinum – but neither great long term

11 Jul 2017 – In the past year the palladium price has moved up and platinum down and there is a real prospect of the former overtaking the latter in the near future.

So what’s happening to gold – and silver?

10 Jul 2017 – Gold, which had been showing signs of strength saw some huge trading volumes late last week which prompted a price slump, while silver fared even worse with the GSR rising to almost 80.

Gold overall H1 performance matches dollar index decline

04 Jul 2017 – H1 commodity price changes very positive for palladium while gold rise pretty well matches fall in dollar index. Silver disappoints. Iron ore worst performer.

 

Chinese gold demand up a little y-o-y but still well down on 2015

04 Jul 2017 – After a blip in May, Chinese gold demand as represented by Shanghai Gold Exchange withdrawals is now a little higher than at the same time a year ago, but still well down on the record 2015 figure.

 

 

The Commodity Cycle: What It Means for Precious Metals Prices

By Stefan Gleason*

The cycle for any commodity follows the same basic pattern…

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

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

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

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

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

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

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

Commodities Are Moving into a Diminishing Supply Phase

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

Oil Market

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

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

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

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

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

Mining Is an Energy-Intensive Business

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

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

Mine Operators

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

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

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

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

 Stefan Gleason

TED BUTLER – Silver: Expecting the Unexpected

The latest commentary from silver specialist analyst Ted Butler, published on Silverseek.com foresees  a rapid and spectacular rise in the silver price ahead:

“I am convinced that silver will soon explode in price in a manner of unprecedented proportions, both in terms of previous silver rallies and relative to all other commodities. By unprecedented, I mean that the price of silver will move suddenly and shockingly higher in a manner never witnessed previously, including the great price run ups in 1980 and 2011. The highest prior price level of $50 will quickly be exceeded.

By “soon”, I mean that the move can commence at any time, but more likely before many weeks or months have gone by. I know that the price of silver has been declining on a daily basis nonstop for three weeks now, itself an unprecedented move, but I also know the reason for the decline and how the sharply improved COMEX market structure has always guaranteed a rally in a reasonable period of time. The only question is whether on the next silver price rally will JPMorgan add aggressively to its COMEX short positions. I’m suggesting JPMorgan is not likely to add to short positions on the next rally.

At the heart of the unprecedented move higher in the price of silver is the manner in which it will occur……”

To read full article CLICK ON THIS LINK

The Blockchain: A Gold and Silver Launchpad?

By David Smith*

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

US 100 Dollar Bill

Will Ben Be Going Bye Bye?

It’s really about people control.

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

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

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

The Foundation Is the Blockchain

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

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

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

The Potential and the Promise

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

American Gold Buffalo

In Venezuela, one ounce of gold
buys a house.

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

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

Digital Metal Data Points

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

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

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

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

Will the Promise Be Honored?

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

Bitcoin

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

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

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

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

Unintended Consequences

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

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

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

 

Precious metals outlook 2017

By Clint Siegner*

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

Europe

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

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

Tattered EU Flag

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

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

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

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

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

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

The Fed

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

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

United States Federal Reserve System

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

A Donald Trump Presidency

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Deutsche Bank’s metals price rigging evidence

By Clint Siegner*

Some say there is honor among thieves. Perhaps, but apparently not among international  bankers when they are under serious legal and regulatory pressure.

Bank Heist

German behemoth Deutsche Bank agreed last spring to assist plaintiffs and regulators by exposing their co-conspirator banks in a wide ranging scheme to rig prices and cheat clients.

They cut a deal to avoid even larger monetary damages and criminal prosecution. Executives there agreed to pay nearly $100 million to settle their legal troubles and share information. In return the bank gets to deny wrongdoing and keep its license to trade in markets. The other alleged cheaters, including the Bank of Nova Scotia, UBS, Barclays, HSBC, Fortis, Standard Chartered, and Bank of America, may not get off as easy.

More details are now emerging as to exactly what kind of evidence Deutsche provided, and it indeed appears to be damning. Plaintiffs in a class action suit looked it over and just filed an amended complaint with broader allegations of wrongdoing implicating more banks. The revised complaint describes what they found in the Deutsche materials this way:

Plaintiffs incorporate factual allegations based on the more than 350,000 pages of documents and 75 audio tapes that Deutsche Bank produced as part of the cooperation provisions of its Settlement Agreement with Plaintiffs (collectively, the “DB Cooperation Materials”). The DB Cooperation Materials provide direct, “smoking gun” evidence of a conspiracy among the Fixing Members and several other silver market makers, including at least UBS, Barclays, Standard Chartered, Fortis, and Merrill Lynch, to illegally manipulate the price of silver and silver financial instruments at artificial, anti-competitive levels through multiple means.

“Smoking gun” appears to be an apt description. Here is an example of a chat between a trader at Deutsche Bank and one at HSBC:

Deutsche Bank [Trader-Submitter A]: I got the fix in 3 minutes

HSBC [Trader A]: I’m bearish

Deutsche Bank [Trader-Submitter A]: Hahahaha

HSBC [Trader A]: Massively… Really wanna sell sil * * *

HSBC [Trader A]: Let’s go and smash it together

That’s clear evidence of illegal collusion to manipulate prices down. But will this hoard of evidence actually lead to anything meaningful in terms of cleaning up the marketplace? We know banks have been rigging all sorts of markets and sticking it to their own customers for a long, long time with little repercussion. Regulatory capture – the cozy relationship between Wall Street and the bureaucrats who often want nothing more than to land a high-paying job there – is a real problem.

The CFTC, which regulates futures markets, announced they were closing their investigation into silver manipulation in 2013. After spending more than 7,000 enforcement hours, officials there somehow managed to miss what appears to be institutionalized cheating over a period lasting years.

