Re-debut of the Shadow of Truth. Google censorship be damned. Note: in the podcast Lidl was mistakenly mentioned at the owner of Trader Joe’s. Aldi owns Trader Joe’s.
The falling price of oil did not garner any mainstream financial media attention until today, when U.S. market participants woke up to see oil (both WTI and Brent) down nearly $2. WTI briefly dropped below $43. The falling price of oil reflects both supply and demand dynamics. Demand at the margin is declining, reflecting a contraction in global economic activity which, I believe the data shows, is accelerating. Supply, on the other hand, is rising quickly as U.S. oil producers – specifically distressed shale oil companies – crank out supply in order to generate the cash flow required to service the massive energy sector debt load.
I am quite surprised by the rapid fall of oil (WTI basis) from the $50 level, because I concluded earlier this year that the Fed was attempting to “pin” the price of oil to $50:
The graph above is a 5-yr weekly of the WTI continuous futures contract. Oil bottomed out in early 2016 and had been trending laterally between the mid-$40’s and $55. I read an analysis in early 2016 that concluded that junk-rated shale oil companies would implode if oil remained in the low $40’s or lower for an extended period of time. Note that some of the TBTF banks who underwrote shale junk debt were stuck with unsyndicated senior bank debt (i.e. they were unable to find enough investors to relieve the banks of this financial nuclear waste). Thus, the Fed has been working to keep the price of oil levitating in the high $40’s/low $50’s, in part, to prevent financial damage to the big banks who have big exposure to shale oil debt.
The problem for the Fed is that it can’t control the global supply of oil. There’s too many players. With oil pinned in that trading range, U.S. oil companies have been pumping out oil as quickly as possible. The oil drilling rig count has risen for 22 weeks – Oilpro.com – the longest consecutive streak since 1987. Rising production from the U.S. and elsewhere is keeping global stockpiles high, especially relative to demand. As a result, you get chart of the price of oil that looks like the one above. Oil is now well below both the 50/200 dma plus the RSI and MACD are pointing straight south, indicating a high probability of lower prices for awhile. Also, note the rising volume in conjunction with the falling price. This is indicates that market participants have been and continues to be better sellers.
The Fed is thus unable to pin the price of oil to $50 on a sustainable basis. Why? Because it has no control over the global supply and demand, which prevents control the price of oil for any meaningful period of time (just ask OPEC about that). Similar to the Fed’s price-management of oil, the Fed has been keeping gold pinned under $1300 since early November in an effort to prevent a rising price of gold from undermining the dollar’s reserves status and signalling the escalating economic and financial distress in the U.S. This is despite rising demand for physical gold coming from numerous eastern hemisphere countries. As long as the Fed (and western Central Banks) can continue delivering physical gold into the massive demand vortex in the eastern hemisphere, it can somewhat successfully manage the price.
Also similar to oil, the Fed has no control over the supply and demand of gold, except to the extent that the Fed/western Central Banks are still holding gold that can be leased out or custodial gold that can be hypothecated for the purpose of enabling a continuous flow of physically deliverable to gold the east. But the difference between oil and gold is that the supply of mined gold is relatively fixed (and has been over a long period of time). At some point the western Central Banks will run out of access to enough gold that can be delivered to buyers who paid to settle their purchases upfront. At that point, the chart of the price of gold will look like the recent graph of Bitcoin, Ethereum, etc.
This brings up a quick point about the cryptocurrencies. When the U.S. blocked Iran’s access to the SWIFT trade settlement system, India began to pay for the oil it imports from Iran with gold. These were very large-dollar transactions. We have yet to hear any reports of sovereign nations using Bitcoin or other cryptos for payment to settle trade agreements. For me, this highlights yet another difference between the use of gold as a currency vs the cryptos. I want to make it clear that I’m not in the anti-cryptocurrency camp, but I do believe that, ultimately, precious metals (gold and silver) are much more functional as a form of money than the cryptos. Bitcoin debuted for peer-to-peer transactions in 2009. Gold has functioned for this purpose for over 5,000 years. My preference in this situation is to bet big on the form of money that has pedigree.
