Category Archives: Gold

The Fed Blinked – Gold And Silver Are Going Higher

Price inflation has been badly misrepresented by CPI figures and have been averaging closer to about 8% annually since gold topped in Sept 2011. Since then the purchasing power of the dollar has declined by about 43%, so that in 2011 dollars the gold price is $740. No one seems to have noticed, leaving gold extremely cheap. – Alasdair Macleod, “Ten Factors To Look For In Gold In 2019

The following is an excerpt from the latest issue of the Mining Stock Journal, which included an analysis of a  highly undervalued, relatively new and unknown junior mining company advancing a gold-silver project in Mexico.

As I have suggested in the past (in more detail in the Short Seller’s Journal), the Fed is retreating quickly from rate hikes and balance sheet reduction (QT). The Fed deferred on raising rates at its FOMC meeting this week. What I found somewhat shocking, however, was the removal of reference to “further gradual rate increases.”

Perhaps more shocking was the reference to the possibility of re-starting the money printing press:  “…the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy…” That statement translated means, “we’ll have to print more money eventually.”

This should be extremely bullish for the precious metals sector. The only issue is the timing of the next big move higher. That depends on the degree to which the banks can continue controlling the price with gold and silver derivatives.  No one knows that answer, not even the banks. At some point, as occurred from 2008-2011, the western banks will be unable to suppress the natural price rise of gold/silver. That said, the Chinese and the Russians could pull the rug out from under the western manipulation if and when they want. That will happen eventually as well.

Alasdair Macleod wrote a brief and insightful essay from which I quoted and linked above describing key factors in 2019 that could push the price of gold significantly higher. Most of the factors are familiar, especially for subscribers to my Short Seller’s Journal. First and foremost will be the Fed, along with Central Banks globally,  reverting to easy monetary policy.

Notwithstanding official propaganda to the contrary, the U.S./global economy is rapidly slowing down. Many areas are contracting. Government spending deficits will soar as tax revenues fall behind the rate at which Government spending is increasing.

At some point, the Government will plead with the Fed to help finance Treasury issuance (this will occur in the EU, Japan and China as well), creating another acceleration in monetary inflation/currency devaluation. This will act as a transmission mechanism to inflate the dollar price of gold. Smart investors understanding this dynamic, and who have the financial resources, will move dollars out of financial assets and into gold. See 2008-2011 for an example of this process.

Gold has outperformed almost every major asset class since 2000:

Gold has outperformed most other assets since 2000 because Central Banks globally began to implement extreme monetary policies in response to the global stock market crash in 2000 led by tech stocks. As John Hathaway, manager of the Tocqueville gold fund, describes it, “gold has been a winning strategy since monetary policy became unhinged nearly two decades ago.”

In addition to the fiscal and monetary policies implemented globally in response to deteriorating economic and financial conditions, Alasdair identifies four factors directly affecting the price of gold this year.

One factor not widely perceived or understood by the markets is the gradual and methodical shift away from using the U.S. dollar for trade and as a reserve asset by Russia and China. It’s clear that both countries are swapping dollar reserves for gold and conducting an increasing percentage of bi-lateral trade with their trading partners in each country’s sovereign currency.

As an aside, gold has been soaring in most currencies besides the dollar. At some point, this shift away from using the dollar as a reserve currency will remove the “safe haven asset” status of the dollar, causing a considerable decline in the dollar vs global currencies. Concomitantly, the dollar price of gold will soar.

Another factor identified by Macleod is price inflation: “price inflation has been badly misrepresented by CPI figures and has been averaging closer to about 8% annually since gold topped in Sept 2011. Since then the purchasing power of the dollar has declined by about 43%, so that in 2011 dollars the gold price is $740. No one seems to have noticed, leaving gold extremely cheap.”

In my view, the price inflation factor as it affects investor attitudes toward gold will be a “slowly then suddenly” process. Investors and the population in general tend to move in herds. Currently the headline Government CPI is accepted and discussed as reported. At some point,  a large contingent of mainstream institutional investors will decide the Government’s measurement of inflation is wrong and will begin to buy gold and silver. The masses will soon follow. We saw this dynamic leading up to the parabolic move by gold in 1979-1980.

