While I may not have been publishing much on lawrieongold.com in the past few weeks or so, I haven’t been being non-productive but have been publishing my own articles elsewhere while using this site for what I deem to be some pertinent independent comment. Readers may thus like to have their attention drawn to a series of three articles, all published on www.info.sharpspixley.com looking at the effects on the gold price and the U.S. dollar of various statements by US Fed Board members and Heads of Regional Feds, which in concert suggested that rather than wait until June to implement the next Fed rate rise, which had been the consensus, that it was now likely to occur at the March meeting of the FOMC, which is now due in 10 days time. The effect of these statements has been to drive the dollar index higher and the gold, and other precious metals prices, downwards.
In chronological order the three articles are as follows – click on the article titles to read in full:
President Trump’s address to Congress, and perhaps even more so statements by US Fed officials, saw the gold price drop more than $10
The odds of the US Fed implementing a rate increase as early as the March FOMC meeting in 2 weeks’ time have increased to over 80% with gold and silver prices suffering accordingly.
The latest series of hawkish forecasts on a probable March interest rate rise could have given anyone with foreknowledge the opportunity to make enormous monetary gains.
Readers may also like to view articles I’ve been publishing on Seeking Alpha. The latest of these is: Gold And Silver Stock Picks: How Are We Doing So Far. Which looks at the performance of some stock picks I made on December 30th – but be advised the article was written immediately before the various Fed grandee statements knocked the gold price back sharply. However I still stand by my recommendations.
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.
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.
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.
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.
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.
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.
Gold Today –New York closed at $1,142.60 yesterday after closing at $1,158.6 on the 13th December. London opened again at $1,136.80 today.
Overall the dollar is much stronger against global currencies today.
– The $: € was stronger at $1.0478: €1 from $1.0649: €1 yesterday.
– The Dollar index was stronger at 102.54 from 100.87 yesterday.
– The Yen was weaker at 117.81: $1 from yesterday’s 114.95 against the dollar.
– The Yuan was much weaker at 6.9352: $1 from 6.9025: $1 yesterday.
– The Pound Sterling was weaker at $1.2520: £1 from yesterday’s $1.2656: £1.
Yuan Gold Fix
|Trade Date||Contract||Benchmark Price AM 1 gm||Benchmark Price PM 1 gm|
| 2016 12 15
2016 12 14
2016 12 13
|$ equivalent 1oz @ $1: 6.9352
Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle Eat eastward metric measurements are used against 0.9999 quality gold. [Please note that the 0.5% difference in price can be accounted for by the higher quality of Shanghai’s gold on which their gold price is based over London’s ‘good delivery’ standard of 0.995.]
Shanghai prices held $33.94 higher levels than prices in New York. London opened at a higher discount to Shanghai of $39.74. In the last day London and New York gold prices have dropped in the dollar around 11% whereas Shanghai gold prices in the Yuan have dropped only 0.5%. This is an important point, we feel pointing to volatility in London and New York continuing then doing so both ways. i.e. Shanghai is implying that gold prices are falling too far too fast, despite the rising dollar..
This confirms that the moves in gold prices in the different markets are a reflection of currency movements not sales and purchases of gold. The arbitrage opportunities are huge for those selling gold to sell into China, not London or New York.
LBMA price setting: The LBMA gold price setting was at $1,132.45 this morning against yesterday’s $1,160.95.
The gold price in the euro was set higher at €1,085.45 after yesterday’s €1,090.45.
Ahead of the opening of New York the gold price was trading at $1,129.50 and in the euro at €1,083.66. At the same time, the silver price was trading at $16.11.
Silver Today –Silver closed at $16.80 at New York’s close yesterday from $16.91 on the 13th December. We see it falling further than gold now, but also rallying, thereafter, faster than gold.
The gold price in the Yuan and the euro only fell slightly. It was a strong dollar rising against gold that brought the price down in dollar terms. We do not expect to see the dollar continue to get stronger over the next few weeks, as that is against the U.S. interests.
We see the fall in the gold price as coming to an end ahead of a rally soon. Shanghai and the silver price points to this. The sale of 6+ tonnes from the SPDR was a large amount but not one likely to cause such a fall. Once the Fed’s announcement is fully digested, then we see gold rallying.
The Fed’s announcement rocked all markets including gold and silver not because of the hike of 0.25% but for the three year forecast pointing to three hikes in each of the next three years. No more the waiting for data to guide them? This was a vote of confidence in the U.S. economy, where they clearly see the economy reaching a self-sustaining momentum, if not there already. Inflation is rising through their 2% target and pointing higher. Trumpanomics was certainly factored in by the FOMC which adds tremendous fiscal stimulus to the formula. If they stick to these rate forecasts [and they don’t have to] and they are too optimistic such rate hikes will hurt the economy and it will turn down fast. But will ‘real’ interest rates go positive?
Take a robust U.S. economy against a weak EU & Japan still in their QE phase and the prospects for exchange rates outside of the U.S. down strongly, something they have wanted for years. The race to the bottom in currencies will produce a very volatile currency world for several years. Right now the “Carry Trade” are racing to unwind their positions, strengthening the dollar and taking it back into its ‘bull’ market. Unless the Treasury takes action to restrain the dollar we expect several currency crises in the next three years. That’s the rosy picture for the future. Of course the Fed expressed intentions, not certain realities, so this picture could easily turn bad if the reality is very different.
Outside of the U.S., difficult times lie ahead as the U.S. will become solely interested in what benefits the U.S., likely at the cost of its current trading partners. We do see a trade war but against a robust ‘enemy’, China. China is on course to eliminate poverty by 2020 and by then should also have a robust, self-sustaining economy too. With their interests diverging we see more division in the world. This will directly impact the currency world to the detriment of the dollar as a reserve currency.
As to gold and silver in this environment we say this;
- Currency turmoil will benefit gold and silver prices as it brings instability and uncertainty.
- Trumpanomics will lessen the value of the dollar and all other currencies, [as they try to remain lower than the dollar], as rising debt and inflation benefits gold and silver prices.
- A multi-currency monetary system is inevitable, which will benefit gold and silver.
Gold ETFs – Yesterday, there were sales of 6.818 tonnes from the SPDR gold ETF and a sale 0f 0.6 of a tonne from the Gold Trust holdings, leaving their respective holdings at 849.441 tonnes and 196.35 tonnes. Under these circumstances we would expect more sales today as the Fed’s announcement is digested.
Since January 4th this year, 245.322 tonnes of gold has been added to the SPDR gold ETF and to the Gold Trust.
Edited version of another of my articles published on the Sharps Pixley website. To read original click here
Gold followers will hardly be unaware that every time a Fed Open Market Committee Meeting draws near the gold price moves, often quite sharply, on the will she, won’t she prospect of Janet Yellen announcing that at long last the Fed will start to raise interest rates again. Now we are coming up to the December FOMC meeting – a full year after the last Fed rate rise. Well the meeting is due to take place on December 13thand 14th and perhaps there is actually a realistic likelihood that indeed on this occasion it will be a case of ‘she will’.
So the gold price has been moving accordingly, but perhaps not quite in such a volatile manner as on previous occasions when the likelihood of a Fed rate raising decision was rather more uncertain. During European and North American trading the futures markets have managed to control it in the $1,170s and $1,180s for the most part, with a so far brief foray into the $1.160s but any moves to the higher levels seem to be swiftly capped and brought back down again. There does seem to have been something of a plethora of adverse gold price comment being released at present and when this has happened in the past it has sometimes been associated with a significant price takedown. It remains to be seen whether this is a portent of yet another instance of such.
