What’s going on with gold, the dollar and interest rates – especially gold? All of the variables that fundamentally support much higher gold prices are lined up perfectly. Why isn’t gold moving higher? The popular narrative in the mainstream financial media would leave one to believe that the dollar is soaring. Eric and Dave put a big dent in that notion. Additionally, in a long-term historical context, the recent rise in interest rates is tiny, yet marginally higher interest are already wreaking havoc on the economy (retail, auto and home sales). What’s going to happen to the economy when the 10-yr Treasury hits 4%, which is still well below its long-run historical norm? (click on image to enlarge)
Visit these links to learn more about the Investment Research Dynamic’s Mining Stock Journal and Short Seller’s Journal. I recommended Almadex Minerals at 28 cents in April 2016 – it closed Friday at $1.13. I recommended shorting Hovnanian at $2.88 in January – it closed at $1.89 on Friday and has been as low as $1.70.
The dollar is said to be “soaring,” though I take issue with that characterization for now (see the chart below); 10-yr Treasury yields are also rising, though the yield on the 10-yr is only up about 67 basis points if you measure from January 1, 2017. What’s really going on?
Ten years of money printing by the Federal Reserve has removed true price discovery from the markets. The best evidence is the inexorable rise in the stock market despite the fact that corporate earnings have been driven largely by share buybacks and GAAP accounting gimmicks. Measuring stock values on the basis of revenue and revenue growth multiples would reveal the most overvalued stock market in U.S. history.
Now that the Fed has stopped printing money used to buy Treasury issuance and prop up the banks, the system is vulnerable to relatively small increases in interest rates. 20 years ago, when I was trading junk bonds on Wall St, a 60 basis point rise in the 10yr or a 200 basis point rise in the dollar index would have be a non-event. Now those types of moves permeate the current market and policy narrative.
In fact, the Fed is terrified by the Frankenstein stock market is has created to the extent that, since the sharp decline in August 2015, the Fed steps in to prevent the inevitable crash when a draw-down in the Dow/SPX approaches 10%.
With the dollar moving higher, gold is has been sluggish. Now the price is being attacked aggressively in the paper gold derivatives market. The propaganda is that a rising dollar and rising rates are negative for gold. However, gold had one of its best rate or return periods from mid-2005 to mid-2006 while the dollar was spiking higher. More troubling, the trading pattern in gold and the dollar reminds me of the same pattern in 2008 – just before the de facto financial system collapse hit the hardest (click on image to enlarge):
The economy has been in a recession for most households below the top 1% in wealth and income. This chart is one of many examples showing that most households are not even fortunate enough to be living on the economic gerbil wheel. Instead, they are sliding backwards downhill in their debt/lease-saddled vehicle and the brakes are about to go out:
I would argue that the rising dollar – an concomitantly the obvious official attack on the price of gold – is the signal that the wheels are coming off the system. The Government issued nearly half-a-trillion dollars in Treasuries in Q1, thanks to the soaring defense and entitlement budget combined with the massive tax cuts. The spending deficit and the flood of Treasury issuance is going to get worse from there and well beyond the CBO’s sanguine projections.
Throw in soaring oil and gasoline prices and rising household debt delinquency/default rates against a backdrop of stagnant wages and an accelerating ratio of household debt service payments to personal income and it’s pretty obvious that the wheels are coming off the system.
The U.S. economic and financial system is an enormously fraudulently Ponzi scheme in which record levels of money printing and credit creation have acted as temporary bandages placed over gaping cancerous economic wounds that are soon going to start hemorrhaging.
The homebuilders are already in a bear market, like the one that started in mid-2005 in the same stocks about 18 months before the stock market started heading south in 2007. My Short Seller’s Journal subscribers and I are raking in a small fortune shorting and buying puts on homebuilder stocks. As an example, I recommended shorting Hovnanian (HOV) at $2.88 in early January. It’s trading at $1.78 as I write this – a 38.2% ROR in 4 months. Anyone get that with AMZN in the last 4 months? You can learn more about the SSJ here: Short Seller’s Journal.
