Category Archives: Precious Metals

Financial Market Collapse: Not an “IF” But A “When?”

“’DON’T PANIC!!!!’ Just 6.9% off of the most offensive valuation extreme in history.” – Tweet from John Hussman, Hussman Funds

The above quote from John Hussman was a shot at the financial media, which was freaking out over the sell-off in the stock market on Wednesday and Thursday last week. As stock bubbles become more irrational, the rationalizations concocted to explain why stocks are still cheap and can go higher become more outrageous. The financial media was devised to function as a “credible” conduit for Wall Street’s deceitful, if not often fraudulent, sales-pitch.

Perhaps the biggest fraud in the last 10 years perpetrated on investors was the Dodd-Frank financial “reform” legislation. The Dodd-Frank Act was promoted by the Obama Government as legislation that would protect the public from the risky and often fraudulent business practices of the big financial institutions – primarily the Too Big To Fail Banks. It was supposed to prevent another 2008 financial crisis (de facto financial collapse).

However, in effect, the Act made it easier for big banks to disguise or hide their predatory business operations. Ten years later it is glaringly apparent to anyone who bothers to study the facts, that Dodd-frank has been nothing of short of a catastrophic failure. Debt, and especially risky debt, is at record levels at every level of the economic system (Government, corporate, individual). OTC derivatives are at higher levels than 2008. This is without adjusting for accounting changes that enabled banks to understate their derivatives risk exposure. The stock market bubble is the most extreme in history by most measures and housing prices as a ratio to household income are at an all-time record level.

A lot of skeletons in the closet suddenly pop out of “hiding” when the stock market has a week like this past week. An article published by Bloomberg titled, “A $1 trillion Powder Keg Threatens the Corporate Bond Market” highlights the fact that corporate America took advantage of the Fed’s money printing to issue a record amount of debt. Over the last couple of years, the credit quality of this debt has deteriorated. More than 50% of the “investment grade” debt is rated at the lowest level of investment grade (Moody’s Baa3/S&P BBB-).

However, the ratings tell only half the story. Just like the last time around, the credit rating agencies have been over-rating much of this debt. In other words, a growing portion of the debt that is judged investment grade by the ratings agencies likely would have been given junk bond ratings 20 years ago. In fact, FTI Consulting (a global business advisory firm) concluded based on its research that corporate credit quality as measured by ratings distribution is far weaker than at the previous cycle peaks in 2000 and 2007. FTI goes as far as to assert, “it isn’t even close.”

I’ll note that FTI’s work is based using corporate credit ratings as given. However, because credit ratings agencies once again have become scandalously lenient in assigning ratings, there are consequences from relying on the judgment of those who are getting paid by the same companies they rate. In reality, the overall credit quality of corporate debt is likely even worse than FTI has determined.

The debt “skeleton” is a scary one. But even worse is the derivatives “skeleton.” This one not only hides in the closet but, thanks to regulatory “reform,” it’s been stashed in the attic above the closet. An article appeared in the Asia Times a few days ago titled, “Has The Derivatives Volcano Already Begun To Erupt?” I doubt this one will be reprinted by the Wall Street Journal or Barron’s. This article goes into the details about the imminent risk of foreign exchange derivatives to the global financial system. There’s a notional amount of $90 trillion in FX derivatives outstanding, which is up from $60 trillion in 2010.

Many of you have heard about the growing dollar “shortage” in Europe and Japan. Foreign entities issue dollar-denominated debt but transact in local currency. FX derivatives enable these entities to swap local currency for dollars with banks. However, these banks have to borrow the dollars. European banks are now running out of capacity to borrow dollars, a natural economic consequence of the reckless financial risks that these banks have taken, as enabled by the Central Bank money printing.

As it becomes more difficult for European and Japanese banks to borrow dollars, it drives up the cost to hedge local currency/dollar swaps. Compounding this, U.S. banks with exposure to the European banks are required to put up more reserves against their exposure, which in turn acts to tighten credit availability.  It’s a vicious self-perpetuating circle that is more than partially responsible for driving 10yr and 30yr Treasury bond yields higher recently.  Perhaps this explains why the direction of the Dow/SPX and the 10-yr Treasury have been moving in correlation for the past few weeks rather than inversely.

But it’s not just FX derivatives. There’s been $10’s of trillions on credit default swaps underwritten in the last 8 years. The swaps are based on the value of debt securities. For instance, Tesla bonds or home mortgage securities. As the economy deteriorates, the ability of debtors to service their debt becomes compromised and the market value of the debt declines. As delinquencies turn into defaults, credit default swaps are exercised. If the counter-party is unable to pay (AIG/Goldman in 2008), the credit default swap blows up.