Bart Chilton, who spearheaded the CFTC investigation, left for greener pastures shortly after the investigation wrapped up. He got a much better paying gig at nation’s largest law firm, advising companies on the topic of regulation. Many have all but given up on agencies like the CFTC when it comes to keeping banks honest.

There is, however, reason for investors to hope. This class action lawsuit is the biggest civil litigation pertaining to metals market rigging to ever get past first base. The judge will allow discovery to proceed, based in large part upon the evidence provided by Deutsche Bank. Attorneys will start deposing traders and bank officials and attempting to find out just how deep the corruption goes. And, because it is a civil matter, the case cannot be derailed by inept or compromised regulators.

Deutsche Bank agreed already to fork over nearly $100 million as part of the suit. Other class-action suits are already pending and it is safe to say more victims will look at that jackpot and jump into the game.

The new evidence might even be too compelling for regulators to keep looking the other way. It is at least possible investors will see actual criminal prosecutions and banks losing their privileges to trade in these markets.

Metals market rigging has moved out of the realm of theory and into the realm of fact. Perhaps, for the first time ever, investors in the sector have a real shot at more honest markets and price discovery. Wouldn’t that be nice?

With gold little is as it seems

 

A lightly edited rerun of another of my sharpspixley.com articles – well I do need to supplement my pension by writing for SP.  In it I endeavour to point to  various aspects of gold pricing and analysis  which set the yellow metal apart form other metals (except perhaps silver which tends to hang onto gold’s coattails.)  Gold is unique in being neither a true commodity – nor a wholly monetary metal although it falls far closer to the latter than the former.  So here goes:

The longer I have been associated with the gold mining sector – over 50 years since I worked as a junior mining engineer on what was then one of the world’s oldest and largest major gold mines – the more I recognise that the gold price itself frequently defies all logic.  Back then gold mining economics were easier to predict in many respects, although perhaps not for the miners which were feeling the squeeze from rising technical costs and a gold price which had been fixed at US$35 an ounce for around 30 years.

According to official U.S. inflation statistics, although these almost certainly understate the true position, $35 back then would be worth just under $300 today – not a level at which most, if any, gold miners could be profitable, but it should also be recognised in most gold producer domestic currencies the inflation rate will have been many times higher and the relative value of mined gold to the economics of gold mining will have changed drastically.  (Other estimates based on the fall in the purchasing power of the dollar suggest that $35 in 1960 is actually the equivalent of around $1,150  today – interestingly about where the gold price is now!)  Gold was thus probably underpriced 60 years ago and thus still is in today’s money.

Of course mining and mineral extraction technology has made huge advances since 1960 and global gold production has more than doubled, but calculations of gold supply and demand are fraught with argument, with some key analysts disputing the estimates from the major analytical consultancies, particularly in respect of Asian demand (See: Gold, GFMS, China Demand – Koos speaks out).  Global new mined gold output does seem to have peaked and looks likely to start reducing further in the years ahead.

Koos Jansen has also published some other analysis which goes much further than what was basically a critique of the way GFMS calculates Chinese gold demand in the face of some substantial – some would say irrefutable – evidence that published figures for gold flows  into China are more than double the GFMS figures for Chinese gold consumption, in part because of what GFMS defines as consumption.  And GFMS is not the only consultancy accused of publishing misleading statistics – its main competitors, Metals Focus and CPM Group also stand so accused.

In an earlier article Jansen goes further and pointed to major anomalies not only in gold demand statistics for China, but for the consultancies’ worldwide estimates too.  He sees the biggest anomalies arising because they tend to treat gold as a commodity and effectively ignore its parallel monetary role – See: The Great Physical Gold Supply & Demand Illusion.

Jansen comments as follows: “In reality gold is everlasting and cannot be consumed (used up), all that has ever been mined is still above ground carefully preserved in the form of bars, coins, jewelry, artifacts and industrial products. Partly because of this property the free market has chosen gold to be money thousands of years ago, and as money the majority of gold trade is conducted in above ground reserves.  Indisputably, total gold supply and demand is far in excess of mine production and retail demand.”

Jansen’s assertion certainly makes some of the seemingly strange goings on in terms of gold pricing perhaps a little more understandable, although not any more transparent –  indeed probably less so.

Meanwhile Deutsche Bank’s settlement of price rigging allegations (without actually admitting guilt) in the silver market, together with an apparent assertion that some other major global financial institutions have been doing likewise, is raising  a host of other questions regarding precious metals pricing.  Some commentators  have been suggesting that if manipulation of the silver market was rife then it is highly likely that the gold market has been similary rigged too which will hardly be a surprise to followers of these markets and justifies some of the accusations that GATA has been making for years.  What remains uncertain in the case of gold in particular is that if it indeed has been happening, which seems highly likely, whether the price rigging has just been conducted by the major financial institutions acting on their own, or whether with the support of government institutions and central banks (which is the GATA position).

What this all means, of course, is that the gold price moves in mysterious ways unfathomable to the person in the street.  With likely regulatory complicity we don’t see this situation ending in the near future unless stimulated by an equity market crash which overwhelms the power of the financial establishment to rein it back.  But then this latter is seen as being increasingly likely by many astute financial observers who see it as not a case of ‘if’, but ‘when’.

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

By David Smith*

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

Endeavour Silver Weekly Chart

Endeavour Silver Weekly Chart

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

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

What Have Physical Gold and Silver Been Doing?

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

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

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

Silver Prices (2011-2016)

Silver Prices (2011-2016)

The World’s Central Banks Are Buying Up Mining Stocks

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

Central Bank Net Gold Purchases

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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