Phil Kennedy of Kennedy Financial invited me onto his podcast to discuss the latest FOMC comedy show, gold, silver, mining stocks, cryptocurrencies and the housing market.
Many of you have contacted me about the sell-off in GDXJ and upcoming re-balancing that will occur at the end of this week (I think). First of all, thank you for your inquiries and please feel free to email me with questions/ideas. The only “dumb” question regarding gold, silver and mining shares is, “should I own any?”
First I wanted to highlight the difference between fact and “propaganda.” The propaganda has led many to believe that the rebalancing of the GDXJ has exerted undue pressure on the mining stocks as a whole and on the GDXJ components specifically. However, a simple graphic analysis differentiates fact from fiction:
The graph above compares GDXJ, the HUI (green line) and GDX (purple line) since the GDXJ rebalancing was announced to the market on April 17th. As you can see, over the time since the GDXJ rebalance was announced, GDXJ has performed in-line with rest of the sector. I was a bit surprised when I ran that chart. In fact, on a YTD basis, GDXJ’s rate of return is almost identical to that of the HUI and GDX:
So where does this leave us? The entire sector has moved lower since early February. Maybe this was in anticipation of the GDXJ rebalancing “whispers” and maybe not. Often the miners will be hit before a manipulated take-down of the gold price is implemented. That narrative fits the chart above as well.
It’s important to distinguish the difference between the propaganda and truth, because that’s where money can be made in the markets. The truth is that the sector has sold off after a nice move from the mid-December 2016 low. But I also believe that the market is setting up for another big move into the 3rd and 4th quarters. It may take all summer for this to materialize, but the economic, financial and geopolitical fundamentals, as they are unfolding, weigh heavily in favor of big move higher in the precious metals sector.
One other point I would like to make – something that you WILL NOT HEAR from Wall Street or from Rickards or from the financial media: since bottoming in mid-December, the HUI is up 14.7%, GDX up 16.1% and GDXJ up 15.3% vs the S&P 500 which is up 7.7%. The mining stocks, since bottoming in mid-December, have outperformed the S&P 500 over the same time period through today (June 15, 2017).
Several of you have asked for ideas on the stocks in the GDXJ index that are “oversold” due to the rebalancing. As I’ve just demonstrated graphically and with ROR numbers, GDXJ has not really sold off since mid-April anymore than the larger-cap mining stocks in the HUI index and in GDX. Those are the numbers. I can’t make those up. It’s “narratives” that are fabricated.
Having said that, I did present two ideas in the Mining Stock Journal which happen to be in the GDXJ. One is up 6% since May 4th – and it has a lot higher to move – and the other is up 20% since June 1st, with a lot more left in the move.
A subscriber told me yesterday that a well-known subscription service that costs $1500/year is promoting 3 ideas from GDXJ. This is probably one of the services that is promoting the idea that the GDXJ has been hit unusually hard. I’ve shown above that idea is a false narrative. The Mining Stock Journal is $20/month with no minimum commitment. Subscriber turnover is exceptionally low for a reason. You can find out more about it here: MSJ Subscription Info.
The answer is debatable but it depends on, exactly, to which rates you are referring. The Fed has “raised,” more like “nudged,” the Fed Funds target rate about 50 basis points (one-half of one percent) this year. That is, the Fed’s “target rate” for the Fed Funds rate was raised slightly at the end of two of the four FOMC meetings this year from 50 to 75 basis points up to 1 – 1.25%. Wow.
But this is just one out of many interest rate benchmarks in the financial system. The 10-yr Treasury yield – which is a key funding benchmark for a wide range of credit instruments including mortgages, municipal and corporate bonds, has declined 30 basis points this year. Thus, for certain borrowers, the Fed has effectively lowered the cost of borrowing (I’m ignoring the “credit spread” effect, which is issuer-specific).
Moreover, the spread between the 1-month Treasury Bill and the 10-yr Treasury has declined this year from 193 basis points to 125 basis points – a 68 basis point drop in the cost funding for borrowers who have access to the highly “engineered” derivative products that enable these borrowers to take advantage the shape of the yield curve in order to lower their cost of borrowing:
In the graph above, the top blue line is the yield on the 10-yr Treasury bond and the bottom line is the rate on the 1-month T-bill. As you can see the spread between the two has narrowed considerably.