This analysis is an excerpt from the opening market commentary in my April 19th issue of the Mining Stock Journal.
I was looking at some charts with a colleague two weeks ago and was startled to discover that a very quiet bull move has begun in the miners. Like the move that began in late 2015, it seems that some of the junior miners per GDXJ have gotten the party going. As you can see in the chart above, GDXJ is up 12.8% since December 7, 2017. GDX is up 9.5% since March 1st. Some individual stocks are up quite a bit more than the indices: AEM up 18% since March 1st, EXK up 49.7% since Feb 9th, Bonterra up 25% since March 1st, etc.
The chart below is two weeks old but the bull pattern in GDX (and GDXJ, HUI, etc) has continued after a brief pullback (which in and of itself is bullish):
In my opinion, the charts in the sector are beginning to look quite bullish. I would like to see the Comex gold futures open interest drop 70-80k contracts – it was 499k as of Friday’s close. However, if a bigger move than has occurred already starts now, the big Comex banks will be forced to cover their large short position in gold futures. This will “turbo-charge” the move [in fact, per the latest COT report, the Comex banks continue to cover shorts and reduce their net short position and the hedge funds continue to dump longs and add to shorts – historically this shift in trader positioning has preceded big bull moves in gold/silver].
Silver is also starting to form a very bullish base:
Wholesale silver eagle premiums are creeping higher, as are retail premiums. Perhaps the big inventory overhang that had formed over the last year is starting to clear out. Also, silver mining stocks, especially the ones that actually produce and sell silver, have been quietly outperforming just about every stock sector (I have had a buy recommendation on a smaller silver producer since early October 2017 – the stock is up 20% since that buy recommendation (I own it) and it’s up 47% since it bottomed in December.
From a fundamental standpoint, given the deteriorating financial condition of the U.S. Government and the escalating rate of inflation and geopolitical risks, the planets are aligned for a big move in the precious metals sector. If the banks continue to reduce their net short position in Comex paper gold – and concomitantly the hedge funds continue to reduce their net long position – then both the planets and the stars will be aligned for a move in the sector that I believe will take a lot of market observers and participants by surprise.
The Mining Stock Journal is a bi-weekly (twice per month) newsletter that offers in-depth precious metals market commentary and, primarily, junior mining stock ideas. My goal is to find the hidden “gems’ ahead of herd. You can find out more here: Mining Stock Journal information.
Wow great report…by the way I have cancelled most of my precious metal subscriptions except your’s…. You do a treat job for us! – from “Robert,” received last week
Since the beginning of 2018, gold has been stuck in a trading range between $1310 and $1360. Silver has ranged between $16.20 and $17.50, though primarily between $16.80 and $16.25 since February. So what’s next? While most analysts base their views largely on chart technicals, I have found – at least for me – the Commitment of Trader “tea leaves” is a more reliable forecasting tool. Friday’s COT report showed a continuation of the trader positioning pattern that I believe will support the next big move higher.
Elijah Johnson and James Anderson invited me on to their weekly Metals and Markets podcast to discuss why I believe the metals may be bottoming. In addition, we discuss the why Amazon.com and Tesla are horrifically overvalued:
CLICK ON IMAGE TO LEARN MORE ABOUT EACH NEWSLETTER:
Some big investors see warning signs ahead for markets but are holding their positions. Egyptian billionaire Naguib Sawiris is taking action: He’s put half of his $5.7 billion net worth into gold.
He said in an interview Monday that he believes gold prices will rally further, reaching $1,800 per ounce from just above $1,300 now, while “overvalued” stock markets crash.
“In the end you have China and they will not stop consuming. And people also tend to go to gold during crises and we are full of crises right now,” Sawiris said at his office in Cairo overlooking the Nile. “Look at the Middle East and the rest of the world and Mr. Trump doesn’t help.”
Sawiris also has large investments in Evolution Mining, Endeavor Mining and La Mancha Resources.