The third factor is “monetary inflation.” Most people think of price when they see the term “inflation.” But the true economic definition of “inflation” is the rate of growth in the money supply in excess of the rate of growth in economic (wealth) output. This in essence reduces the value of each dollar. Think about it terms of an increasing amount of dollars made available to chase a fixed supply of goods and services. That’s the monetary inflation that causes “price” inflation. Rising prices are the manifestation of monetary inflation.

As discussed at the beginning, at some point the Fed will be forced to re-start the printing press or face the consequences of a rapid economic and financial collapse.  Macleod points out that “these are exactly the conditions faced by the German government between 1918 and 1923, and the likely response by the Fed will be the same. Print money to fund government deficits.”  Recall that the policies used by the Weimar Government eventually led to hyper price inflation. The hyperinflation did not occur until the early 1920’s. But the policies leading to this condition began in 1914, when Germany World War 1 started and Germany’s huge war debt began to pile up. This is strikingly similar to the huge U.S. Government debt outstanding currently.

The final factor mentioned by Macleod is simply, “Gold is massively under-owned in the West.” By 1980, institutional investors on average held 5% of their assets in gold. Currently the percentage allocation to gold (or fake gold like GLD) is well under 1%. All it would take for a massive price reset  in gold and silver is for institutions to allocate 1-2% of their assets to gold. I believe eventually that allocation percentage will move back to 3-5%, which will drive the price of gold well over $2000/oz.

The Stock Market Would Crash Without Central Bank Support

The mis-pricing of money and credit has also driven a terrible misallocation of capital and kept unproductive zombie debtors alive for too long. Saxo Bank, “Beware The Global Policy Panic”

“Mis-pricing of money and credit” refers to the ability of the Fed to control interest rates and money supply.  Humans with character flaws and conflicting motivations performing a role that is best left to a free market.   After the market’s attempt in December to re-introduce two-way price discovery to the stock stock market, the Fed appears ready to fold on its “interest rate and balance sheet normalization” policy, whatever “normalization is supposed to mean.

Tesla is the perfect example of terribly misallocated capital enabling the transitory survival of a defective business model. Access to cheap, easy capital has enabled Elon Musk to defer the eventual fate of the Company for several years. But as the equity and credit markets become considerably less tolerant, companies with extreme financial and operational flaws are exposed, followed by a stock price price that plummets.

The Stock Market Would Crash Without Central Bank Support – A few weeks after Fed head, Jerome Powell, hinted that the Fed may hold off on more rate hikes, an article in the Wall St. Journal suggested that the Fed was considering halting its “Quantitative Tightening” program far sooner than expected, leaving the Fed’s balance sheet significantly a significantly higher level it’s original “normalization” plan.

But “normalization” in the context of leaving the Fed’s balance sheet significantly larger than its size when the financial crisis hit – $800 billion – simply means leaving a substantial amount of the money printed from “QE” in the financial system. This is a subtle acknowledgment by the Einsteins at the Fed that the U.S. economic and financial system would seize up without massive support by the Fed in the form of money printing.

I suggested in the January 13th issue of my Short Seller’s Journal that the Fed would likely halt QT: “The economy is headed toward a severe recession and I’m certain the key officials at the Fed and White House are aware of this (perhaps not Trump but some of his advisors). I suspect that the Fed’s monetary policy will be reversed in 2019. They’ll first announce halting QT. That should be bad news because of the implications about the true condition of the economy. But the hedge fund algos and retail day-trader zombies will buy that announcement. We will sell into that spike. Ultimately the market will sell-off when comes to understand that the last remaining prop in the stock market is the Fed.”

Little did I realize when I wrote that two weeks ago that the Fed would hint at halting QT less than two weeks later.

When this fails to re-stimulate economic activity, the Fed will eventually resume printing money. Assuming the report in the Wall Street Journal on Friday is true, this is a continuation of the “mis-pricing” of money credit alluded to above by Saxo Bank. Moreover, it reflects a Central Bank in panic mode in response to the recent attempt by the stock market to re-price significantly lower to a level that reflected economic reality.

