Tag Archives: silver

Negative Rates, Gresham’s Law And A Parabolic Move In Gold

Thomas Gresham observed in the 1500’s that “bad money drives out good.”  The concept applied to gold and silver coins and the value of precious metals metals used in the coins relative to their face value.  Back then silver coins would be debased by replacing some of the silver content with base metals.  Of course, that practice of monetary debasement goes back to ancient Rome.

But the idea applies today in the sense that, as fiat currency continues to be devalued with money printing and artificially low interest rates, those paying attention will begin to convert cash savings into physical gold and silver and use the devalued fiat currency for transactions settlement. This is likely part of the reason the prices of gold and silver are at all-time highs in almost every fiat currency globally.

But I got to thinking about the further imposition of negative rates after absorbing Alasdair Macleod’s must-read essay, “Deeply negative nominal rates are on their way.” In this brilliantly written explanation of the problems with negative rates, Macleod references two working papers from the IMF which address the problem of hoarding cash if commercial banks impose a negative rate on cash balances by “taxing” cash withdrawals. This would be the implementation of negative rate on money held at banks. Money spent electronically would not be taxed like this.

As preposterous as that may seem, if the International Monetary Fund (“IMF”) is publishing working papers which discuss taxing those who attempt to remove cash from the banking system, it likely means implementation of this policy is being considered not only by the IMF but also the BIS.

The imposition of a negative rate policy in the form of a “tax” on cash withdrawals will likely lead eventually to a run on the banks by large depositors, who will “smell” this policy in advance. This cash – or “untaxed good money” – will be removed from the financial system. Currency needed for daily use would remain in the banks and used electronically – this would be the “bad money.”

In a sense, we’re already seeing Gresham’s Law in the sovereign bond market. Large pools of capital are flooding into sovereign bonds as the price of these bonds grinds inexorably higher. It would be absurd to pay a huge premium above face for a bond knowing that if you hold it to maturity you’ll be repaid substantially less than the price you paid for the bond (i.e. a negative return on these bonds held to maturity). So it’s rational to assume that savvy players will eventually sell before the price of the bond is below the price paid.

It’s performance-chasing that gives the investor a better return than simply holding cash if he sells at the right time. The alternative is holding the cash in short term money market type investments which guarantees a negative return. To visualize this dynamic, here’s the price chart of a 100yr Austrian sovereign bond:

As Bloomberg describes it: “this type of debt carries heavy risks. After all, it will only redeem at 100% of its face value (or par) so investors who have bought in at much higher prices would suffer if yields returned to levels seen as recently as the start of this year – and the price of the bond fell. Furthermore, while interest might not be the priority for many investors in ultra-long maturities, the Austrian paper is only yielding 60 basis points currently. That won’t butter many parsnips.”

Again, as I argued above, rationale investors will begin to sell paper like this and look for alternatives. At some point, as the monetary policies of the Central Banks become more totalitarian, rational investors will turn to gold and silver rather than chase bond prices into even more negative territory. Unfortunately for them, institutional investors will be confined to gold and surrogates like GLD and SLV, both of which have seen massive inflows of capital already. But wealthy investors will soon be converting cash into physical gold and silver and safekeeping it outside of the banking system, thereby effectively removing good money – i.e. untaxed large bank deposits – from the system and using gold and silver as wealth preservation assets.

This in will turn into a real gold rush and the prices of gold and silver will go parabolic. To visualize what this will look like, refer to the chart of the 100yr Austrian bond above.

I agree with Alasdair Macleod’s conclusion that deeply negative interest rates will lead to a collapse of fiat currencies – probably not as soon as this year but, then again, a bell won’t ring when it’s time get out of fiat currencies and bank accounts:

Given the rapidity with which the global economy is now declining, we will be lucky if a credit crisis leading to deeply negative nominal rates doesn’t happen this year. The pace at which depositors in the banks then become aware of what is happening to their fiat currency will determine the speed and extent of the currency collapse. 