Thus, I would place the news reports that the Fed has “raised in rates” in the category of “Propaganda,” if not outright “Fake News.”
One has to wonder if the Fed’s motives in orchestrating that graph above are intentional. On the one hand it can make the superficial claim that it is raising rates for all the reasons stated in the vomit that is mistaken for words coming from Janet Yellen’s mouth; but on the other hand, effectively, the Fed has managed to lower interest rates for a widespread cohort of longer term borrowers.
Furthermore, this illusion of “tighter” monetary policy serves the purpose of supporting the idea of a strong dollar and enabling a highly orchestrated – albeit temporary – manipulated hit on the gold price using paper gold derivatives.
To borrow a term from Jim Sinclair, the idea that the Fed has “raised rates” is nothing more than propaganda for the primary purpose of “MOPE” – Management Of Perception Economics. On that count, I give the Fed an A+.
“If liberty means anything at all, it means the right to tell people what they do not want to hear.” – George Orwell
There’s a narrative here that the Government, the Fed, the Trump Administration, etc conveniently ignored. Here’s the headline list this morning:
- GM Extends Plant Shutdowns
- 2nd Quarter GDP Hit As Inventories Tumble In April
- Retail Sales Tumble Most Since January 2016
- Pension Crisis Escalates
- House Majority Whip Shot At Congressional Baseball Practice
Real Clear News reported that Representative De Santis stated to police that the shooter asked “whether Republicans or Dems were on the field before shooting.” Fox News has confirmed the report.
The public is getting pissed. It is told daily, on no uncertain terms, by the White House that the economy is rapidly improving. The Fed confirms that the economy is improving. Wall Street chimes in confirming that “narrative.”
The public is told that the unemployment rate is under 5% and the labor market is tight. But 95 million people in the working age population don’t have jobs. They are not considered part of the “Labor Force” and have been removed from the statistics altogether by some BLS bureaucrat’s pencil eraser. To be sure, maybe 1/3 or even 1/2 of those people don’t want to work or need to work for some reason (wealthy, wealthy and lazy, inherited income, public assistance of some form, etc). But 1/2 to 2/3’s of those people would like to find a job that doesn’t entail delivering pizza or washing dishes – in other words, jobs that pay to support a family.
A growing portion of the population understands the underlying truth about the economy that exists behind the propaganda and lies. And they are getting pissed. It’s become clear to anyone desperate enough in their fight to get by that the politicians, corporate elitists and Wall Street crooks are no longer beholden to Rule of Law. The conclusion for the growing legion of desperate is obvious: “why should we adhere to Rule of Law?”
At least this time the Deep State can’t shove the “it was ISIS” narrative down our collective gullets.
One/some/several “entities” decided at 9:38 a.m. this morning that it was necessary to dump 14,315 contracts of paper gold. This is just the August contract. In total a lot more was unloaded. This represents 1.43 million ozs of gold. The Comex is only showing 900,000 ozs of “gold” as “registered,” or available for delivery in June, July and August (assuming all of that gold is actually sitting physically in the Comex vaults as reported). If we make that generous assumption, 531,000 ozs of paper gold was naked shorted.
The news report or event that triggered this sudden need to unload / naked short 40.5 tonnes of paper gold beginning at 9:38 a.m. EST is not clear. The mainstream financial media is attributing the dump in gold to the “anticipation of Comey’s testimony.” But this is patently absurd, if not a complete insult to the public’s intelligence. The market has known all week that Comey was testifying this morning and it was generally know what he would say.
This is what the price action in the gold market looked like before the huge paper dump onto the Comex – Asia/India buying physical gold and driving the price higher, London/LBMA selling paper gold and driving the price back down:
With all the frenzy connected to the parabolic rise of cryptocurrencies, one has to wonder why the western Central Banks are concerned with controlling the price of these block-chain based digital currencies. If the Comey testimony was a reason to push down the price of gold, why were the “flight to safety” cryptos left alone?