The stock market (per the Dow), after an initial spike up at the open, has sold off continuously today. The sell-off began to accelerate just before 2 p.m. EST on no specific news or event catalysts. So what the heck happened? To begin with, the stock market jumps at the open almost everyday no matter what type of news hits the tape overnight. It’s clear that the Fed’s “unspoken” policy is to support asset prices. But it’s the events developing behind the thick veil of propaganda that is starting to become obvious.
The real economy sucks. The average household is sinking slowly under the weight of debt that grows continuously and will soon become unbearable. The fraud and corruption at all levels of Government and Corporate America has become glaringly blatant. The Federal Government is going to issue well over $1 trillion in new Treasury debt this year – debt that not only will never be repaid but will continue to grow exponentially until the system collapses.
Gold has spiked up in response to the stock market turmoil. Physically deliverable gold is running low in NY and London. The clearest sign of this is persistent backwardation on the LBMA. Eric Dubin and I discuss the ticking time bomb of rising interest rates and what it will take for gold and silver to finally break out and up in our “WTF Just Happened” podcast hosted by Jason Burack’s Wall St For Main St:
“Furthermore, in the main, historians educated as Keynesians and monetarists do not understand the economic history of money, let alone the difference between a gold standard and a gold-exchange standard. These similar sounding monetary systems must be defined and the differences between them noted, for anyone to have the slimmest chance of understanding this vital subject, and its relevance to the situation today…
…The pricing of financial assets, and today’s extraordinarily low interest rates indicate that a flight from the dollar is the last thing expected in financial markets. If they were still alive, de Gaulle and his economic advisor, Jacques Rueff, would be instructing the ECB, as successor to the Bank of France, to dump all dollars for gold immediately. And probably to dump all other foreign fiat currencies for gold as well. However, today, it is likely that other actors will blow the whistle on the dollar, such as the Chinese, and the Russians.”
The quotes above are from Alasdair Macleod’s piercing essay on the gold standard and the mechanics underlying an inevitable collapse of the U.S. dollar: Why A Dollar Collapse Is Inevitable. No one can claim to understand the modern monetary system without reading this piece from Macleod. It also explains by Modern Monetary Theorists are full of shit.
As the antithesis to the dollar, gold will soar. I was looking at some charts with a colleague earlier this week and was startled to discover that a very quiet bull move has begun in the miners.
Like the move that began in late 2015, it seems that some of the junior miners per GDXJ have gotten the party going. As you can see in the chart below, GDXJ is up 12.8% since December 7, 2017. GDX is up 9.5% since March 1st. Some individual stocks are quite a bit more than the indices: AEM up 18% since March 1st, EXK up 49.7% since Feb 9th, Bonterra up 25% since March 1st, etc.
I’ve had several stocks in my Mining Stock Journal that have outperformed the sector my several multiples. Some of them are risky junior exploration stocks and some are lower-risk producers. A good example is EXK, which I presented in the August 24, 2017 issue at $2.16. It closed Friday at $3.06, up 41% from my buy recommendation. This is just one out of many examples. You can learn more about the Mining Stock Journal here: Mining Stock Journal Information.
Below is a must-read essay from a friend and colleague of mine, Chris Marcus, who is a former options trader (Wharton MBA) that now lives in Denver. Many of you may not be aware, but Mark Cuban made his fortune the old fashioned way – he was lucky to be in the right place at the right time. Cuban owned Broadcast.com (a relic of the 1990’s tech bubble). Yahoo.com used tech bubble stock “wampum” to acquire Broadcast.com. Broadcast.com was no longer around a few years later.
If anyone knows how to get lucky off a worthless asset, it’s Mark Cuban. Currently he spends his time running the Dallas Mavericks into the ground. Chris Marcus eloquently presents the counter-argument to Mark Cuban’s absurd comments about gold in a Kitco.com interview.
During my time training to be an equity options trader, the shop I worked for required that I log 100 hours of poker training. Under the belief that there are great similarities between the decision-making required for poker, and that required for successfully trading the financial markets.
Along those lines, there was a particular lesson that always stood out to me. That while the numbers and percentages are important in both sciences, understanding the people you are playing against is equally, if not a more important element of the game.