The Deflating Stock Bubble Will Fuel A Bull Move Mining Stocks

“The economic and financial condition of the U.S. and global economy is similar to that of 2008, although I think now it’s a lot worse than it was back then…the ‘gravity’ of true fundamentals has finally gotten ahold of stocks…”

Fundamentals ultimately drive value.  In terms of the fundamentals, financial assets – stocks, bonds, real estate – are extremely overvalued.  The precious metals sector right now is extremely cheap relative to fundamentals.

Don’t be fooled into thinking that the stock market bounce that started the day after Christmas was the end of the “bear market,” as Jim Cramer is asserting.  Bear markets last a lot longer than four weeks.  A bear market in financial assets is just getting started.  At the same time, the bull market cycle in gold, silver and mining stocks that began in late 2015 with a 250% run-up in GDX over the next 8 months  is ready to resume after using just over 2 years to effect a 38% pullback from the sharp in 2016.

Elijah Johnson invited me to discuss the economy, stock market and precious metals sector on his Silver Doctor’s podcast:

************************

If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:   Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

The Fed Panics And Gold Soars

First it was the loudly broadcast convening of the Working Group on Financial Markets – aka “the  Plunge Protection Team” – by the PPT’s el Jefe, Steven Mnuchin.  This was followed the “mouse that roared” speech from Fed head, Jerome Powell, hinting that the Fed would moon-walk away from rate hikes.

Today was trial Hindenburg launched by the Wall St Journal suggesting that the Fed was considering curtailing the the FOMC’s balance sheet Weight Watchers program.  The terminology used to describe the Fed’s actions is Orwellian vernacular. “Reserve levels” – as in, “leaving more reserves on the Fed’s balance sheet” – sounds mundane. In plain-speak, this is simply the amount of money the Fed printed and will leave in the financial system or risk crashing the stock market.

I suggested in the January 13th issue of my Short Seller’s Journal that the Fed would likely halt QT: “The economy is headed toward a severe recession.  I’m certain the key officials at the Fed and White House are aware of this (perhaps not Trump but some of his advisors). I suspect that the Fed’s monetary policy will be reversed in 2019. They’ll first announce halting QT. That should be bad news because of the implications but the hedge fund algos and retail day-trader zombies will buy that announcement. We will sell into that spike.”

Little did I realize when I wrote that two weeks ago that the assertion would be validated just two weeks later. When this fails to re-stimulate economic activity, the Fed will eventually resume printing money.  Ultimately the market will figure out that it’s a very bad thing that the only thing holding up the stock market is the Fed.

The policy reversal by the Fed reflects panic at the Fed. Nothing reflects “Fed Panic” better than the price of gold:

CEO Of Moscow Exchange: Replace Dollars With Russian Gold

One way or another, the eventual fate of the dollar is inevitable…

“Super-conservative investors purchase dollars and keep them “under the pillow, which is not very safe”

Russian gold could become the perfect alternative to conservative investments in the greenback, the CEO of Russia’s key trading floor, Moscow Exchange (MOEX), believes.
“Let’s offer an alternative to the US dollar in the form of Russian gold, which we produce… investment gold,” CEO Alexander Afanasiev suggested, speaking in the Lower House of Russia’s parliament on Monday.

He added that some “super-conservative investors” purchase dollars and keep them “under the pillow,” which is not very safe, he believes. The MOEX chief also noted that Russians have increased their investment activity and act “surprisingly rational.”

Russia is the world’s third-largest gold producer and in 2017 boosted its gold output by more than six percent. It produced almost 265 tons of gold in January-October 2018, according to data provided by the Finance Ministry.

Read the full article here: US Dollar/Russian gold

What’s In Store For The Precious Metals Sector in 2019?

The Newmont/Goldcorp merger is the second mega-deal in the industry after Barrick acquired RandGold in September. Without question, the two deals reflect the growing need for large gold and silver mining companies to replace reserves, which are being depleted at these two companies more quickly than they are being replenished. The deal will give Newmont access to Goldcorp’s portfolio of developing and exploration projects acquired by Goldcorp over the last several years.