The anomaly here appears to be the Shanghai Gold Exchange Benchmark Pricing which seems to be coming in at levels above $1,200 two or three times this week so far, although these higher levels don’t seem to appear in the Kitco gold price charts. We do know that Chinese gold prices are running higher at the moment and carrying the highest price premiums over London and New York prices seen for some time. Some put this down to reports that the Chinese Government is already restricting, or is planning to restrict, the number of gold import licences. This has been running in parallel to rumours that India, the other major global importer of gold, is planning to ban gold imports altogether, although one suspects that if this were to happen the amount of gold smuggled into the country would soar. The caution here though is that when Chinese and Indian demand was just about at its strongest back in 2012, the gold price tanked due to heavy withdrawals out of the big gold ETFs and we have again been seeing some major outflows from GLD in particular.
The other reason for the Chinese high premiums – reportedly approaching $30 an ounce on some days – is that traditionally this is the time of year for Chinese fabricators and gold retail outlets to stock up ahead of the Lunar New Year festivities which can create temporary gold shortages, particularly in a year when gold imports have been running at a lower level. In 2017 the Chinese New Year falls on January 28th, followed by a full week of holidays (The Spring Festival Golden Week) and gold has always played a hugely significant part in gift giving over the period.
It should be noted, though, in respect of something of an anti-gold media campaign that reports are surfacing that a number of major bank analysts are now seeing a period of substantial gold price weakness ahead coupled with the Fed rate rise decision. and more Whether these analysts should be given any credence or not given most analysts were predicting that a Donald Trump victory in the U.S. Presidential election would see gold surge and the stock market crash, is a moot point.
Perhaps before drawing any conclusions one should wait for the results of this weekend’s Italian constitutional referendum. A defeat for the Renzi Government position, which the opinion polls are suggesting, given the set anti-euro positions of the opposition could put the EU in turmoil again, which could give the gold price a welcome boost. But then, after the Brexit vote and the U.S. Presidential election result, who believes the opinion polls any more?
In the context of a Fed rate increase those with only a short memory may also recall that after the last rate increase a year ago, gold fell back just a little, and briefly, in a knee-jerk reaction and then set off on a six month bull run!
The past year has seen a number of major destabilising events occurring (the Brexit vote, Trump victory and Indian banknote cancellation fiasco all within the past few months) and with the Italian referendum perhaps adding another. In the long term such uncertainties have to be gold positive, but there could well be some negatives in the interim and perhaps the first will be the actuality of a Fed rate increase. Prepare for a bumpy ride.Gold
With so much seeming to ride on central bank interest policies in terms of equities in general, and precious metals in particular, perhaps one should look at the motivations behind the timings of likely interest rate hikes.
If we start with the U.S. Fed – nine months ago its Federal Open Market Committee (FOMC), which calls the tune on interest rates, was predicting that the U.S. economy was recovering sufficiently to allow three, or perhaps four, small rate hikes in 2016. Presumably the economy has not so far recovered sufficiently to do so and thus not a rate hike to be seen as yet, which is why there has been so much attention being paid to a possible September rate increase. Perhaps this could still happen despite some poor economic data, if only to save FOMC face. We get successive statements suggesting the U.S. economy is coming right, only for the next set of government data showing that it patently is not doing so, and the rate increase can gets kicked down the road again.
The latest data, showing disappointing retail sales in August, following on from an ultra cautious statement from Fed Governor Lael Brainard, seems to have left those thinking that there could yet be a September rate increase announcement, in the distinct minority. But there are still lingering doubts that the FOMC may talk itself into a rise this month, hence some of the weakness seen in the gold price and equities.
Everyone rules out a November rate hike as that would come so close only a couple of days ahead of the Presidential election date and now apparently some 70% of analysts believe that the FOMC will bite the bullet and implement a small increase in December – probably whether the data would seem to justify this or not. While the Fed’s forecasting credibility is perhaps near zero, to do this might be a tiny face-saver, although there are still analysts and commentators out there who believe the Fed may hold off any tightening for a few months beyond that date.
Here in the UK we have the opposite scenario post the Brexit vote. The establishment spent so much time telling everyone what a disaster a vote to leave the EU would be economically that not surprisingly, in the immediate aftermath of the referendum, economic nervousness prevailed. Bank of England (BoE) Governor, Mark Carney, was at the forefront of the dire warning brigade, as was the Chancellor of the Exchequer (Finance Minister), George Osborne who had suggested there would have to be an immediate increased austerity budget should Britain vote to leave the EU. George Osborne is no longer Chancellor and his successor, Philip Hammond, does not seem to be considering drastic changes ahead.
To almost everyone’s surprise, the UK economy is yet to show much, if anything, in the way of a downturn after an initial stutter which we would put down to the ‘Project Fear’ Remain campaign. Even so the BoE lowered interest rates ‘just in case’ as an economic stimulus in August and although it has kept them steady this month as the data so far has notGovernor supported the necessity of a further cut, Carney is still forecasting the likelihood of an additional drop before the year-end – presumably taking the bank’s base rate down to zero percent – or very close, although his most recent statements have perhaps been slightly less negative.
Consider the data. The stock market is up post Brexit, employment has risen, property prices appear to be on the rise again, we are still in a GDP growth phase, the latest Services PMI for August (i.e post Brexit) has shown the biggest month on month rise in its history; the August manufacturing PMI also grew at the fastest rate in its 25 year history to 53.3 when the market had been expecting a contraction; inflation has not yet taken off, despite the fall in the value of the pound sterling against the euro and the US dollar. Indeed the pound seems to be just about the only sufferer so far from the Brexit vote, although this is a two-edged sword in that it makes UK exports more competitive, and boosts tourist spending as foreign currencies go further making the UK an even more attractive destination.
Now Carney, the BoE and the other Brexit naysayers will warn that this is a phony temporary outcome. Inflation is almost certainly going to increase as lower sterling means higher costs of imports and if that starts filtering through to consumer spending we could well see difficult times ahead. It is early days yet, and the UK is still in the EU so the real exit fallout is perhaps still two years or more away. But so far the figures have confounded virtually all the ‘expert’ predictions and perhaps they will continue to do so when some of the potential positives of Brexit are at last taken into account.
However, this doesn’t stop the Brexit doom and gloom merchants from still trying to talk things down in order to justify their dire predictions – and Carney and the BoE are among these and thus may yet decide to cut rates again whether the data really justifies this or not. Conversely the U.S. Fed may well raise rates to pursue the so-called legitimacy of its own forecasts. That’s what happens in global economics and politics. The experts and the establishment hate to be seen to be wrong and will often follow their pre-conceived paths regardless with no thought for the general public and the investment community if it may affect them adversely in the process.
What is doubly worrying is that this same analysis may well apply throughout the global political arena – even down to going to war! Once national leaders are set on a particular path they tend to continue regardless, even though intelligence data may change and not ultimately support their decisions. One might argue that the Iraq wars and the interventions in Afghanistan, Libya and Syria have indeed followed this kind of route with no planning or perception of the potential consequences, not only for the combatants, but probably even more importantly for the domestic populations of those nations. They just create a power vacuum allowing extremist organisations to take control, if not of the whole country, but large swathes of it.
NATO could find itself embroiled in something similar in the Ukraine when it could talk itself into lining up against Russia – altogether a different, and far more alarming, confrontation for all concerned. But it’s too easy for what starts as combative rhetoric to lead to an ultimate nightmare scenario with neither side willing to back down for fear of losing face.