The Remarkable Resiliency Of Gold And Silver

The price of gold continues to hold up under the enormous selling in the paper derivatives markets on the Comex and LBMA.  This morning’s price attack is a good example:

The chart above shows December paper gold in 5 minute intervals. Typically the price of gold is taken lower leading up to the a.m. London “fix,” in which the “price fix” process is characterized with heavy offerings.  Lately the price bounces after that. And of course there’s the obligatory price-smack when the Comex floor trading commences (8:20 a.m. EST).  Check that box.  Then the “hey can I tell you the good news” item hit the tape about 4 minutes after the NYSE opened.  The hedge fund algos spiked the S&P 500 futures and dumped paper gold.

For the better part of the last 18 years, when this type of “market” action occurs, gold is down for the count. Not only does the initial “fishing line” sell-off hold, but the gold price moves lower throughout the day.  This snap-back action in the gold price after a price attack since early June is unique to the way gold (and silver) has traded over the last 18+ years.

Gold is at or near an all-time high in most fiat paper currencies except the dollar. This summer, however, it would appear that the dollar-based valuation of gold is starting to break the “shackles” of official intervention and is beginning to reflect the underlying fundamentals.  On the assumption that gold can continue to withstand serious efforts to push the price back below $1500 (the net short position in gold futures held by Comex banks is near a record high, for instance), we could see $1600 or higher before Labor Day weekend.

This price-action in gold is being driven by enormous flows of capital into both physical gold and gold “surrogates” or “derivatives.”  Yes, GLD is a derivative of gold – a device used to index the price movement in gold.  The action over the last two months is more remarkable given that the increased excise tax on bullion imports into India has largely stifled import demand beyond what gets smuggled into the country (in excess of 300 tonnes annually).

I have been told my someone who claims to be in a position to know that there’s a buyer of massive amounts of physical gold and silver on every dip in price and that’s what is driving the resiliency of the precious metals.

Make no mistake, even if by chance of a miracle a “trade agreement” is reached between China and the U.S., the underlying economic fundamentals globally have already deteriorated into a recession. And it’s getting worse. It has nothing to do with tariffs.  For the primary cause, research the amount of debt outstanding now vs.  2008…

Moreover, the randomness of unforeseen news events causing sudden market sell-offs and precious metals rallies is starting to occur with greater frequency. This is driving the flight-to-safety move into the precious metals. The mining stocks have lagged relative to the risk-adjusted percentage move since early June in gold and silver. I do not expect that to last for long…

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

Is the Federal Reserve losing control of the gold price?

For the majority of the last 20 years, the western Central Banks, under the direction of the BIS, have been able to use the precious metals derivatives markets to “manage” the price of gold.  As long as counterparties who are “synthetically” long gold and silver are willing to settle the derivatives trade in cash or ETF shares, gold derivatives can be created in infinite quantities and used to keep a lid on the price of gold.

But since late spring, it seems that the attempts to use the paper gold and silver markets on the Comex and LBMA to drive the price lower have been met with aggressive buying.  For now the only explanation is that a large buyer  (or maybe several) may be accumulating physical gold/silver, which is preventing the price managers from indiscriminately printing and flooding the market with paper derivative contracts to drive the price down.  The tail may no longer be wagging the dog.

My friend and colleague, Paul Craig Roberts wrote this commentary about the possibility that the physical gold market is taking away:

After years of being kept in the doldrums by orchestrated short selling described on this website by Roberts and Kranzler, gold has lately moved up sharply reaching $1,510 this morning. The gold price has continued to rise despite the continuing practice of dumping large volumes of naked contracts in the futures market. The gold price is driven down but quickly recovers and moves on up. I haven’t an explanation at this time for the new force that is more powerful than the short-selling that has been used to control the price of gold.

You can read the rest of PCR’s analysis here:  Is The Fed Losing Control Of Gold

Gold / Silver May Be Breaking Free From Manipulation

The price of gold has rejected numerous attempts by the banks to hammer the gold price below $1400 using paper gold derivatives on the Comex and the LBMA. I have not seen gold behave with such resiliency in the last 19 years when the Comex banks have an extremely large short position in Comex paper.

