Tag Archives: mining stocks

Gold Is Going Higher – But Brace Yourself For Volatility

Short of a raid orchestrated by the central planners to fasten tighter the cap on gold (which remains a real possibility given the historical record), the yellow metal shouldn’t encounter much price resistance until above $1,500/oz.  – Adam Taggart, Peak Prosperity

I agree with the statement above from Adam Taggart but an aggressive price attack by the banks who operate the Comex is inevitable.  In fact, based on the big jump in gold contract open interest and the spike up in EFP/PNT transactions – Privately Negotiated Transactions /Exchange for Physicals – it’s likely the banks have been setting the trap for another massive open interest liquidation price control operation.

Let me explain.  The banks are unconstrained by the amount of paper contracts they print and feed into the market to supply the demand from the hedge funds, who are the primary buyers. By unconstrained, I mean that the amount of gold represented by paper derivative open interest is far greater than the amount of actual physical gold held in Comex vaults.  Gold and silver are the ONLY commodity contract products for which this disparity between open interest and underlying supply of the physical commodity is allowed to occur.

As an aside, if the Comex were a true price discovery market, the amount of gold/silver represented by the paper contracts would be tied closely to the amount of gold held in Comex vaults.  When hedge funds rush in to buy futures, the market makers would then be required to wait until an entity holding contracts was willing to sell. This is how a bona fide price discovery market functions using price to clear the market’s supply and demand.

Instead, with CME gold and silver contracts, the banks print up new paper contracts to satiate buying demand.

Last week when the price of gold began to spike higher in response the FOMC policy statement released on Wednesday, the price of gold began soar.  Between Wednesday and Friday, the open interest in gold contracts spiked up by over 50,000 contracts – nearly 10%. This amount of paper represents over 5 million ozs of gold. As of Friday, the Comex warehouse report shows just 322,910 ozs of gold available for delivery (“registered”) and 7.6 million total ozs of gold. But the total open interest is 572,000 contracts, or 57.2 million ozs of gold, nearly 8x the amount of total gold held in Comex vaults.

But wait, there’s more.  During periods of aggressive price control, the activity of PNT/EFP’s also soars.  These transactions avoid settlement in 100 oz Comex bars per basic contract terms. Instead, it’s way for the banks to “deliver” under the terms of the Comex contract without producing and delivering the actual physical bar, recording the serial number on the bar under the receiving party’s name and moving the bar into an allocated account. It’s an extension of the fractional bullion system that is used to manipulate the gold price. It allows the banks to deliver phantom gold in lieu of delivering real bars.

On Tuesday the PNT/EFP volume was 8k and 5.9k respectively. On Wednesday the volume was 11.5k and 9.1k. On Thursday, when gold was soaring over $1400, the volume in PNT/EFP’s was  30k and 22k respectively.  On Friday the volume was 21k and 11.3.

On average, the daily volume of these two transactions is typically under 10k – except when the banks are aggressively implementing price management operations.

The banks use these transactions, along with feeding tens of thousands of newly printed gold contracts to the hedge funds. This drives up the open interest.  On Friday, May 31st, the open interest in Comex gold was 465k contracts.  The current open interest of 572k is approaching the level at which the price of gold was attacked on the Comex in each of the last three years.

The process is set up by letting the hedge fund algos chase the price higher and accumulate an excessively large net long position in gold contracts,  At the same time, the banks feed contracts into the buying frenzy and accumulate an offsetting net short position.  As the operation cycles through, the banks force the price lower by attacking the stop-loss levels set by the hedge funds as they chase the price higher.  The banks use the concomitant hedge fund selling to cover their shorts, thereby reaping enormous profits.

In September 2016, gold ran higher during the summer and the open interest had reached close to 600k. The price gold was dropped from $1200 to $1070.  In September 2017, the gold contract o/i reached over 580k and gold subsequently was taken down from the high $1300’s to $1125.  Then, in January 2018, the open interest once again was over 580k contract and the gold price was taken down from $1350 to $1200.

In all three price control cycles, the open interest fell below 500k as the banks unloaded long positions and the banks covered their shorts.

This is a long-winded way of explaining why I believe that sometime in the next 10 trading days  the market should expect an aggressive attempt by the banks to attack the gold price on the Comex – and to some degree on the LBMA.  We’ll know I’m right if we get a series of “fishing line” price drops sometime between now and the July 4th holiday. Fridays and pre-holiday trading days, when volume is light, is a favorite time for the banks to begin taking down the gold price.

The good news is, if you follow the sequence I described above from 2016 to now, the price of gold is establishing a series of higher highs and higher lows.  This tells us that the western Central Bank/bullion bank effort to control the price of gold is limited in its success.  This is likely because of immense demand from eastern hemisphere buyers (Central Banks, investors, citizens) who require actual physical delivery.