But that’s something of a digression, albeit an alarming one. Both the U.S. Fed and the BoE, and perhaps the European Central Bank too, could be talking themselves into economic policies which are to the ultimate detriment of their own domestic communities and will likely also adversely impact the world’s emerging economies. Arguably the Bank of Japan has already accomplished this having implemented policies which have driven this key economic and industrial powerhouse into years of average zero growth.
But until we hear the results of the FOMC deliberations before the end of this week, precious metals and equities may remain volatile – even with the week-long moratorium on Fedspeak ahead of the meeting so there won’t be FOMC participants muddying the waters with their conflicting statements. If, as most expect, there’s no decision on rates this time, the markets may breathe a collective sigh of relief up until the weeks ahead of the December FOMC meeting when we’ll see this all play out again.
The above article is an updated and edited version of one which first appeared on the Sharps Pixley website last week
We have recently speculated as to how the gold price might perform now U.S. execs are back at their desks after holidaying in the summer sunshine. Precious metals investors will no doubt recall the time in 2011 when the end of the summer holidays precipitated the beginnings of a prolonged period of precious metals price weakness and will have been worried that this year might see something of the same effect given gold and silver’s strong run over the first half of the year, but this year’s price performance has been very different from that of 2011. Back then the gold price had soared throughout the normally weak July and August months – unsustainably so as it proved. This year the gold price has been pretty flat to weak in July and August following a Brexit boost in late June. Many analysts have seen this as consolidation, perhaps ahead of an upturn in the final four months of the year. Early signs for this look good with the gold price today heading into the mid-$1,340s. Indeed it has hit $1,350 on the spot market on a couple of occasions before slipping back.
Thus, on the first days of trading after the Labor Day holiday, initial portents for precious metals price performance will have been encouraging for investors, helped by weaker than expected PMI Services data and by a weaker dollar. Interestingly, like Friday’s nonfarm payroll figures, the latest Services PMI is not actually weak per se – remaining above the all-important 50 level – but was sharply weaker than analysts’ expectations. The U.S. economy may thus well be growing, but perhaps at a far slower rate than entities like the U.S. Fed would like us to believe.
The net result of the weaker than anticipated US data is for analysts and investors to assume the Fed is unlikely to restart interest rate tightening at the September FOMC meeting in two weeks’ time, for fear of nipping any tentative economic upturn in the bud. If this assumption is correct – and it may be dangerous to assume that it is, given Fed credibility could be at stake in that it had foreshadowed up to four interest rate hikes in 2016 back in December last – then that effectively rules out any interest rate hike announcement until the December FOMC meeting which takes place December 13-14. And if US data follows its current weaker than anticipated course then even a December rate hike may be in doubt. (November is effectively ruled out as a rate increase announcement then would only come about a week before the Presidential Election date scheduled for November 8th.)
Of course the Presidential Election itself could provide yet another huge degree of uncertainty in U.S. markets. According to the latest CNN poll, Donald Trump and Hillary Clinton are running neck and neck – and the Donald is actually in the lead taking into account those who are most likely to turn out and vote, although the majority still anticipates a Clinton victory. Voter turnout could be key with neither candidate being popular with the electorate and, if anything, the latest polls show that Clinton is even less popular, or trusted, among registered Democrats than Trump is among Republicans. As with Brexit, voter turnout may be key and with the two contenders being so unpopular even among their own party supporters, this could be hugely unpredictable.
With the election only two months away we will be seeing probably the most vitriolic, and personally antagonistic, campaign ever which will do nothing for any positive global perceptions on the US political system and could rebound on the economy and markets dependent on who is seen as gaining the upper hand. As someone who awoke on June 24th to hear that UK voters had gone for Brexit, contrary to nearly all the polls, one cannot but help wondering if U.S. voters will be similarly shocked at the Presidential outcome on November 8th. Whoever is elected, economic uncertainty will undoubtedly come to the fore and that could give a big boost to gold in the final two months of the year – and could see the dollar and the general equities markets take a substantial knock further hamstringing any Fed move to raise interest rates.
As we advised UK investors to invest in gold ahead of the Brexit vote – and those who did were rewarded well with the double whammy of a dive in the value of the pound against the dollar coupled with a rise in the gold price – US investors might also be well advised to buy gold ahead of the Presidential election as financial insurance against an unlikely result causing the dollar to fall and gold to rise (which many will see as effectively the same thing!)
For the moment, gold still seems to be holding up in the $1,340s and silver at or around just below $20. After rising to above 71, the Gold:Silver ratio (GSR) has come back down to a little below 68 showing that, as usual silver has been performing better than gold when the latter is looking even just a little stronger. Should gold breach $1,350, expect the GSR to come down even more and silver could easily hit the mid $20s or higher – still an awful long way off where it rose to up until the big take-down in 2011, but in terms of performance this year has already done well for those invested in it at the beginning of 2016.
This is an updated and edited version of one posted by me on the Sharps Pixley website earlier in the week
First one US Fed leader says one thing regarding the possibility of a second interest rate hike this year and then another comes up with a different take on the U.S.’s overall economic position and gold and the dollar move up or down depending on what position is being taken. We have commented before that why the gold price moves to the extent it does on the potential timing of what is likely to be a minimal interest rate increase of perhaps 25 basis points is somewhat of a mystery. (See: Why does gold react so sharply to poss. Fed interest rate rise schedule?) Real inflation is growing at a higher rate than official figures suggest and even if there is a small rate increase, the U.S. will effectively remain in negative rate territory, which is generally positive for gold, but this seems to be being totally disregarded.
Regarding a possible Fed rate increase, possible dates, if the Fed will raise them this year, are September, November and December. We can probably rule out November as the Fed meeting is scheduled only a week ahead of the US Presidential election and the Fed wouldn’t want to be seen as doing anything which might be seen as impacting the result for whatever reason. That leaves next month – probably too early, given the tone of the last FOMC minutes – and a more likely date of December, a full year after the last rate increase assuming economic indicators don’t turn down, which they well could. But from a Fed credibility point of view one suspects that there will be added pressure to go for at least a December rate rise and we would rate that as the most likely date even though a number of top rated analysts do not believe the Fed will return to making small rate rises at all until next year – if then.
So what if the Fed does raise rates by perhaps another 25 basis points in December. The biggest worry for the FOMC is perhaps that this will adversely impact general stock market growth. There are many out there predicting a stock market crash as stocks are seen as overvalued and the worry is that it may only take a tiny adverse change in interest rates to trigger the start of a major downturn.
One doubts that the possible effects on gold will even be considered but it is worth remembering that after a very small adverse reaction given the rate rise was well forecast last December, within 3 weeks gold started on its upwards surge. So much for adverse effects of a Fed rate increase on the gold price.
Personally one feels it would make sense to forbid Fed members from making statements suggesting whether or not rates will be raised sooner or later between FOMC meetings. There’s always a knee jerk reaction in the U.S. markets following such statements with stocks, and gold in particular, moving up or down, sometimes quite sharply, on such statements which makes them potentially prone to abuse. The Fed members who make these statements must be aware of exactly what their prognostications will do with respect to market movements. Now maybe it’s Fed policy to promote such uncertainties, but if so it is a dangerous game to play, and an unfair one for the investment community
By Clint Siegner, Director, Money Metals Exchange*
Investors need to feel like they are getting a bargain – that prices can head much higher still. Many aren’t “feeling” it in the bullion markets. Now that silver has made a run back to $20/oz and gold is once again at $1,350/oz, the metals don’t seem cheap. Some investors are even grabbing the opportunity to sell.