While this deal and the Barrick/Randgold deal will help cover-up the managerial, operational and financial warts on Barrick and Newmont, it will also likely stimulate an increase in M&A activity in the industry. I believe that the other largest gold mining companies – Kinross, Yamana, AngloGold Ashanti, Gold Fields, Eldorado, and Agnico-Eagle – will look closely at each other and at mid-cap gold producers to see if they can create “synergistic” merger deals

The same “impulse” holds true for silver companies, the largest of which are diversifying into gold or acquiring competitors (Pan American acquires Tahoe Resources and SRM Mining buys 9.9% of Silvercrest Metals, which will likely block First Majestic from going after Silvercrest, and Americas Silver buys Pershing Gold). Similarly, we could see mid-cap producers merging with each other or acquiring the junior producers.

Phil Kennedy – Kennedy Financial – invited me along with Craig Hempke – TF Metals Report – to discuss the implications of the two gold mega-deals, our outlook for the precious metals sector and a some other timely topics affecting the financial markets:

***********

In my latest issue of the Mining Stock Journal, I provided a list of gold and silver stocks that I believe could become acquisition targets this year, as well as an in-depth update on one of my top gold exploration stock ideas. You can learn more about this newsletter here: Mining Stock Journal

Unprecedented Manipulation And Trading The Precious Metals Ratios

Anyone who denies that Governments and Central Banks manipulate the gold and silver markets using paper derivatives and deceptive physical metal custodial operations is ignorant of history and facts.  Currently the gold and silver price capping is as oppressive as I’ve witnessed in 18 years.

As of Tuesday, January 15th, the open interest in gold had soared by 89,120 contracts to  501,605. 89,120 contracts is 8.9 million ozs of paper gold, or 278.5 tons – about 30 tons  more than the amount of gold produced by mines in the U.S. in one year.

But artificial market intervention creates information inefficiencies. This in turn generates exploitable profit opportunities for traders who know how to identify the set-ups from official manipulation.

With unprecedented manipulation continuing to occur in the precious metals market, some tradeable anomalies have appeared in the gold /silver and platinum / palladium ratios. My friend and colleague, Chris Marcus (former options trader at Susquehanna International), got together with Andy Schectman and Mickey Fulp to discuss strategies you can use to take advantage of the market anomalies which have been created by official intervention in these markets in the video below. You can see more of Chris’ at his website, Arcadia Economics:

Barkerville Gold: Quickly De-Risking And Undervalued

Barkerville Gold (BGMZF, BGM.V) is advancing it Cariboo Gold Project in British Columbia.  The Cariboo Project is a district-scale, massive land package loaded with gold mineralization (over 110 gold-bearing streams on the property).  Osisko Mining took operational control of the Project, with the transition beginning in mid-2015.  Chairman, Sean Roosen, took the old Osisko Mining’s Canadian Malarctic Project purchased for about $90,000 and developed it into what is now one of the largest gold mines in the world, selling it to Yamana/Agnico-Eagle in deal worth nearly US$3 billion.

BGM currently has a resource consisting of a little more than 3 million ozs of measured, indicated and inferred gold averaging 6 grams/tonne.  It also has an operating mine at the Bonanza Ledge/BC deposits which has been successfully tested recovering over 20,000 ozs of gold at a 91% recovery rate.  This is important for two reasons:  1) the mine will used to generate cash flow to help fund the massive exploration program in progress; 2) it confirms that the ore can be extracted economically at the current price of gold.

The current market cap of BGM using the 555.6 million fully-diluted share-count is US$194 million. It would be a mistake to dismiss this investment opportunity because of the high share-count.  The resource could easily end up at least 3-4x larger than the current 3 million ozs. with a production profile of 400-500,000 ozs of production  per year.  With a higher price of gold, this company has $1 billion market-cap potential. Even if there’s 1 billion fully-diluted shares outstanding at the time, that’s a triple from the current price.  That said, I can guarantee that Sean Roosen did not just invest another $1mm of his own money for only  a triple.