And thus the fuse on the global derivatives bomb is lit. The global web of derivatives is extremely fragile and highly dependent on the value of the assets and securities used as collateral. As the asset values decline, more collateral is required (a “collateral call”). As defaults by those required to post more collateral occur, the fuses that have been lit begin to hit gunpowder. This is how the 2008 financial crisis was ignited.

In fact, given the financial turmoil in Italy, India and several other important emerging market countries, I find it hard to believe that we have not seen evidence yet of FX derivative accidents connected to those situations. My best guess is that the Central Banks have been able to diffuse derivative problems thus-far. However, the drop in the stock market on Wednesday surely must have triggered some equity-related derivatives mishaps. At some point, the derivative fires will become too large s they  ignite from unforeseen sources – i.e.the derivatives skeletons come down from hiding in the attic – and that’s when the real fun begins, at least if you are short the market.

I would suggest that the anticipation of an unavoidable derivatives-driven crisis is the reason high-profile market realists like Jim Rogers and Peter Schiff have recently issued warnings that the coming economic and financial crisis will be much worse than what hit in 2008.

Gold Going Higher – Mining Stocks Are Historically Cheap

It’s important to keep in mind that the mining stocks have been sold to levels well-below their intrinsic value – in the case of larger-cap producing miners. Or their “optionality” value – in the case of junior mining companies with projects that have a good chance eventually of converting their deposits into mines. “Optionality” value is based on the idea that junior exploration companies with projects that have strong mineralization or a compliant resource have an implied value based on the varying degrees of probability that their projects will eventually be developed into a producing mine.

In relation to the price of gold and silver, the mining stocks generically (i.e. the various mining stock indices like the HUI or GDX) have rarely traded at cheaper levels than where they are trading now.

Bill Powers invited me on to his Mining Stock Education podcast to discuss why the price of gold and silver is going higher and why the mining stocks are historically undervalued:

In the next issue of the Mining Stock Journal, I dissect my favorite junior mining stock ideas. These are stocks that have unreasonably sold-off and have at least 10-bagger potential. You can learn more about this here:  Mining Stock Journal information.

The Tragically Flawed Fed Policies And The Eventual Reset Of The Gold Price

With gold showing good resiliency as it has tested the $1200 level successfully after enduring aggressive paper gold attacks during Comex floor trading hours, it’s only a matter of time before gold breaks out above $1220 and heads toward $1300. Gold has been under attack in the futures market this week as the world’s largest physical gold importer, China, has been closed all week for holiday observance. In addition, with financial market conditions stabilizing in India, the world second largest physical gold importer’s peak gold buying season resumed this week. When gold spikes over $1220, it will unleash an avalanche of short-covering by the hedge funds.

What will cause gold to spike up? There’s any number of potential “black swans” that could appear out of nowhere, but the at the root of it is the tragically flawed monetary policies of the Federal Reserve, along with the rest of the Central Banks globally…of course, the eastern hemisphere banks are buying gold hand-over-fist…

Chris Marcus invited me onto this StockPulse podcast to discuss the precious metals market and the factors that will trigger an eventual price-reset:

The Fed: Lies, Propaganda And Motive

The agenda of the Fed is to hold up the system for as long as possible. The biggest stock bubble in U.S. history has been fueled by 10 years of negative real interest rates. The only way to justify that policy is to create phony inflation statistics. Based on historical interest rates and based on the alleged unemployment rate, a “normalized” Fed funds rate should be set at 9%, which reflects a more accurate inflation rate plus a 3% premium. The last time the unemployment rate was measured at 3.7% was October 1969. Guess what? The Fed funds rate was 9%. I guess if you live an a cave and only buy TV’s and laptops, then the inflation rate is probably 2%…

Silver Doctor’s Elijah Johnson invited me to discuss the FOMC policy decision released on Wednesday afternoon:

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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.

Tilray: Little More Than A Stock Bubble Scam

Tilray could well become the poster-child stock of the biggest stock bubble in U.S. History.

This past summer Tilray (TLRY) went public (July) at $17 per share. TLRY is a Canada-based medical marijuana company. While its operations are targeting the international medical marijuana market, the Company generated just $9.7 million in revenues in its Q2 2018. It produced a net loss of $12.8 million. The stock had run from $30 on August 20th to
a close of $120 on September 17th. The stock jumped again the next day to $154 on newsthat the DEA granted the approval for Tilray to provide THC capsules to UC San Diego for a clinical trial on the medicinal use of THC/CBD.