The U.S. Mint finally caught up with orders for the silver American Eagle. Dealers are no longer faced with rationing by the dysfunctional government mint. And premiums for bellwether 90% silver U.S. coin bagsare falling. For the first time in years, there is more than enough being sold back into dealer stocks.
Highest Probability Bet Is Lower Interest Rates, Higher Gold Prices
The Congressional Budget Office is projecting the federal government will rack up another $9.4 trillion in debt in 10 years. That may be wishful thinking. They have a history of underestimating how much programs will cost. Normalizing interest rates 3-4% higher than they are currently will lead to crushing public and private debt service payments and send the economy off a cliff.
And no, electing Donald Trump as president won’t solve this problem either.
We suggest it would be wiser to bet on negative interest rates, or helicopter money, or both. That means the dollar has much further to fall and gold and silver prices are just getting started on their journey north.
Bullion investors should also consider that, despite the rise in prices, the value proposition for gold and silver is quite compelling. Speculative interest in gold and silver futures is near all-time highs. Same for ownership in metals ETFs. Heavy speculative inflows in recent weeks may be cause for concern about precious metals markets overheating near-term. But by comparison, the bond and stock markets have been overheating for years.
The “smart” money is dumping stocks and looking for alternative assets given that equity prices are so high with so little in the way of profits to support them. Large investors aren’t buying Janet Yellen’s assurances about recovery, and they are increasingly uncomfortable with price to earnings valuations at the current levels.
Want to know something else institutional investors don’t love? A 1.5% yield on a 10-year Treasury note. They may be buying bonds – perhaps because they anticipate yields are going even lower or even negative – but the lower yields go, the more attractive metals become. No one has to sacrifice much interest to hold metals instead of cash or bonds.
Many hedge fund managers, including some who previously hated gold, are looking in consternation at inflated stock prices and epic low yields in the bond market and saying, why not? At least gold and silver are among the best performing assets of the year, and prices are still nowhere near all-time highs like bonds and equities.
There is certainly nothing wrong with bargain hunting. Bullion investors just need to remember that when prices are in an uptrend, finding a bargain means not waiting too long to buy.
*Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs. This article first appeared on the www.moneymetals.com website
A controversial article looking at former U.S. Fed Chairman Alan Greenspan’s role in the easy money systems which have pervaded the U.S. and the world economies – and his recent disavowals of these systems in retrospect. While the article is primarily directly relevant to the U.S. economy, it has parallels within any nation which has implemented similar monetary easing. The views expressed are those of the author and not necessarily those of the owner of this website.
By Stefan Gleason*
Under certain circumstances, seemingly decent human beings are capable of horrific things.
So it is with Former Federal Reserve Chairman Alan Greenspan, who parlayed his sound money bona fides into the top post at America’s private banking cartel and current issuer of our un-backed currency. In betrayal of his own stated free-market principles, Greenspan spent his tenure at the Fed pumping up financial markets with easy money and enabling runaway government spending commitments.
Today, however, the “maestro” of central banking is playing a very different tune. He’s warning against an inevitable crisis resulting from the very policies he helped implement.
Perhaps it’s a late-life crisis of conscience. Perhaps he feels guilty. Perhaps at age 90, he just feels free to speak his mind in a way that most current and former Fed officials don’t. In any event, Alan Greenspan is very concerned about the legacy he will leave and now seems genuinely worried about the country’s financial future.
Greenspan: “We Are in the Very Early Days of a Crisis Which Has Got a Way to Go”
Following the Brexit shock and the market volatility that followed in its aftermath, Greenspan scolded British officials for the “mistake” of allowing the vote to leave the European Union to take place. He predicted more dominos would fall. In an interview with Bloomberg last week he said, “We are in very early days of a crisis which has got a way to go.”
It’s not surprising to hear Greenspan echo other pro-globalist voices in bemoaning the potential disintegration of the European Union. Central bankers, commercial bankers, governments, and international corporations all have vested interests in pushing for what they call “integration.”
Outgoing United Kingdom Independence Party (UKIP) leader Nigel Farage declared the successful Brexit referendum “a victory for ordinary people” against “multinationals,” “big merchant banks,” and “big politics.”
As global stock markets protested, the gold market surged to new 2016 highs post-Brexit.
The success of Brexit, which defied the predictions of pollsters, may bode well for Donald Trump. His unconventional campaign for the presidency hits on similar anti-globalist, anti-establishment themes.
Meanwhile in Congress, renegade Republican Rep. Thomas Massie is pushing what he calls an “Amexit” from the United Nations. Massie’s American Sovereignty Restoration Act (HR 1205) would allow the U.S. to leave the United Nations and cease sending $8 billion per year in “contributions” to the world body.
Anti-establishment politics irks elites in central banking and elsewhere who institutionally prefer the status quo. But what really worries former Fed chair Alan Greenspan isn’t the upcoming election or any bill in Congress. It’s the $19+ trillion national debt and the trillions more in future spending commitments that are already baked into the cake.
Greenspan: Entitlements Time Bomb “Is What the Election Should Be All About”
The problem, as Greenspan sees it, is the structure of Social Security, Medicare, and other “mandatory” spending programs. Through them, ever growing numbers of people “are entitled to certain expenditures out of the budget without any reference to how it’s going to be funded. Where the productivity levels are now, we are lucky to get something even close to two percent annual growth rate. That annual growth rate of two percent is not adequate to finance the existing needs.”
Greenspan’s prognosis: “I don’t know how it’s going to resolve, but there’s going to be a crisis.”
His pessimism stems from the political reality that elected representatives lack the will to address entitlement spending. “Republicans don’t want to touch it. Democrats don’t want to touch it. They don’t even want to talk about it. This is what the election should be all about in the United States. You will never hear one word from either side,” Greenspan told Bloomberg.
He is right, of course. Even self-described “conservative” Republicans who tout smaller government in principle don’t actually vote for it in practice. Mathematically, they can’t.
Once you rule out cuts in military and entitlement spending, as most Republicans do, what’s left on the table to cut is small potatoes. Going after waste, fraud, and abuse isn’t going to stop the bleeding of red ink as millions of Baby Boomers withdraw from the workforce and expect to collect trillions in unfunded benefits that have been promised to them.
The good news (if you’re a politician) is that under our monetary system you don’t ever have to cut. You don’t have to ensure that your promises of future benefits can be met with revenues. You can be as fiscally irresponsible as the Federal Reserve’s willingness to expand the currency supply permits you to be. The Fed stands ready to buy up government bonds in unlimited quantities, making a sovereign default practically impossible and enabling the government to borrow at artificially low interest rates.
The government debt bubble is a product of the fiat monetary system. Under a gold standard, Congress would be limited by what it could actually extract from the people in taxes.
Here’s what one of the world’s most famous economists said recently about gold: “If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1913, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard.”
The self-described “gold bug” economist quoted above is none other than Alan Greenspan!
Yes, the longest-serving chairman of the world’s most powerful fiat money establishment.
The same Alan Greenspan who helped both Republican and Democrat administrations drive up the national debt from $2.4 trillion to $8.5 trillion in the years 1987-2006.
The same Alan Greenspan whose implicit open-ended backing of U.S. debt markets helped Congress grow unfunded liabilities by untold trillions more than is even reported in official debt figures.
The same Alan Greenspan who engaged in shocking interventions and currency devaluations, starting with bailing out Long Term Capital Management in 1998 and followed by a blowing up of the tech bubble, and, after its crash, the housing bubble.
Why Did Greenspan Commit His Horrific Monetary “Crimes”?