You can view a webcast presentation of Barkerville by BGM’s President/COO, Chris Loder, with intermittent comments from Sean Roosen by clicking on the link below.  The webcast is hosted by O&M Partners, which produces live management presentations of mining stocks for retail/high net worth/small institutional investors.  I have found these webcasts to be invaluable. I was invited to give brief opening remarks on gold and junior mining stocks  (note: you will need to fill out form with your name and email information – this will only be used by O&M to invite you future webcasts):

BARKERVILLE GOLD MINES Management Presentation

***********************

You can learn more about Vista Gold and other highly undervalued junior mining stock in the Mining Stock Journal:   Mining Stock Journal information

Vista Gold: Overlooked And Undervalued

Vista Gold (VGZ) has a storied history as a junior gold miner.  In 2012 new management, led by CEO, Fred Earnest, took control of the operations and has been advancing the Mt. Todd gold project, which is the largest undeveloped gold project in Australia.

Mt. Todd contains nearly 6 million ounces of gold reserve (proven/probable).  A Preliminary Feasibility Study updated in 2018 shows a project with 381,000 ozs of annual production over a 13-yr mine life (479,000 ozs/yr for first 5 years), an after-tax IRR of 20% and after-tax NPV of $679 million.  The current market cap of the stock is $57 million (100 million shares outstanding).  As an operating mine, it would be the fourth largest gold mine in Australia and one of the largest new gold mines in the world over the last several years.

I’m not sure why VGZ trades at a huge discount to its peers and to its “intrinsic value.”  To be sure, the Mt. Todd Project has a checkered history.  But this is primarily attributable to inept management by previous owners.  On the surface the resource grade may appear low (.82 grams per tonne). But VGZ has successfully tested and implemented high-tech ore sorting technology which has improved the throughput grade by as much as 50% (1.2 grams per tonne) and has taken heap leach recovery rates north of 90%.

The Mt Todd Project will be converted eventually to a mine.  I suspect that, as the price of gold rises, a large mining company will either invest in the Project and take over operational control or acquire Vista outright.  The Company has signed recent non-disclosure agreements with mining companies interested in the Project. Until an “exit strategy” event unfolds, this stock is an easy double from its current price.

The Mining Stock Daily’s Trevor Hall interviewed Vista’s CEO to discuss the Mt. Todd Project (click on the graphic below to stream the interview or stream it on your favorite app here – Mining Stock Daily):

The Mining Stock Daily is produced by Clear Creek Digital and the Mining Stock Journal. MSD is now sponsored by Mineral Alamos, which has a portfolio of high quality gold and gold-silver-copper polymetallic assets in Mexico.

You can learn more about Vista Gold and other highly undervalued junior mining stock in the Mining Stock Journal: Mining Stock Journal information.

In the latest issue, I discuss my outlook for the precious metals and mining stocks in my latest Mining Stock Journal. I also present a list of large and mid-cap mining stocks that should outperform the market for at least a few months, including ideas for using call options.

The Powell Helium Pump

The stock market has gone “Roman Candle” since Fed Chairman, Jerome Powell, gave a speech that was interpreted as a precursor to the Fed softening its stance on monetary policy.  Not that intermittent quarter-point Fed Funds rate nudges higher or a barely negligible decline in the Fed’s balance sheet should be considered “tight” money policy.

Credible measures of price inflation, like the John Williams Shadowstats.com Alternative measure, which shows the rate of inflation using the methodology in place in 1990, show inflation at 6%.  The Chapwood Index measures inflation using the cost of  500 items on which most Americans spend their after-tax income.  The index is calculated for major metro areas and has inflation averaging 10% (The John Williams measure which uses 1980 Government methodology also shows the current inflation at 10%).

Using the most lenient measure above – 6% current inflation – real interest rates are negative 3.5% (real rate of interest = Fed Funds – real inflation).  The “neutral” interest rate would reset the Fed Funds rate to 6%.  In other words, the Fed should be targeting a much higher Fed Funds rate.

So, if the economy is booming, as Trump exclaims daily while beating his chest  – and as echoed by the hand-puppets in the mainstream media – why is the Fed relaxing its stance on monetary policy?  The huge jump in employment, per the December jobs report, should have triggered an inter- FOMC meeting rate hike to prevent the economy from “over-heating.”