The action in the price of gold is signalling that large buyers are accumulating a lot of physical gold. This is preventing the banks from using the Comex as a manipulative tool. Based on historical preferences, I highly doubt the buying is coming from the hedge funds, who have been content playing in the paper gold sandbox of the Comex.

Per the World Gold Council numbers, which are notoriously understated, Central Banks have purchased 374 tonnes of gold in the first half of 2019. This is the highest level of CB gold purchases in over 50 years. Note that western Central Banks – specifically the Fed, ECB, BoE and BoJ have been notably absent from the buying frenzy. The buying has been led by China, Poland and Russia.

“With governments everywhere itching to increase spending without raising taxes and as the global economy sinks into a trade and credit-cycle induced recession, budget deficits will fuel monetary inflation at a faster pace than seen before. Re-learning that gold is sound money is now the most urgent priority for all those charged with responsibility for other peoples’ investments.”

The quote above is from Alasdair Macleod’s must-read essay titled, “The Reasoning Behind Gold’s Breakout.”  The article dispels the common “Fake news” myths about gold. It would be a great article to read for Warren Buffet, who believes that gold “just sits there doing nothing.” Of course, students of gold and history know that gold has outperformed the Dow since 1971. Macleod revisits the math behind this fact.

If you are looking for mining stock ideas to take advantage of the emerging bull market move in gold and silver, please consider my Mining Stock Journal.  In the latest issue released last night I review a popular silver stock that I believe is overvalued and I present a high risk/high return junior exploration stock that is relatively unknown but has 10x potential. You can learn more about this newsletter here:  Mining Stock Journal information.

Gold, Silver, Mining Stocks Are A Coiled Spring

Currently gold and silver are behaving in a way that I have not seen since late 2008. The gold open interest on the Comex is near a record high (657,776 on July 11, 2016). The Comex banks continue pile into the short side while the hedge funds pile into the long side. However, every attempt to start a “waterfall” type sell-off is met with buying. Several attempts to take gold below $1400 this week have been thwarted. Silver all of sudden started moving higher manically. Based on the data I see daily, India and China are not participating in the buying. At least overtly. It feels like someone “big” is out “there” accumulating gold.

Phil Kennedy of Kennedy Financial put together a roundtable discussion with Bill Murphy, Dave Collum, Rob Kirby and me to discuss our thoughts on the gold market:

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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

Tesla, Gold, Silver And A Historical Stock Bubble

“Tesla’s headed for bankruptcy. It’s got a flawed business model; costs are way too high for the price charged for the vehicles and its riddled with accounting fraud. But the regulators will look the other way until it’s too late.”

Silver Liberties invited me on to its podcast to discuss reality. We spend 35 minutes trying to blow away the Orwellian “smoke” that is engulfing the United States’ economic, political system:

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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

A Predictable Gold Price Attack – Now What?

Today’s attack on gold and silver was one of the most predictable in my 18 years of involvement in the precious metals sector. On Wednesday just before the close of the NYSE, I loaded up at-the-money puts on NUGT that expire today. I sold them right after the open for home run trade. The sector has been grinding higher since the first hour of trading, which is bullish.

Trevor Hall and I discuss the recent move up in gold (and the new move below $1400), silver expectations, and the increasingly positive investor sentiment toward the junior mining sector. We also share a few stocks which we have likened over the first half of 2019 along with a few disappointments. You can listen to the discussion by clicking here: MINING STOCK DAILY  or on the graphic below:

The Mining Stock Journal  covers several mining stocks that I believe are extraordinarily undervalued relative to their upside potential. I also present opportunistic recommendations on select mid-tier and large-cap miners that should outperform their peers.  In response to subscriber requests, in the latest issue released Wednesday  I presented an initial opinion on Great Bear Resources. You can learn more about this newsletter here:   Mining Stock Journal information.

The Flight To Safety In Gold – A Conversation With The Prepared Mind – Part 1

The Chinese have been slowly trading out of their U.S. dollar exposure and converting it to gold. Something a lot of analysts don’t pay attention to because they don’t even know what the facts are [with regard to the actual amount of physical gold held by China] when they look at China and proclaim that China has a debt problem.  Sure, China has a fiat currency-derived debt problem but it’s nowhere near as bad as the U.S. fiat currency-derived debt problem. And guess what? On the other side of the paper debt China has 25,000-35,000 tonnes of physical gold they’ve hoarded over decades.