At last, Greenspan sees the light. Perhaps in private he always did. Before he helmed the Fed, he was known as a free-market advocate who associated with novelist-philosopher Ayn Rand and strongly favored a gold standard. But unlike a Randian hero, Greenspan compromised his principles in his pursuit of power, fame, and social status.
Taken to its extreme, the phenomenon of Greenspan’s tenure was akin to the “banality of evil,” a concept that came into prominence following Hannah Arendt’s book about the Nazi trials. Arendt’s thesis, as described by author Edward Herman, was that people who carry out unspeakable crimes aren’t necessarily crazy fanatics, but rather “ordinary individuals who simply accept the premises of their state and participate in any ongoing enterprise with the energy of good bureaucrats.”
Why did Greenspan play a key role in undermining sound fiscal policies and sound money while he was at the height of his power and influence at the Fed? Why did he do so much to fuel asset bubbles and reckless debt spending? Only Alan Greenspan himself knows for sure, but we’re the ones paying the price.
Gold Today –Gold closed in New York at $1,294.30 up $9 on Wednesday rose strongly in Shanghai to $1,306 before rising again at London’s opening.
The $: € moved lower to $1.1260 from yesterday’s $1.1228 overnight. The dollar index moved to 94.48 down from 94.78.
Yuan Gold Fix
|Trade Date||Contract||Benchmark Price AM||Benchmark Price PM|
|2016 06 16
2016 06 15
|Dollar equivalent @ $1: 6.5982
Shanghai led the way again, after New York closed, taking the price higher to be followed by London taking it higher still, where the gold price barged through overhead resistance and the psychological resistance at $1,300 and hit $1,310. We see this, in part, as HSBC buying in London to supply yesteradya’s SPDR gold ETF demand as well as Chinese investors rushing into gold.
For supplies to be this tight in London tells us that the improvement in the technical picture was reinforced by the supply/demand position in London as U.S. demand continues to burgeon.
We note from Shanghai’s performance, that demand in London or New York cannot be met in China, as no gold exports are allowed from there. Hence Shanghai is untouched by any supply squeeze in the developed world.
Only the Chinese bank ICBC could relieve such demand from its London stocks. But its task, while it is to provide gold to the market as a ‘market maker’ it is not bound to keep the London market ‘in balance’ from its stocks. But it is tasked by China to supply gold to China too. Consequently, it is entirely proper to provide balance in the Chinese gold market, not London. This means that the ICBC will send the gold not needed to be a market maker in London, to China to meet that demand.
Global financial markets are appearing to be discounting an exit of the U.K. from the E.U. and the consequential turmoil now expected. Next week may well prove a ‘watershed’ week for the financial world. If the U.K. votes to stay in the E.U. it will be a damp squid, but if not it may well prove to be ‘the event’ that triggers disruptions that will benefit gold and silver tremendously.
LBMA price setting: $1,307.00 up from Wednesday 15th June’s $1,282.00.
The gold price in the euro was set at €1,164.37 up from Wednesday’s €1,141.79.
Ahead of New York’s opening, the gold price was trading at $1,305.50 and in the euro at €1,168.44.
Silver Today –The silver price closed in New York on Tuesday at $17.54, up from Tuesday’s $17.38 a rise of 16 cents. Ahead of New York’s opening the silver price stood at $17.71.
Not only did the Fed hold rates at current levels, it did warn of game changing events such as Brexit, that could affect U.S. growth and the dollar. It stated that while jobs growth was slowing, economic growth was rising. After Janet Yellen’s statement the gold price jumped to over $1,294 in line with more buying into the SPDR gold ETF.
The next event, overnight, to affect markets was the Bank of Japan’s Kuroda confirmation that it would do nothing more to stimulate Japan’s economy. At this point the global markets reacted by falling. It was not just in Japan, it was across the world, why?
We see this as a signal that Japanese monetary stimulation is not succeeding, confirmed by a stronger Yen, now trading at 104.26 to the U.S. dollar. Falling equity markets around the world tell another story. While they are the remaining source of decent yields and likely to stay that way, prospects for global growth are slowing and now affecting global equities, which are either ‘toppy’ or beginning to fall. In other words, the dark clouds that we have been seeing on the horizon are moving above us. What next? Brexit is next, next Thursday with results seen later that day.
Gold ETFs – On Wednesday the holdings of the SPDR gold ETF(GLD) & Gold Trust(IAU) rose another 2.14 tonnes as more bullion was purchased into the gold ETF, leaving its holdings at 900.75. 0.75 of a tonne of gold bullion was added to the Gold Trust, leaving its holding at 197.65 tonnes.
Since January 4th this year, the holdings of these two gold ETFs have risen 301.632 tonnes. This could prove more that the central banks disclose they bought over 2016. With the distinct possibility of Brexit ahead we could see this total leap over the rest of the year.
Silver –Silver is going at full pelt now and should continue to do so in the weeks ahead.
Julian D.W. Phillips
Julian Phillips’ latest view on what’s going on in the gold and silver markets.
Yesterday (Thursday) was a quiet day for the gold, silver and currency markets after alarming, stronger moves in the Yen and while Janet Yellen’s comments were being digested. Today sees the same process going on, but the tightening of the trading range of both gold and silver tells us a strong move is imminent.
This is one of those days in the precious metal markets when people are looking around, waiting for something to happen. It’s Friday now, the day when we usually see the most action.
In our opinion the markets in gold and silver are rather like a cat getting ready to pounce. We expect the moves to be higher, but it could need more days of consolidation such as we have seen in the last week.
It’s also one of those days when one stands back to fine tune one’s perspective. When we do that we see the Fed [and Treasury] making clear that they don’t want a strong dollar, something the media seems unwilling to accept. The consequences of this are to see the anguish among emerging and other developed world central banks as they see their currencies strengthen. Japan is openly discussing ways of making their currency weaker while at the same time Abe is stating countries should not intentionally weaken their currencies. Are we to believe that they do not intend to weaken their currency with their present interest rate policies? Surely not!
Interest rates and their prospects are driving exchange rates globally as well as equity markets. Their rises have little to do with positive economic prospects, making such rises stand on questionable foundations. This leaves them vulnerable.
With the ‘powers that be’ themselves warning of future crises, the prospects for gold and silver remain good and not subject to single daily events.
China added 9.02 tonnes of gold to its reserves last month. This is down from over 20 tonnes the previous month.
Gold ETFs – We saw no sales or purchases into the SPDR gold ETF on Thursday. There were however, purchases of 0.3 of a tonne into the Gold Trust yesterday. This leaves their holdings at 819.596 and 187.26 tonnes in the SPDR & Gold Trust respectively.
Silver – The silver price continues to be consolidating around $15 still, ahead of a strong move.
Julian D.W. Phillips
Precious metals banked another solid week of gains as investors looked for alternatives to the stock market and U.S. dollar. Both gold and silver pushed through important technical resistance levels. Metals bulls hope to see markets enter a virtuous cycle; improving charts followed by more speculative long interest leading to improved charts.
There is some evidence this may be happening.
TFMetalsReport.com reports the inventory of the largest exchange-traded gold fund (GLD) bottomed in December. It has since rallied sharply as 1) speculators are buying shares in the ETF in volume and 2) GLD “authorized participants” — mostly bullion banks — are covering short positions.
The U.S. equity markets will command most of the focus this week as trading continues to be volatile. The S&P 500 has fallen back to just above key support level in the 1,850 range. If support fails, we’ll have an interesting week.