In truth, the economy is not “booming” and the employment report was outright fraudulent. The BLS revised lower several prior periods’ employment gains and shifted the gains into December. The revisions are not published until the annual benchmark revision, on which no one reports (other than John Williams). Not only will you never hear or read this fact from the mainstream financial media and Wall Street analysts, most if not all of them are likely unaware of the BLS recalculations.

The housing market is deteriorating quickly. Housing and all the related economic activity connected to homebuilding and home resales represents at least 20% of GDP. And the housing market is not going to improve anytime soon.  According to a survey by Fannie Mae, most Americans think it’s a bad time to buy a home even with the large decline in interest rates recently.

Several other mainstream measures of economic activity are showing rapid deterioration:  factor orders, industrial production, manufacturing, real retail sales, freight rates etc. Moreover, the average household is loaded up its eyeballs with debt of all flavors and is sitting on a near-record  low savings rate.  Corporate debt levels are at all-time highs.  In truth the economy is on the precipice of going into a tailspin.

The stock market is the only “evidence” to which Trump and the Fed can point as evidence that the economy is “strong.”  Unfortunately, over the last decade, the stock market has become an insidious propaganda tool, used and manipulated for political expediency.  The stock market can be loosely controlled by the Fed using monetary policy.

The stock market can be directly controlled by the Working Group on Financial Markets – a subsidiary of the Treasury mandated by a Reagan Executive Order in 1988 – using the Exchange Stabilization Fund. Note:  anyone who believes the Exchange Stabilization fund and the Working Group are conspiracy theories lacks knowledge of history and is ignorant of easily verifiable facts.

Trump referred to the stock market as a “big fat ugly bubble” in 2016 when he was running for President with the Dow at 17,000.  If it was a visually unaesthetic sight back then, what should it labelled now when it almost hit 27,000 in 2018?  Trump blamed the recent decline in stock prices on the Fed.  Worse, Trump has put inexorable political pressure on the Fed to loosen monetary policy and stop nudging rates higher.  Note that this debate never covers the topic of “relative valuation…”

The weekend before Christmas, after a gut-wrenching sell-off in the stock market, the Secretary of Treasury graciously interrupted his vacation in Mexico to place a call to a group of Wall Street bank CEOs to lobby for help with the stock market.  The Treasury Secretary is part of the Working Group on Financial Markets.  The call to the bank CEOs was choreographically followed-up by the stock market-friendly speech from Powell, who is also a member of the Working Group.

The PPT combo-punch jolted the hedge fund algos like a sonic boom.  The S&P 500 has shot up 10.8% in the ten trading days since Christmas.  It has clawed back 56% of the amount its decline between early September and Christmas Eve.

In reality, the speech was not a “put” because a “put” implies the installation of a safety net beneath the stock market to stop the descent. Rather, the speech should be called, “Powell’s Helium Pump.”  This is because the actions by Mnuchin and Powell were specifically crafted with the intent to drive the stock market higher.  It’s worked for a week, but will it work long term?  History resoundingly says, “no.”

Make no mistake, this nothing more than a temporary respite from what is going to be a brutal bear market.  The vertical move in stocks was triggered by official intervention. It has stimulated manic short-covering by the hedge fund computer algorithms and panic buying by obtuse retail investors.

Investors are not used to two-way price discovery in the stock market, which was removed by the Federal Reserve and the Government in late 2008.  Many money managers and retail investors were not around for the 2007-2009 bear market. Most were not around for the 2000 tech crash and very few were part of the 1987 stock crash.

The market’s Pied Pipers have already declared the resumption of the bull market, Dennis Gartman being among the most prominent.  More likely, at some point when it’s least expected, the bottom will once again fall away from the stock market and the various indices will head toward lower lows.

In the context of well-heeled Wall Street veterans, like Leon Cooperman, crying like babies about the hedge fund algos when the stock market was spiraling lower, I’m having difficulty finding anyone whining about the behavior of the computerized buy-programs with the stock market reaching for the moon.