The Prepared Mind invited to its podcast to discuss a wide range of issues from precious metals to geopolitical problems. Here’s Part 1:

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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

Gold: BOOM Goes The Dynamite

After dancing around the $1350 level (August futures basis) the price of gold launched in three stages after the FOMC circus was over on June 19th. The first move enabled gold to break above and hold the $1360 area of resistance that has been referenced ad nauseum for the last three years. Then, two “reverse flash crashes” later on Thursday and Friday that week, gold powered well above $1400 before a “flash crash” at the end of Friday’s trading pushed gold back below $1400 for the weekend. On Monday afternoon (June 24th) gold broke free from  the shackles of official price containment and sustained a move over $1400 and ran up to $1440.

As I expected, a combination of profit-taking by the hedge funds chasing momentum higher with paper gold and official efforts to push the price of gold lower triggered a sell-off that tested $1400 successfully. Gold closed out the week (August futures basis) at $1412.

While I was expecting a move like this at some point in response to the Fed reimplementing loose monetary policy, I thought that it wouldn’t happen until the Fed signaled that it would begin printing money again. It’s not clear to me if this move is being fueled by fundamentals and a flight to safety or if it’s hedge fund algos chasing price momentum. It’s likely a combination of both.

Independent of any economic disruption that may or may not be caused by the trade war, economic activity globally is deteriorating rapidly. Every country around the world recklessly printed money and piled up debt which artificially revived economic activity after the 2008 de facto systemic collapse. Mathematically the world can’t print money and issue debt ad infinitum. We may have hit the wall in that regard over the last 12 months. The trade war is being used as a convenient scapegoat. It’s like blaming the start of World War I on the assassination of Archduke Franz Ferdinand…

I believe there’s no question that highly negative events are unfolding “behind the scenes” which are sucking liquidity out of the system. I believe these events will emerge in plain sight well before year-end. The yield curve inversions (Treasury, Eurodollar futures) are telling us there’s hidden explosives detonating that have been contained for now. I have no doubt that the troubles are connected to primarily to Deutsche Bank but also stem from the early stages of a subprime debt problem. The “secret” meeting held a couple weeks ago by Mnuchin and the Financial Stability Oversight Council concerning “alarms” in the junk bond market was a tell-tale as was the “bad bank” plan announced by Deutsche Bank, which was curiously devoid of any details on how it would be funded or what would go into it.

The systemic problems and geopolitical animosities percolating behind “the curtain” are not lost on those with an inside view of the action. I expect an aggressive attack on the gold price next week. The Fourth of July observance falls on Thursday, which means most Wall Street trading desks will be lightly staffed most of the week. Low-volume holiday periods are the favorite time for the bullion banks to stage a raid on gold. The success of this raid is crucial to maintaining the illusion that obvious systemic problems are manageable.

Any attempt to push the price of gold lower will be helped by the fact that official gold imports into India have stopped while the Indian public digests the recent surge in the price of gold. This is typical behavior by India after a sharp move higher in gold. Smuggling to avoid the import duty likely continues unabated. But the removal of India’s official bid from the physical gold market is a window of opportunity for the western gold price managers to make an effort to push bold back below $1400 using paper.

If any attempt to  manipulate gold back below $1400 fails in the next week or two, it means that unhealthy quantities of brown fecal matter are connecting with the fan blades – out of sight for now except for the signal coming from the gold.

Any sustained move higher in gold and silver will ignite a fire below the mining stocks, especially the historically undervalued juniors. My Mining Stock Journal covers several mining stocks that I believe are extraordinarily undervalued relative to their upside potential. I also present opportunistic recommendations on select mid-tier and large-cap miners that should outperform their peers. In response to subscriber requests, in the next issue released this upcoming week I’ll present an initial opinion on Great Bear Resources. You can learn more about this newsletter here:   Mining Stock Journal information.

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.