Because you might think you’re right, and the person you’re trading against might think they’re right. But if you can identify why they’re wrong and spot the flaw in their thinking, that can really arm you with some confidence in your bet.
If you’ve seen the movie The Big Short, you may remember the scene where right before one of the funds was getting ready to increase the size of their bet against the mortgage industry, they were a little bit concerned.
But to ease those fears, the Deutsche Bank character played by Ryan Gosling took the fund managers to meet the people they were actually trading against. Because once they heard how the people they were trading against were completely caught up in the mania and missing the bigger picture, it gave them the confidence to pile on their trade in even bigger size.
Along those lines, for those investing in gold and silver, there were some interesting recent comments from Dallas Mavericks owner Mark Cuban. That are somewhat reflective of the mainstream view of gold, and similar to the rhetoric you hear out of the central banks.
Which in my own personal opinion comes as extremely fantastic news for those who own precious metals and wonder whether there is still upside to the pricing.
Cuban was interviewed by Daniela Cambone of kitco.com. And with all due respect to Mr. Cuban, some of his answers were so far detached from the reality I’m living in that the more I heard him talk, the more I was tempted to dial Andy Schectman and buy more gold.
Consider the following:
Cambone: Where do you think are some of the safest bets for your money right now?
Cuban: If you need safe, just put the money in the bank. (Editor side note – seems safe to say at this point that Cuban likely hasn’t been reading Von Mises during halftime at the Mavs games).
Cambone: Gold, up 2.5% for the first quarter. I know in the past you’ve seen it as a speculative bet. How do you see it today?
Cuban: I hate gold. Gold is a religion. There’s some fundamental value to gold, but everything else…it’s a collectible.
Cambone: Well hate is a strong word. The miners too?
Cuban: Individually as people, I heard they’re great people (he says giggling). But as an investment, hate is not strong enough. Hate with an extreme prejudice.
Cambone: So you don’t see gold as money.
Cuban: I do not see it as an alternative to currency. No not at all.
Cambone: Do you feel the same about silver, palladium, or platinum?
Cuban: I don’t know those others as well. But those are pretty much based off their intrinsic value as much as I can tell.
Cambone: So you’re in the camp of gold is just a pet rock.
Which makes his current comments all the more baffling. Although perhaps Cuban doesn’t see any cause for concern with rising interest rates and foreign creditors walking away from the dollar system.
Ultimately what Cuban thinks about gold may be irrelevant. Yet to the degree that there are many in the markets who share a similar line of thinking, it’s worth registering that if you own gold, this profile and argument is essentially what you’re betting against.
Personally I receive it as great news. Because in my career, the best trades are not when a person thinks they’re right and puts the trade on. But when a person thinks they’re right, knows why the other person is betting against them, and can spot the flaw in that person’s logic.
I’ll leave it up to you to decide whether Cuban’s argument makes much sense. But his views are generally reflective of what the anti-gold crowd is thinking, and it makes me feel better than ever about owning physical gold and silver. (Article LINK)
The recent stock market volatility reflects the beginning of a massive down-side revaluation in stocks. In fact, it will precipitate a shocking revaluation of all assets, especially those like housing in which the price is driven by an unchecked ability to use debt to make the “investment.” This unfettered and unprecedented asset inflation is resting precariously on a stool that is about to have its legs kicked out from under it.
The primary reason the U.S. is now holding a losing hand at the global economic and geopolitical “poker table” is that this country has been committing too many sins for too long for there not to be a price to be paid. With bankrupt Governments (State and Federal), a bankrupt pension system, a broken healthcare system, all-time high corporate and household debt levels and a broken political and legal system, the U.S. is slowly collapsing. This is the “perfect storm” for which you want to own plenty of gold, silver and related stocks.