Furthermore, if I’m wrong about an imminent price attack to take the price of gold lower, it means that the Central Banks/bullion banks have lost control of the market – at least for the time being – and the market is experiencing Bill “Midas” Murphy’s “commercial signal failure.”  If this turns out to be the case, and it is ultimately an inevitability, strap in for some fun if you own physical gold, silver and mining stocks.

ZIRP And QE Won’t Save The Economy – Buy Gold

It’s not that we’ll mistake them for the truth. The real danger is that if we hear enough lies, then we no longer recognize the truth at all…  – “Chernobyl” episode 1 opening monologue

I’ve been discussing the significance of the inverted yield curve in the last few of my Short Seller’s Journal. Notwithstanding pleas from the financial media and Wall Street soothsayers to ignore the inversion this time, this chart below illustrates  my view that cutting interest rates may not do much  (apologies to the source – I do not remember where I found the unedited chart):

The chart shows the spread between the 2yr and 10yr Treasury vs the Fed Funds Rate Target, which is the thin green line, going back to the late 1980’s. I’ve highlighted the periods in which the curve was inverted with the red boxes. Furthermore, I’ve highlighted the spread differential between the 2yr/10yr “index” and the Fed Funds target rate with the yellow shading. I also added the descriptors showing that the yield curve inversion is correlated with the collapse of financial asset bubbles. The bubbles have become systemically endemic since the Greenspan Fed era.

As you can see, during previous crisis/pre-crisis periods, the Fed Funds target rate was substantially higher than the 2yr/10yr index.  Back then the Fed had plenty of room to reduce the Fed Funds rate. In 1989 the Fed Funds Rate (FFR) was nearly 10%; in 2000 the FFR was 6.5%; in 2007 the Fed Funds rate was 5.25%. But currently, the FFR is 2.5%.

See the problem? The Fed has very little room to take rates lower relative to previous financial crises. Moreover, each successive serial financial bubble since the junk bond/S&L debacle in 1990 has gotten more severe. I don’t know how much longer the Fed and, for that matter, Central Banks globally can hold off the next asset collapse. But when this bubble pops it will be devastating. You will want to own physical gold and silver plus have a portfolio of shorts and/or puts.

The Fed is walking barefoot on a razor’s edge with its monetary policy. Ultimately it will require more money printing – with around $3.5 trillion of the money printing during the first three rounds of “QE” left in the financial system after the Fed stops reducing its balance sheet in October – to defer an ultimate systemic collapse.

But once the move to ZIRP and more QE commences,  the dollar will be flushed down the toilet. This is highly problematic given the enormous amount of Treasuries that will be issued once the debt ceiling is lifted (oh yeah, most have forgotten about the debt ceiling limit).  If the Government’s foreign financiers sense the rapid decline in the dollar, they will be loathe to buy more Treasuries.

The yellow dog smells a big problem:

It’s been several years since I’ve seen gold behave like it has since the FOMC circus subsided. To be sure, part of the move has been fueled by hedge fund algos chasing price momentum in the paper market. But for the past 7 years a move like the last three days would be been rejected well before gold moved above $1380, let alone $1400, by the Comex bank price containment squad.

While the financial media and Wall Street “experts” are pleading with market participants to ignore the warning signals transmitted by the various yield curve inversions (Treasury curve, Eurodollar curve, GOFO curve) gold’s movement since mid-August reflects underlying systemic problems bubbling to the surface. The rocket launch this week is a bright warning flare shooting up in the night sky.

…What can we do then? What else is left but to abandon even the hope of truth, and content ourselves instead…with stories. (Ibid)

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

 

“Dave mate. You’re making me rich. I don’t know what’s going on with Gold Fields but they’ve spiked up 33% and my calls are going ballistic.” – Mining Stock Journal subscriber in Australia

Cheers,

Gold, Silver And The Mining Stocks Are Showing Signs Of Life

“Shanghai Gold will change the current gold market with its ‘consumed in the East but priced in the West’ arrangement. When China has the right to speak in the international gold market, the true price of gold will be revealed.” – Xu Luode, Chairman, Shanghai Gold Exchange, 15 May 2014

The quote above is for the benefit of anyone who refuses to acknowledge or accpet that the price of gold is manipulated by western Central Banks, led by the BIS, using the paper gold derivatives traded on the LBMA and the Comex as well as using “structured notes” in the OTC derivatives market. Those who assert that the precious metals market is not manipulated do so from a position of either complicity or ignorance.