At the close of trading last Tuesday, TLRY’s market cap reached $14.1 billion, despite the fact the the UC San Diego deal would provide little in the way of revenues. Wednesday the stock soared to as high as $300 – a $27.6 billion market cap. TLRY did $17 million in revenues for the first-half of 2018. Let’s double that for the next 6 months and give them credit for a forward 12-month revenue stream of $68 million, which is more than generous. That means at Wednesday’s peak, TRLY was trading at 405x forward revenues. But from Q2 2017 to Q2 2018, its operating loss nearly quintupled, from $2.3 million to $11 million. We don’t know to what extent, if ever, this business model will be profitable.

Tilray closed just below $100 on Monday. On Tuesday the stock jumped $17, adding $1.5 billion to its market cap on the “news” that the Company “successfully” delivered CBD capsules to 29 “critically ill children” at a hospital in Victoria, Australia. There was no mention of revenue or profit impact of this “event,” which means this “feat” will be an expense item. Funny thing about CBD products, they are egally available in high concentration capsules and tinctures to anyone. See Ambary Gardens, for instance.

Marijuana was approved for medical use in Colorado in 2008. It was approved for recreational use in 2012. From 2008 to present, the retail price for “top shelf” weed has gone from $350 per ounce to as low as $150 per ounce. Once marijuana is legalized in a jurisdiction, the barrier to entry for producers and distributors is low. This means that, over
time, the selling price of marijuana will begin to approach the cost of production plus the cost of distribution plus a small profit incentive for growers and distributors. I have to believe the big tobacco companies are waiting impatiently for the Federal Government to legalize marijuana out of desperation to generate tax revenues. Then it’s game-over for existing growers.

TLRY’s operating loss including non-cash stock compensation was $14.7 million in the first half of 2018. Net of the huge jump in accounts payable, TLRY’s operations burned $11 million in cash in the first 6 months of 2018. TLRY insiders are sitting on 83 million of the 92 million shares outstanding. I’ll be curious to see how quickly insiders begin to register their shares and unload them. It’s only a matter of time before ground-floor investors try to quietly unload shares. They are idiots if they don’t.

The point here is that, while the run-up in stocks like Tesla and Netflix has been absurd, the trading action is Tilray has been absolutely insane. As it turns out, with only 17.8 million shares in the public float, TLRY has been engulfed by a vicious short-squeeze made even worse by momentum-chasing hedge fund algos and day-traders. Buyers blindly chasing the price higher, driven by fearless greed and the expectation that they will be able to unload their stock purchase on the next buyer willing to pay even more for the stock in complete disregard to valuation considerations.

This is very similar to the early 2000 dot.com/tech stock bubble. Tilray’s price rise to $300 is similar to rise in Commerce One. I was short CMRC at $200/share, which at the time was a completely irrational valuation. CMRC then ran quickly up to $600. But $600 was the top and it fell off a cliff from there.

Silver, Trump’s Trade War, Mining Stocks And The Fed’s Gold

If you have gold, you have money – If you don’t have gold, you have a problem – Alisdair Macleod

With the massive net short position in both gold and silver Comex paper precious metals, offset by the historic net long position of the “commercials” (banks, mining companies, users, hedgers), numerous rumors are swirling around the precious metals market. For certain, the availability of physical gold bars in London that can be delivered to the large eastern hemisphere buyers who demand delivery is growing tight.  Apparently the retail silver coin/bar market is starting to feel supply strains.

Miles Franklin’s Chris Marcus invited me onto this podcast to discuss the precious metals markets, mining stocks, Trump’s Trade War and the status of the gold held in custody by the Fed on behalf of the American public:

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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.

Reasons To Optimistic About The Precious Metals Sector

The September 7th COT report is probably the most bullish I’ve seen since the beginning of my involvement in the precious metals sector in 2001. As most of you probably know by now, the “commercial” trader category is now net long both gold and silver for the first time going back to at least 1994. The banks (“swap dealers”) net long position in both paper metals increased. Conversely the hedge fund net short increased in both.

It may take a few weeks for gold to push through $1215-1220, as the hedge fund algos will be looking to attack the price until they have covered their enormous net short position. That said, it will take only one particularly surprisingly bad economic report or unexpected geopolitical event (Syria, trade war, domestic political surprise, reckless Trump tweet, etc) to trigger a spike-up in the price of gold. Once this occurs, the hedge fund computers will race to cover their shorts, which will drive the price higher very quickly.

Trevor Hall and I co-produce the Mining Stock Daily, a brief, daily overview of news and events connected to the precious metals and mining stock market. We focus on junior mining stocks. We are looking to exploit audio information distribution on 10 different digital platforms including Anchor, Alexa, Apple Podcasts, etc. Trevor and I discussed why there is cause for optimism in the precious metals sector for MSD’s Friday feature interview segment (click on graphic to listen):

Precious Metals, Mining Stocks, Housing Market – What’s Next?