One wonders if the U.S. can be far behind should economic data continue to disappoint. Former Fed chairman, Ben Bernanke, expects our central bank to add negative rates to the tool kit for fighting recession. And Bloomberg reported that the odds of negative rates, while still relatively small, are rising.
Reasons to Be Cautiously Optimistic on PRECIOUS Metals
Precious metals markets are picking up steam. Last week’s price performance was the best we have seen in months and both gold and silver broke through some important overhead resistance levels. The weekly gains stacked on top of the very strong showing in January. So where do we go from here?
Metals prices are riding higher primarily based on two drivers; fear and the Federal Reserve. Let’s take a look at both for clues about what to expect in the coming months…
It looks increasingly like the world economy is headed for trouble. Fear may be on the rise. Investors are grappling with some pretty lousy economic data, and last week was no exception. The ISM Manufacturing Report showed the fourth straight down month for factories, and the biggest drop in manufacturing activity in more than a year.
Even more problematic, Chinese manufacturing hit a 3-year low point, and the outlook there is grim. The Baltic Dry Index — which tracks costs of ocean freight for commodities such as grains, base metals, and coal — dropped to its lowest level ever last week. Demand for raw goods globally continues to sink.
Main Street America was hit with announcements totaling more than 75,000 planned layoffs in January — 42% more than the same month last year. The retail sector is particularly hard hit. Wal-Mart announced it will close 269 stores globally and 16,000 people will lose their jobs. Macy’s expects to cut nearly 5,000 from its payroll.
But retail certainly isn’t the only sector struggling. Job losses in the oil and gas sector are huge, and Caterpillar recently announced plans to close 4 plants in the U.S. and China.
American consumers are responding to the recent bad news. The key Personal Incomes and Outlays report published a week ago revealed they are battening down the hatches — spending less and saving more.
Wall Street is also feeling the pain. The market for high yield “junk” bonds is deteriorating. Lenders, desperate for better yield in a world dominated by artificially low interest rates, aggressively loaned money into volatile sectors such as oil and gas. Much like the collapse of subprime home lending in 2008, it looks as if those bets may go bad.
In fact, markets are dealing with increasing fears of default everywhere. Risk is jumping significantly for some of the world’s largest banks. The cost to insure the debts of many of these behemoths via credit default swaps spiked massively in recent days.
Virtually all of these institutions are larger than Lehman Brothers. Should even one of them collapse, it will likely be much more difficult to contain the chain reaction that follows.
Fear looks likely to persist and may even accelerate in the coming months. Thus far in 2016, precious metals have been big beneficiaries as investors look for safe havens. That’s an encouraging sign given gold and silver futures missed getting much safe-haven buying the last time the economy slid toward recession in 2008 — at least initially.
With regards to Fed policy, officials there want you to know their decisions are “data dependent.” Lately the S&P 500 seems to be the data they care most about. Just a few weeks ago the consensus was for four additional rate hikes in 2016. Since then the S&P 500 has dumped nearly 10% and the official Fed-speak, as well as the consensus for further hikes, completely reversed.
Our central bankers are now talking about cutting the funds rate back to zero and even the possibility of Negative Interest Rate Policy – NIRP – much like we predicted late last year.
The next FOMC meeting is in March. Odds are we will see officials become even more dovish between now and then. If that occurs we can expect even more weakness in the U.S. dollar and strength in precious metals.
It is important to note that if we get a major shock in the markets — akin to the collapse of Lehman Brothers in 2008 — then all bets are off with regards to metal prices. As happened then, traders may initially be forced to sell precious metals futures along with just about everything else to raise cash and cover margin calls.
This time around, however, metals are at a cyclical low with all speculative money having already been completely flushed out. So far, so good.
While a month is a pretty short time in terms of global finance, the fallout from the U.S. Fed’s December rate rise has seen, as expected, a stronger U.S. dollar. But what virtually all the major bank analysts had forecast – a consequent decline in the gold price in U.S. dollar terms – just has not come about. In the event the reverse has been true and gold has been rising along with the dollar, contrary to generally accepted gold price theory. This is pointed out beautifully in the latest chart from Nick Laird’s www.sharelynx.com charting site and is shown below.
As can be seen from the chart, ever since around the time of the Fed increase of 25 basis points, small though that was, the dollar index has been on an overall upwards trend. Before the Fed increase gold and the dollar had been exhibiting their normal relationship – dollar up and gold down. But since the rate rise – almost to the day – gold has also been rising overall. Indeed it has even been rising far faster than the dollar. Can this continue?
What the forecasters had not been taking into account has been the post Fed rate increase dive in general equities virtually across the board, as markets took the rate rise, together with Fed projections of three or four more similar increases this year, as a sign of continuing money tightening. Indeed the stock market declines – perhaps further stimulated by something of a rout in Chinese equity markets, which are even more of a casino than their Western counterparts – look as though they could be in danger of turning into a true rout……..
The above is the lead into my latest article published on sharpspixley.com. To read the full article click on: Fed Rate Rise has Boosted the Dollar AND Gold
The New York gold price closed Monday at $1,109.30 up from $1,093.50 In Asia it was moved down to $1,100 but in London it slipped back slightly where the LBMA price was set at $1,097.45 up from $1,096.00 with the dollar index a tad higher at 98.82 up from 98.72 yesterday. The euro was at $1.0882 up from $1.0863 against the dollar. The gold price in the euro was set at €1,010.12 up from €1,010.23 as the euro steadied. Ahead of New York’s opening, the gold price was trading at $1,099.00 and in the euro at €1,011.65.
Silver Today –The silver price in New York closed at $14.30 up 28 cents. Ahead of New York’s opening the silver price stood at $14.06.
The breach of $1,100 has made some investors swallow hard after a strong rise brushed away resistance easily once gold broke above $1,085. The gold price is settling back to support at $1,100. Yesterday saw purchases of 4.166 tonnes into the SPDR gold ETF and a relatively massive purchase of 3.87 tonnes into the Gold Trust. The holdings of the SPDR gold ETF are now at 645.131 tonnes and at 156.42 tonnes in the Gold Trust. These two purchases confirm a change in attitude towards gold by U.S. investors.
When global markets are so volatile all investors have to increase the ‘charlie suger’ [common sense] and lower emotions in their investment decisions. For instance, the P.E. ratio on Chinese equities is around 60 whereas on developed world markets it is at 18 on average. The Chinese stock market is peopled by retail investors who rely on ‘good luck’ to dictate the way forward in markets. It is independent of the Chinese economy despite official efforts to make it a conservative reflection of the economy. For the fall in global equities to be attributed to Chinese markets, stretches credibility too far. Developed world equities have been readying for a fall for a long time. While China may have been a ‘trigger’ to their fall, they fell because there is little reason to, on average, to take them higher. Investors are now selling and looking for alternatives. The falls seen to date are only the beginning, we feel. We do see markets in crisis in 2016 with increasing volatility and diminishing liquidity. The potential for rate rises in 2016 to threaten gold, have evaporated as only two small hikes appear to be on the cards for 2016.
The fall in the Yuan is just over 3% of late. Why the fuss over its fall? It is primarily because the U.S. & China’s different interests point to a future currency war should their interests diverge too far. The Chinese purchase of 19 tonnes of gold last month indicates once more, just how committed to gold China is just as U.S. holdings of over 8,000 tonnes shows just how important gold is to the U.S., particularly in view of the potential currency conflict in the future.
The silver price will run up to catch gold when it resumes its rise.