The price of gold began spiking higher on Thursday, May 30th. Over that time period the front-month futures contract (August) has run from $1280 to $1340. I believe this is being driven primarily by the market’s perception – in response the steeply inverted Treasury and Eurodollar futures curves – that a significant problem or problems is/are occurring in the global financial system.

The idea for this chart came from a  chart I saw posted by @StockBoardAsset (he had it labeled “Gold/Silver”). The chart shows the XAU index since inception to the present on a monthly basis. I also edited the labels and added the British pound crisis label.

I like it because it shows why it’s highly probable that the precious metals and mining stocks – especially the mining stocks – are near the bottom of a long-term trading pattern that goes back 35 years. The low end happens to correlate with a period in which the stock market was at or near a top followed by a significant sell-off in stocks.

If I spent the time to create a chart showing the SPX to XAU ratio, it would look somewhat like the inverse of the chart above. I’m encouraged by the move in gold and silver over the last week. At some point there will be a pullback/ consolidation of the sharp price-rise. But if you study the chart above, it would appear that the mining stocks have the potential to make a big move in the 2nd half of 2019 and that move may be starting.

One of the “tells” which indicate the fundamental underpinnings are in place for a big move in the sector is the escalation in the frequency and intensity of price manipulation on the Comex.  The banks have been significantly enlarging their net short position in gold contracts plus the volume of PNT and EFP transactions (Privately Negotiated Trades and Exchange For Physicals) has increased substantially over the last couple of weeks. There’s a high correlation between the volume of PNT/EFP transactions and the price-capping efforts exuded by the Comex price-action.

Note: PNT/EFPs are a way for the banks to “deliver” under the terms of the Comex contract without producing and delivering an actual physical Comex bar, recording the serial number on the bar under the receiving party’s name and moving the bar into an allocated account. It’s an extension of the fractional bullion system that is used to manipulate the gold price. It allows the banks to deliver phantom gold in lieu of delivering real bars.

Global Synchronized Depression: Buy Gold And Silver Not Copper

It’s not “different this time.” The steep, prolonged yield curve inversion reflects the onset of a deep global economic contraction which is now being confirmed by leading indicators such as semiconductor and auto sales.  At some point the Fed is going to be forced by the market to cut the Fed Funds rate, as the 1yr Treasury is now yielding less than the Fed  Funds target rate. In addition, the yield curve is inverted from 1yr out to 7yrs, with a steep inversion between the 1yr and 3yr Treasurys.  It won’t take much flinching from the Fed to ignite a rally in the metals.  In addition, the investor sentiment as measured by MarketVane is about as low as I’ve seen it in a long time (34% bullish for both gold and silver).

We are headed into a severe global recession with or w/out a trade agreement. To be sure, over the next 10-20 years, it’s likely the price of copper will move higher. But if my view plays out, a severe recession will cause a sharp drop in the demand for copper and other base metals relative to the demand over the last 10-15 years. This in turn will push out the current supply/demand forecasts for copper by several years and drive the price of copper lower.

Trevor Hall and I discuss the global economy, the intense western Central Bank gold price manipulation activity and the factors that will drive the price of real money – gold and silver – higher and commodities like copper lower in our latest Mining Stock Daily podcast – click here or on the graphic below:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Massive Asset Bubbles And Cheap Gold And Silver

Notwithstanding today’s absurdly phony and propagandistic employment report, it’s becoming more apparent by the week that the Fed and the U.S. Government are once again preparing to print more money. I don’t know when the Fed will revert to more QE but I would argue that the intense effort by the banks to use the Comex as a conduit to control the price of gold is a probable signal – just like in 2008 from March to October. Several FOMC officials have already hinted at the possibility of employing “radical” policy measures to keep the system from falling apart.

Silver Liberties invited on its podcast to discuss the extreme overvaluation of financial “assets” and the extreme undervaluation of real money – gold and silver – and the related derivative of real money – mining stocks.

The Historical Stock Bubble And Undervalued Gold And Silver

When the hedge fund algos inevitably turn the other way and unload stocks, a meaningful amount of the capital that leaves the stock market will likely rush into gold and silver.  The record hedge fund net short position on the Comex will add fuel to the move in gold/silver.

James Anderson of Silver Doctors/SD Bullion invited me to discuss the largest stock bubble in U.S. history and why gold is extremely undervalued relative to the U.S. dollar.  (Note:  at the 20:44 mark I reference China’s foreign reserves to be $1.2 trillion. This is the dollar amount of China’s reserves; China’s total foreign reserve is $3 trillion).

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Hedge Funds Record Net Short Paper Gold

The latest commitment of traders report (COT report) showed that the hedge funds on the Comex (the “managed money” account) is now net short 33.9k contract of paper gold.  This is a record net short position in paper gold for the managed money account on the Comex.  The previous all-time high was 27.2k contracts at the end of December 2015.