This is a rhetorical question, but the relative threat – and therefor the legitimacy as a competing form of money – that each represents to the dollar-based reserve currency system is a hint. For some reason the “wizards” behind the BIS curtain are not concerned about the cryptos…
Although it may not “feel” like it, the price of gold has been in a nice – albeit “controlled” –
uptrend since late December (1-year daily, Comex continuous futures contract):
Gold is up over 12% since 12/22/16. By comparison, the SPX is up 7% and the Dow Jones Industrials index is up 6%. AAPL is responsible for 13% of the SPX move higher and 25% of the Dow move higher. The primary drivers of gold besides elevated geopolitical risk are the expectation of an easing of monetary policy and the fall in value of the U.S. dollar:
While I don’t think the effort will yield any success, the only way the Trump Government can stimulate economic growth other than by printing another few trillion and distributing it across the population, is to attempt to stimulate the demand for U.S. exports globally by devaluing the dollar vs. the currencies of our primary trading partners (Canada, Europe, China).
As with any form of Government intervention, this will further destabilize the U.S. financial system. That said, most other major industrialized countries (except for Russia) are devaluing their currency vs. global currencies in order to bolster their export industries.
After today’s employment report, in conjunction with the negative economic reports released earlier this week, it’s likely the Fed’s next policy shift ease monetary policy and further enable the expansion of credit. When this reality hits the market, the hedge fund algos will take gold and the mining stocks higher.
Paul Craig Roberts and Dave Kranzler
In a series of articles posted on www.paulcraigroberts.org, we have proven to our satisfaction that the prices of gold and silver are manipulated by the bullion banks acting as agents for the Federal Reserve.
The bullion prices are manipulated down in order to protect the value of the US dollar from the extraordinary increase in supply resulting from the Federal Reserve’s quantitative easing (QE) and low interest rate policies.
The Federal Reserve is able to protect the dollar’s exchange value vis-a-via the other reserve currencies—yen, euro, and UK pound—by having those central banks also create money in profusion with QE policies of their own.
The impact of fiat money creation on bullion, however, must be controlled by price suppression. It is possible to suppress the prices of gold and silver, because bullion prices are established not in physical markets but in futures markets in which short-selling does not have to be covered and in which contracts are settled in cash, not in bullion.
Since gold and silver shorts can be naked, future contracts in gold and silver can be printed in profusion, just as the Federal Reserve prints fiat currency in profusion, and dumped into the futures market. In other words, as the bullion futures market is a paper market, it is possible to create enormous quantities of paper gold that can suddenly be dumped in order to drive down prices. Everytime gold starts to move up, enormous quantities of future contracts are suddenly dumped, and the gold price is driven down. The same for silver.
Rigging the bullion price prevents gold and silver from transmitting to the currency market the devaluation of the dollar that the Federal Reserve’s money creation is causing. It is the ability to rig the bullion price that protects the dollar’s value from being destroyed by the Federal Reserve’s printing press.
Recently, the price of a Bitcoin has skyrocketed, rising in a few weeks from $1,000 to $2,200. Two explanations suggest themselves. One is that the Federal Reserve has decided to rid itself of a competing currency and is driving up the price with purchases while accumulating a large position, which then will be suddenly dumped in order to crash the market and scare away potential users from Bitcoins. Remember, the Fed can create all the money it wishes and, thereby, doesn’t have to worry about losses.
Another explanation is that people concerned about the fiat currencies but frustrated in their attempts to take refuge in bullion have recognized that the supply of Bitcoin is fixed and Bitcoin futures must be covered. It is strictly impossible for any central bank to increase the supply of Bitcoins. Thus Bitcoin is standing in for the suppressed function of gold and silver.
The problem with cryptocurrencies is that whereas Bitcoin cannot increase in supply, other cryptocurrencies can be created. In order to be trusted, each cryptocurrency would have to have a limited supply. However, an endless number of cryptocurrencies could be created that would greatly increase the supply of cryptocurrencies. If entrepreneurs don’t bring about this result, the Federal Reserve itself could organize it.