“The housing market is 100% a function of the Fed’s money printing.  Half the money the Fed printed, $2.2 trillion, went directly into the housing market.”

Analysts and financial media meatheads look at the $4.5 trillion created by the Fed and truly believe that it wasn’t money printing because it’s “backed” by Treasury bonds and mortgages.  But this is pure ignorance.  Not taken into consideration is the amount of credit and debt issuance enabled by using the $4.5 trillion as the “reserve capital.”  It’s fractional banking on steroids.

As the U.S. financial system reaches its limit on the amount of debt that can be serviced from the current level of wealth output, what happens next?  We’re already seeing what happens in the housing market per the fact that the homebuilder  stocks are in an “official” bear market, with some of them down over 30% since late January.

Then what?  The Fed will have to print multiples of the original amount it printed or face systemic collapse. At that point the precious metals sector will soar beyond anyone’s imagination at this point in time.

Phil Kennedy (Kennedy Financial) invited me to discuss these issues on his podcast.  Phil’s podcasts blend truthseeking, facts, humor, humility and sarcasm.  It’s  well-worth the time spent to listen:

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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 Employment Report Has Become Orwellian In The Extreme

“Today’s job numbers might be the biggest disaster I’ve ever seen reported. This Fall could get real ugly real fast. The deterioration of the participation rate is so big it makes me suspicious of earlier numbers.” – John Titus, producer of Best Evidence videos.

Titus goes on to say, “”The Household Survey” is showing a net loss of 1.47 million jobs year-over-year and a Labor Force reduction north of 2 million [YoY]. CNBC headline: ‘Economy adds more jobs than expected.'”

The employment report is unquestionably the most manipulated economic report issued by the Government. The content of the the headline on which the mainstream media bases its  broadcast and analysis of the report is entirely disconnected from the actual data contained in the report. The damning data that no one in the financial media or Wall Street seems to be able to find is at the top of the BLS’ report:

As you can see, the “civilian labor force”declined by 469,000 people in August from July. The number of “employed” dropped 423,000. The “not in labor force” increased by nearly 700,000. With these facts in mind (“facts” at least as far as the BLS numbers contain any shards of credibility),  how can the Government claim that 201,000 “jobs were created” in August? How can CNBC say the “economy created more jobs than expected?”  Based on the numbers in the details of the BLS report, it looks like, between the decline in the number of people employed and the decline in those not counted as part of the labor force, the economy shed over 1 million jobs.

Titus remarked to me that, in terms of manipulating the data to make the headline report look positive, this is the worst report he’s ever scrutinized: “In terms of people leaving the labor force, it sure looks like earlier data was was manipulated to hell and back and the BLS just couldn’t hide it any longer. The deltas are f—ing crazy.”

By the way, has anyone besides me noticed that the BLS calls this report the, “Employment Situation Report?”  What does that even mean?

On another note, my colleague and Mining Stock Daily collaborator, Trevor Hall, posted a fascinating interview with Scott Close and Dr. Eric Jensen of EMX Royalties.  EMX employs a project generator royalty  model and has 92 assets, three of which are current-pay royalty assets. One topic covered is what EMX will do with the cash proceeds from the sale of its giant Malmyzh copper-gold project in eastern Russia. EMX will receive a cash payment ($68 million) that is approximately two-thirds of EMX’s current market cap ($98 million).  You can listen this interview by clicking on the image below (or this link: MSD / EMX Royalty):

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The Mining Stock Journal has featured EMX Royalties as strong as recently as early May, when EMX was trading at 80 cents. You can learn more about this newsletter service here: Mining Stock Journal subscription information.

Why Are The Banks Long Gold And Silver Futures?

“The banks are very net long gold and silver futures. To the extent that banks can peer at what’s going on behind the proverbial ‘curtain,’ they must see something that has inspired them to take long position in the precious metals.”

Gold is behaving the same way it was behaving in the months leading up to the 2008 financial crisis.  Emerging markets are melting down and transmitting a financial and economic virus that infect the entire world.  The coming financial collapse will be magnified by the enormous amount of visible and hidden debt, the worst perpetrator of which is the United States.

Elijah Johnson invited me onto his Silver Doctors podcast to discuss the bullish set-up for gold and silver, along with the underlying factors that will lead to problems which have motivated the banks to go long gold and silver:

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You can learn more about this newsletter here:  Short Seller’s Journal information and more about the Mining Stock Journal here: Mining Stock Journal information.