This explains a lot to me about the character of the price decline in gold since early April. Just like in the stock market, the large macro “quant” funds use computer algorithms to momentum trade Comex futures. It’s this factor that caused the price of gold to drop quickly once it went below its 50 dma on April 12th. The shift to a net short positioned reflects hedge fund computers unloading long positions and piling into the short side.

At some point this dynamic will go the other way and, at the very least, there will be a significant short-covering rally as the hedge fund positioning swings back the other way. This will really get interesting if the hedge fund algo move to cover  shorts on the Comex at the same time the stock market heads south again. This would  stimulate a hedge fund algo party that could finally send gold over $1400.

The Mining Stock Journal focuses on junior exploration mining stock ideas and, on a selective basis, larger-cap producing mining stocks. You can learn more about this newsletter here:  Mining Stock Journal information

Gold And Silver May Be Setting Up For A Big Move

Gold and silver are historically undervalued relative to the stock and bond markets. The junior mining stocks overall are at their most undervalued relative to the price of gold since 2001. Gold’s relative performance during the quarter, when the stock market had its best quarterly performance in many decades, is evidence of the underlying strength building in the precious metals sector.

Furthermore, the stock market is an accident waiting to happen. By several traditional financial metrics, the current stock market is at its most extreme valuation level in history. This will not end well for those who have not positioned their portfolio in advance of the economic and financial hurricane that is beginning to “move onshore.”

Bill Powers invited on to his Mining Stock Education podcast to discuss the precious metals sector and the economy:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

The Divergence Between Stocks And Reality Is Insane

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

This is the nastiest bear market rally that I have seen in my over 34 years of experience as a  financial markets professional. It would be a mistake to make the assumption that there has  not been some official intervention to help the stock market recover from the December sell-off.

Rob Kientz of goldsilverpros.com – a relatively new website that focuses on gold and silver market news and research – and I had a conversation about the extreme negative divergence between the economy and the stock market. And, of course, we discussed gold, silver and mining stocks:

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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.

Is Barrick Gold Signaling Peak Gold?

Barrick Gold’s hostile takeover offer for Newmont Mining likely signals “peak gold.” Barrick claims the shareholders would benefit from over US$7 billion in NPV of “real synergies.” These “synergies” would primarily be derived from proposed cost-savings by combing the Nevada operations of both companies. As it turns out, footnoted in Barrick’s presentation is the disclosure that the proposed $7 billion NPV represents the projected cash flow benefit of the merger over a 20-year period discounted at 5%.

If I were a NEM shareholder, my answer would be “no thanks.” First, it would be more
appropriate to use a 15-20% discount rate to better represent the probability that Barrick’s
projections over 20 years are even remotely accurate. Second, given the poor track record
over the last 20 years of Barrick’s management, I would be skeptical of any representations
and projections made by the Company. Barrick’s stock has substantially underperformed the  HUI index over the last 20 years. This is significant because Barrick carries a 13.8% weighting in the HUI. While some type of joint venture or merger of the two companies’ Nevada operations makes sense, I do not believe that Barrick will achieve the synergies as presented.

I believe Barrick’s move to buy Randgold and its attempt to acquire Newmont is a desperate attempt to accumulate as much gold reserves as possible to replace the depletion rate of Barrick’s reserves. The most cost effective way with the gold price at its current level to build a large gold resource base is to buy it. Acquiring Newmont would double Barrick’s  proven/probable reserve base and double its annual production.

In my opinion, Barrick’s acquisition of  Randgold and its attempt to acquire Newmont signals both “peak gold” and an outlook for a much higher gold price. There has not been a major gold deposit discovered in  several years. A five million oz discovery used to be considered “major.”  While I don’t know if this is still the case, a former Newmont geologist who now runs a junior mining company told me 10 years ago that NEM wouldn’t even consider a project unless the geologists thought it had a least 5 million ozs of gold.

Those days are probably over. It’s likely that Barrick’s management does not believe the Company has a major discovery to be made in its future. However, the strategy of buying large gold reserves does not make sense unless the Company believes that the depletion rate of gold in the ground is going to exceed the amount of gold found in new deposits going forward.  It also suggests that Barrick believes in the eventuality of a much higher gold price.

On another note, since August 12th, the price of gold has outperformed all of the major stock indices plus Tesla stock (TSLA):

If you are looking for ideas in junior mining stocks to take advantage of the coming bull move in the precious metals sector, try out the Mining Stock Journal:  Mining Stock Journal subscription information (there’s no minimum commitment beyond the first month).