Source: Karen Roche of The Gold Report
Rick Rule Reveals a Unique Arbitrage Opportunity
One of the hardest things for a mining executive to do may be nothing. But in a market that is not rewarding companies for pulling resources out of the ground, Sprott US Holdings Inc. CEO Rick Rule would prefer to see what he calls “optionality” rather than dilution from companies looking to justify salaries. In this interview with The Gold Report, he praises innovative precious metals streams on base metal projects.
The Gold Report: In November, you called the bottom for precious metals. Do you still believe that we’re in the bottom?
Rick Rule: Yes, as long as you can define a bottom gently. I said in that same interview that the most important factor in gold pricing was the fact that it was priced in U.S. dollars, and we see a topping in the U.S. dollar. In fairness, Karen, if you had asked me that same question two years ago, I would have responded in the affirmative and been quite wrong. But I do think the upside in gold is both larger and closer than the downside in gold.
TGR: Now that the Federal Reserve has increased the key interest rate slightly, the expectation is that the value of the dollar will increase relative to other currencies. How could that be the sign of a bottom for gold?
RR: I cut my teeth in the gold business in the 1970s when the prime interest rate in the U.S. increased from 4% to 15%, and the gold price went from $35/ounce ($35/oz) to $850/oz. I also remember that the gold price increased in 2002 in a climate of increasing U.S. interest rates.
The question is more about the reason that interest rates get raised than it is about the simple fact that interest rates go up. If interest rates go up because there is an anticipation of the deterioration in the price of the dollar and, as a consequence, savers deserve more compensation for lending credit, that sort of ethos is supportive to the gold price. If, by contrast, Janet Yellen can make not just the first 25 basis point interest rate rise succeed but subsequent interest rates rise, too, in other words if she can get a positive real interest rate on the U.S. 10-year treasury that exceeds the depreciation in the purchasing power of the currency, then I think we’ll see renewed dollar strength. I don’t believe she’s going to be able to do that, but the market will determine that.
TGR: Back in the 1970s, the international currency situation was different. Today, the euro and the yuan are part of a currency basket competing with the dollar. If gold is priced in U.S. dollars but now we have competitive currencies, is the logic used in the 1970s relevant anymore?
RR: Although we are in a multicurrency world, the dollar hegemony relative to other currencies has stayed intact. If you owned gold in almost any currency in the world in the last 18 months, gold performed its role as a store of value relative to the depreciation in currencies. It was only the strength of the U.S. dollar relative to all other media of exchange, including gold, that caused gold to perform poorly in U.S. dollar terms. To the extent that the U.S. dollar hegemony in world trade begins to be compromised in favor of other currencies, that weakening would be beneficial to the gold price.
You see, any time the denominator declines, the numerator becomes less important. That means if the dollar buys less of everything, it buys less gold, ergo, the gold price goes up at least nominally. Probably more importantly, however, the response that we’ve seen in the last 10 years to financial uncertainty has been an attraction for international investors into U.S. Treasuries as a store of value. If the purchasing power obtained from the real interest rate on U.S. Treasuries comes to be seen globally as negative, the attractiveness of U.S. Treasuries generally, relative to gold, will decline.
What traditionally has happened in periods of uncertainty is that investors have chosen to store some portion of their wealth in gold. The U.S. Treasuries have replaced gold to some degree over the last 10 or 15 years. My suspicion is that gold will regain some of the market share it has lost to the U.S. Treasuries as a consequence of a reduction in confidence in the U.S. dollar and U.S. Treasuries. At current interest rates, with the ongoing deterioration in the purchasing power of the dollar, U.S. Treasuries are a very flawed instrument despite their popularity.
TGR: Why are they popular?
RR: I think they are popular because people have an intrinsic sense that losing 1 or 2% a year in purchasing power beats losing 30% a year in the equities markets. People are genuinely afraid of the direction in the economy. They’re afraid of a replay of 2008.
Super investor George Soros once said that you make large amounts of money by finding a popularly held public precept that’s wrong and betting against it. I just last night watched the movie The Big Short, and I was reminded that it’s not uncommon to have the financial services industry, the government and the populace believe something to be true that is categorically false. I’m not suggesting that the U.S. 10-year Treasuries are as stupidly overpriced as the U.S. housing market and mortgage-related securities were in the last part of the last decade, but I do suspect that we are in a bond bubble, in particular a sovereign bond bubble. I suspect that a 30-year bull market in bonds is fairly close to being over. Raising rates is very difficult for the principal value of bonds. I think we’re closer to the end of the bond bull market than we are to the beginning and that’s very good for gold.
TGR: In terms of resources, are there some widely held popular beliefs that you believe are not true?
RR: I do. Sadly, as an American, I think the hegemony of the U.S. economy relative to the rest of the world economy is a widely held precept that’s untrue. Remember in 2011, the pro-gold narrative revolved around on-balance sheet liabilities of the U.S. government—just the federal government, not the state and local governments—of $16 trillion ($16T). That was considered unserviceable in an economy that generated new private savings of $500 billion a year. If $16T was unserviceable in 2011, how can $19T be serviceable today? Was $55T in off-balance sheet liabilities—Medicare, Medicaid and Social Security—in 2011 less serviceable than $90T in off-balance sheet liabilities today?
My suspicion is that the change in the interpretation of the narrative has to do with the fact that in 2011, the lessons of 2008–2009 were much closer. My observation, having been in financial services for 40 years, is that people’s anticipation of the future is set by their experience in the immediate past. And the experience that we’ve had in the 2011–2015 time frame is that the big thinkers of the world—the Yellens, the Merkels, the Obamas—have somehow muddled through. But the liquidity they have added to the equation is not a substitute for solvency. That is the great, popularly held precept that’s wrong. What I don’t know is when the reckoning occurs.
TGR: Going back to Soros and a widely held popular belief and you bet against it, what’s the bet against this?
RR: Gold for one thing. I think you also need to have U.S. dollars because cash gives you the courage and the means to take advantage of circumstances like 2008. But I think that if you had a set of circumstances where faith in the U.S. dollar and U.S. dollar-denominated sovereign instruments began to falter, gold would be an enormous beneficiary. History tells us that if you’re using gold as an insurance policy that a very small premium—a fairly small amount of gold held in a portfolio—gives you an enormous amount of insurance. In other words, the upside volatility in the gold price is such that you can protect your portfolio against losses in other parts of your portfolio by having fairly moderate gold holdings.
TGR: Are you talking about physical gold?
RR: This would apply to physical gold or proxies like the Sprott Physical Gold Trust, the Sprott Physical Silver Trust and the Sprott Physical Platinum and Palladium Trust.
TGR: Soros has said that sometimes it takes two or three years before a bet actually comes in to the money. If we are expecting the gold price to increase as the faith in the dollar falters, what is the role of mining equities in betting against the status quo?
RR: I think it’s important to segregate between the gold bet and the gold equities bet. I would say if you think that gold is going to go up, buy gold. Don’t buy the gold stocks for that reason. This is particularly the case with the juniors. People ask me, “Rick, if the price of gold goes up, what will it do to the share price of my Canadian junior, Amalgamated Moose Pasture Mines?” The truth is that Amalgamated Moose Pasture doesn’t have any gold. It’s looking for gold.
If the price of something that you don’t have goes up, it doesn’t have much impact on the intrinsic value. I will say that the leverage that’s inherent in the best 10% of gold stocks is superb, but you need to buy those stocks because the management team is adding relative value. You can’t buy the shares hoping for a magnification of the gold price increase. That won’t compensate for the risks. There have to be other ways the company is advancing.