Eric Dubin and I are producing a new podcast called, “WTF Just Happened?” The inaugural show discusses the topics mentioned above:
“WTF Just Happened?” w/ Dave Kranzer and Eric Dubin is produced in association with Wall Street For Main Street – Follow Eric here: http://www.facebook.com/EricDubin
There’s been an abundance of commentary on the net long position of the “Swap Dealers” in Comex silver futures per the COT report. As of the latest COT report, the Swap Dealers are net long almost 22k silver contracts. This is unprecedented. At the same time, the “Large Speculators,” the majority of which is comprised of the “managed money” (hedge funds) sub-component, are net short nearly 17k silver contracts. The data my business partner tracks goes back to April 2004. In that period of time, the Large Speculator category has never been short until February 2018.
On the surface, the silver COT report appears to be extraordinarily bullish. However, there’s a bigger picture not discussed by “COT” analysts that includes the other segment of the large “Commercial” category and the COT structure of gold.
The other “commercial” segment includes producers of silver, commercial “users” of silver (jewelers) and “merchants.” It would be naive to assume that the Comex banks do not throw a large percentage of their gold/silver short positions in to the this category. That would be within the CFTC regulations. Hell, JP Morgan was fined a little over $650k a few years when it was caught by the CFTC putting a portion of its trades into the “speculator” category of trader. This was not within regulations. $650k is a joke and would not deter Jamie Dimon from speeding on the Long Island Expressway let alone manipulating the silver market.
Currently the “Commercial” segment per the latest COT report is net short 2.6k contracts. Again, this is by far the lowest net short position in the Commercial category going back to at least April 2004 and likely ever. The closest the net short position has been before now was for the June 3, 2014 COT report, when the Commercial category net short in silver was down to 9.6k. Back then silver was trading at $18.80. It bounced briefly to $21 by early July then headed lower from there.
While the silver COT appears to be exceptionally bullish, it needs to be analyzed in the context of the gold COT structure. The gold COT structure currently, based on historical statistics, is neutral but trending toward bullish. I looked at data going back to the beginning of the current bull market cycle in the metals, which is commonly considered to be early-December 2015.
From the beginning of December to the latest COT report, the average large spec net long position in gold is 171k. The high was 315k (bearish) and the low was 9.7k (very bullish). For the Commercials as a whole, the average net short during that time period is 209k contracts. The high was 340k (bearish) and the low was 2.9k (very bullish). The low net short in gold for the commercials banks occurred in the December 1, 2015 COT report. This also corresponded with the low print in the large spec net long. This type of COT structure is the most bullish for both gold and silver.
Currently, the large specs are net long 166.5k gold contracts and the commercials are net short 188.8k contracts. You can see vs the averages over the time period that this is still neutral to bearish, but it’s trending in the direction of becoming bullish.
The other element for a bullish gold COT structure is open interest. A high open interest tends to correlate with a bearish COT structure – i.e. a high commercial bank net short – and a low relative o/i correlates with a cyclical low-point in gold. From December 2015 to present, the average o/i in gold has been 492k contracts. The high was 652k and the low was 357k. The net short of the commercials as percentage of the total o/i at the low-point in total o/i was 0.74% – again in the December 1, 2015 COT report. Currently the open interest is 493k which is about average. The commercial short position as percentage of total o/i is 38%. Again, about average for the time period.
I have noticed that the last two moves higher over the last two years have occurred with the total gold o/i in the 420-440k range. This would suggest that, minimally, the open interest needs to drop by 60-70k contracts before the gold COT structure can be considered favorable for a rally in the price of gold.
On average and in general, gold and silver are highly correlated in their directional movements, especially over long periods of time. Since 2001, it’s been my experience that major moves higher in the precious metals sector begin with gold taking off and tend to end with silver outperforming gold by a substantial margin. The numbers presented above would suggest that both gold and silver will not be set-up to embark on a major move higher until the both the total open interest in gold and the net short position in gold of the commercials banks declines by another 60-70k contracts.
In the context of my analysis and my view on methods used by the banks to manipulate the paper price of gold and silver on the Comex, in my pinion the silver COT report – though remarkably bullish on a stand-alone basis – is not as bullish as some analysts are presenting when both the gold and silver COTs are considered in tandem. At this point, I believe gold will lead both metals higher when the next big move begins. Once that move is underway, I’m highly confident silver contract short-covering by the hedge funds will send silver soaring.