Therefore, cryptocurrency might be only a temporary refuge from fiat money creation. This would leave gold and silver, whose supply can only gradually be increased via mining, as the only refuge from wealth-destroying fiat money creation.
For as long as the Federal Reserve can protect the dollar by bullion price suppression and money creation by other reserve currency central banks, and as long as the Federal Reserve can keep the influx of new dollars out of the general economy, the Federal Reserve’s policy adds to the wealth of those who are already rich. This is because instead of driving up consumer prices, thus threatening the US dollar’s exchange value with a rising rate of inflation, the Fed’s largess has flowed into the prices of financial assets, such as stocks and bonds. Bond prices are high, because the Fed forced up the price by purchasing bonds. Stock prices are high, because the abundance of money bid prices higher than profits justify. As the US government measures inflation in ways designed to understate it, the consumer price index and producer price index do not send alarm systems into the markets.
Thus, we have a situation in which the Fed’s policy has done nothing for the American population, but has driven up the values of the financial portfolios of the rich. This is the explanation why the rich are becoming more rich while the rest of America becomes poorer.
The Fed has rigged the system for the rich, and the whores in the financial media and among the neoliberal economists have covered it up.
After the concerted western Central Bank effort, led by the BIS, to squelch Indian gold imports by eliminating the most commonly used currency bills failed, the fake news about Indian gold imports coming from the World Gold Council amplified. The WGC missed its Q1 2017 forecast for Indian gold imports by a country mile, as Indian gold imports doubled in Q1 to 253 tonnes. Please note that these numbers do not include the amount of gold smuggled into India, which has been estimated to be 200-300 tonnes annually.
Now the World Gold Council is promoting the narrative that Indian gold imports will average only 90 tonnes per quarter the rest of the year because of a new General Sales Tax scheduled to be implemented on July 1st plus restrictions to be implemented on gold dore bar imports. However, this is again an ill-fated prediction, likely for the purpose of spreading anti-gold propaganda, which seems to be one of the World Gold Council’s general directives.
First, in April and May, the premiums to world gold paid in India suggest that April/May imports already are well into triple-digits. And the WGC’s arguments are absurd, as expressed by John Brimelow in his Gold Jottings report:
In JBGJ’s opinion the only way this prediction can be right is if the $US price of gold jumps a couple of hundred dollars. Since Q2 is half gone and premiums have if anything been even more constructive during April and May, imports for the quarter are very likely be deep in triple digits also. The dore point is just ridiculous. To the extent dore is not available India will just revert to buying kilo bars which are only a few dollars more expensive. How the Authorities will treat the gold trade in introducing General Sales Tax is still uncertain. But using it to increase the rate of tax will just increase smuggling. In any case, fear of a tax increase should be stimulation anticipatory buying, a point the WGC avoids mentioning.
In addition to the current elevated level of gold demand in India, the early arrival of monsoon season to India will further boost demand for gold “by setting up India for higher farm output and robust economic growth” (Economic Times). Farmers use cash from their harvest sales to buy gold, which is one of the major sources of demand fueling India’s biggest seasonal gold-buying period in the fall through year-end. The bigger the harvest, the more gold bought by Indian farmers.
For the WGC to forecast 90 tonnes per quarter for the rest of 2017, especially given that Q2 is nearly in the bag and is likely already well over 100 tonnes, is nothing short of motivated anti-gold propaganda. An increase in the General Sales Tax will likely cause a temporary dip in gold imports. But, as with sudden moves higher in the price of gold, Indians will “get used” to paying a slightly higher price and normal import patterns will resume. Furthermore, a higher rate of taxation on gold sales in India will likely stimulate increased smuggling, over which the Indian authorities seem to limited control.
I appears currently that the western Central Banks are having a difficult time keep a lid on the price of gold. The elevated level of Privately Negotiated Transactions and Exchange for Physical transactions – both of which facilitate settlement of Comex gold contracts off-exchange, privately and out of sight – is an indicator the banks are struggling to settle gold contracts with deliveries from the amount of gold available on the Comex. For now the price of gold has been successfully contained below $1300. But it would not surprise me if gold makes a strong run over $1300 heading into, in not before, Labor Day weekend.