The truth is that the gold mining industry has been an enormously efficient destroyer of capital in the last 40 years despite real increases in the gold price. You need to be an excellent stock picker to overcome drag brought on by corporate inefficiency relative to the inherent leverage that you should theoretically enjoy in equities relative to the gold price. The equities have made me an enormous amount of money in the last 40 years. It’s just that as a consequence of understanding the equities for what they are, I’ve done a better job of picking them.
TGR: The Silver Summit was the first time I heard you explain the concept of “optionality.” What is your advice in this climate for mining investors?
RR: For the right class of reader who is speculative and willing to do the work, there is a class of junior company that offers extraordinary leverage to the changing perceptions in favor of gold and gold equities. It is inherently illogical to put a mine in production because you think the price of a commodity is going to go up in the future. Let’s say that there’s a five-year lag between the time that you put the mine in production and the time that the commodity price goes up. What happens is that you’ve mined the better half of your ore body and sold that gold during periods of low gold prices in anticipation of higher gold prices. So the gold price goes up, and you have a hole in the ground where your gold used to be. Fairly silly.
A much better strategy is to buy deposits cheaply when gold prices are low. Then hold them in the ground, spending almost no money on beneficiation. Spending money at that point only causes you to issue equity, which reduces your percentage ownership in the deposit.
TGR: How does someone who is not a geologist know what the relative cost of getting that gold is if the company hasn’t done some work like drilling and publishing a preliminary economic assessment to educate me?
RR: One thing investors can do is subscribe to publications like Brent Cook‘s newsletter or visit the free educational material at www.sprottglobal.com. The truth is that nobody, even the best investor in the world, is going to get it right all the time. All you have to do is get closer than your competition. Given the fact that most of your competition isn’t doing any work whatsoever, the bar isn’t very high.
TGR: Another investment strategy that you have been a fan of is streaming companies. How would you compare their optionality given where the gold price is now?
RR: I love the streaming business. It’s regarded as an extremely conservative strategy, and maybe that’s why I like it. In the streaming business, the contracting company buys the rights to a certain amount of gold or silver from a mine for a fixed price over a given period of time. The company receives the gold in return for a pre-negotiated payment irrespective of the gold price at the time that the gold is received. The company that contracts for the gold isn’t responsible for the capital cost required to build the mine, so any cost overrun associated with the mine is irrelevant to the streamer. Similarly, it is not responsible for the operating cost of the mine. It has already locked in its costs. Commonly, those are about $400/oz. The margin between $400/oz and $1,000/oz—$700/oz—is substantially greater than the margins enjoyed by the mining industry in general, which are, in fact, negative.
What I really like about the streamers right now is the arbitrage in cash flow valuation between the streaming companies and the base metals mining companies. Precious metals-derived revenues in a streaming company, because of the success of streamers in the last 20 years, have been capitalized at about 15 times cash flow. That same precious metals revenue as a byproduct revenue in a base metals mine is capitalized at about six times cash flow. That means that a streaming company could buy that cash flow from a base metals mining company at $10M, and it would be wildly accretive to the streaming company at the same time as it would materially decrease the cost of capital for the base metals mining companies.
Base metals mining companies are in truly dire circumstance right now, with the price that they’re being paid for their base metals commodities being substantially lower than their all-in sustaining capital costs for producing it. This means that the base metals mining companies need to do whatever they can do to lower their cost of capital. My suspicion is that you will see many billions of dollars of precious metals byproduct streams from base metals mines being sold from the major base metals mining companies around the world to the streaming companies. My suspicion is that these transactions will simultaneously save the base metals mining company billions of dollars in capital while being accretive to the precious metals streamers by billions, too. I think this is a transformative event for the streamers.
TGR: If a base metals company is essentially losing money for every pound pulled out of the ground, why wouldn’t the management leave the commodity in the ground until prices increase? Why don’t they practice optionality?
RR: One of the challenges with the optionality strategy is it is very tough to get a management team to do nothing. It’s tougher yet to get them to be paid appropriately for doing nothing. Not mining is an awful lot cheaper and an awful lot easier than mining, but the truth is that there’s a bias to produce, and there may be a need to produce. Your all-in cost to produce 1 pound of copper may be $2.75, but your cash cost to produce that pound may be $1.70, and if you sell it for $2/lb, you are generating $0.25 to service debt and cover the all-important CEO salary.
TGR: Frank Holmes agreed with you when he said that while the price of gold seems to have languished in the U.S. dollar terms, in other currencies it has been doing quite well. Particularly, he pointed to Australian mining companies as standing out. Do you agree?
RR: Australian gold stocks have performed incredibly well this year, so part of that thesis has been used up by the share price escalation of those companies. Given that Australian gold mining companies sell their product in U.S. dollars but pay their costs in Australian dollars, they had a de facto 40% decrease in their operating costs, which is extraordinary. In fact, the decrease was deeper than that because a major component of their variable costs is the price of energy, and the price of energy fell 50% in U.S. dollar terms at the same time that the Australian dollar fell further. That means that the operating performance of gold mining companies in Australia relative to gold mining companies whose costs are denominated in U.S. dollars with U.S. operations has been extraordinarily good.
We don’t see any near- or immediate-term strength in the Australian dollar so this cost competitiveness could continue. Additionally, the iron and the coal industry, which compete for workers and inputs directly with the gold industry, have experienced continued distress, which means that the cost push even in Australian dollar terms will diminish.
Plus, we see the Australian market as more honest than the Canadian or the London market in the sense that the mining industry in North America and Europe became increasingly securities-oriented where the value proposition became rocks to stocks and stocks to money. In Australia, the ethos is more a direct drive, more a sense that you want to make money mining and that the stock ought to take care of itself. We see that as a competitive advantage that will continue for five or six years while the North American and European industries reform their expectations.
TGR: The value of the Canadian stocks has been decimated over the last three years. If the management teams are not focusing now on making money now, what’s going to make them change?
RR: Hopefully, bankruptcy. There are 500 or 600 listings on the TSX Venture Exchange that are zombie companies with negative working capital. They’re in a capital-intensive business, but they have no capital, so they aren’t really in businesses. These companies need to be extinct. It’s an ugly thing to say to the people who own stock in these cockroaches and uglier still to the people who work for the cockroaches, but it has to happen.
TGR: You’ll be speaking at the Vancouver Resource Investment Conference at the end of January. What are you hoping that investors take away from that conference?
RR: This conference is in Vancouver, so it’s easy and cheap for companies to exhibit there. The first thing that I hope that people do is understand that if the narrative that existed with regard to resources and precious metals in 2011 was true then, it’s more true now. Only the price has changed. Investors need to recognize that a market that’s fallen by 88% in nominal terms and 90% in real terms is precisely 90% more attractive now than it was then. The mistakes that people made then were mistakes of overvaluation. The mistakes that people make now are mistakes of undervaluation.
It’s important, however, not to make the mistakes that we made in the past. The truth is that you need to temper your expectation of wonderful stories with hard core reality, with securities analysis, which people are unwilling to do. At that conference, you will have the ability to learn lessons in equity market valuations if you are willing to work and absorb them. And you have the ability, with 200 exhibitors present, to practice the lessons that you’ve learned in real time, 20 or 30 meters away from where you learned the lesson itself. So it’s a wonderful opportunity for people who come to work rather than people who come to be entertained.
TGR: Thank you, Rick, for your insights.
Rick Rule, CEO of Sprott US Holdings Inc., began his career in the securities business in 1974. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. His company has built a national reputation on taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries. Rule writes a free, thrice-weekly e-letter, Sprott’s Thoughts.
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