Tag Archives: silver

An Unavoidable Global Debt Implosion

“[Whatever] the repo failure involved, it is likely to prove a watershed moment, causing US bankers to more widely consider their exposure to counterparty risk and risky loans, particularly leveraged loans and their collateralised form in CLOs. a new banking crisis is not only in the making, for which the repo problem serves as an early warning, but it could escalate quite rapidly.” Alasdair Macleod, “The Ghost of Failed Bank Returns”

The delinquency and default rate on consumer and corporate debt is rising. This creates funding gaps and cash flow shortfalls at banks. In a fractional banking system, banks only have to put up $1 of reserve for every $9 of money loaned. When the value of the loans declines because of non-performance, it requires capital – cash liquidity – to make up the shortfall in debt service payments received by the banks. In simple terms, the banks are staring at a systemic “margin call.”

To be sure, the current repo funding shortfall may subside. But it will not fix the underlying causes (Deutsche Bank, CLO Trusts, subprime debt, consumer debt, derivatives), which are likely leading up to another round of what happened in 2008 – only worse this time.

Chris Marcus of  Arcadia Economics  invited me to discuss my thoughts on the meaning behind the sudden need for the Fed to inject $10’s of billions into the overnight bank lending 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

With More Money Printing Coming (“QE”) Gold, Silver And Miners Will Soar

It would be difficult to find a chart with a  more bullish set-up than that of GDX unless it was a chart of the imminent move higher in the U.S. dollar money supply:

The Fed was unable to move the Fed funds rate within 50% of the long term average “normalized” level. It was also unable to unwind little more than 20% of the money it printed under Bernanke and Yellen, despite Bernanke’s insistence that the $4.5 trillion printed and injected into the banking system was “temporary.”  Not only was the first series of QE operations not temporary, the Fed is preparing to re-start its printing press.

I believe we are very close to a major shift in investor sentiment, as investors lose faith in the Central Banks’ ability to control the markets with monetary policy. As you can see from the chart above, we experienced just a “whiff” of the type action we can expect in the precious metals sector as reality ushers in true price discovery in the markets.

I can tell the sentiment is not getting frothy in the precious metals sector when several people, subscribers and others, have expressed disappointment in the rate of return for the mining stocks. From May 30th thru the start of Labor Day weekend, gold rose 15.3% and silver climbed 32.3%. Over the same period of time, GDX rose 43.7%. Call me old fashioned, but I can remember when 43.7% over a two or three year period of time was considered a great return on stocks (this was before the tech bubble).

Where I really see disappointment expressed is with the junior exploration micro-cap stocks. Although some have been stuck in mud, many have doubled or tripled. One example is Discovery Metals (AYYBF, DSV.V), which ran from 17 cents to as high as 52 cents this summer. Based on today’s closing price, it’s more than doubled since May 30th. Many of the other stocks I feature in my  Mining Stock Journal newsletter provided double-digit percentage returns this summer and some have doubled or tripled.

I believe the pullback in the sector this month is a necessary and healthy technical correction, with some help from the price management squad, that will lead to higher highs sometime between now and year-end. Certainly investor sentiment, from the metrics I see daily, are far from exuberant, which is bullish.

 

Repo Rates And Gold: Something Big Is Happening

“We can ignore reality, but we cannot ignore the consequences of ignoring reality.” – Ayn Rand

Something big is happening beneath the surface of a Dow and S&P 500 trading near all-time highs. The soaring repo rate, more demand for overnight Fed funding loans than is being supplied and a big move in the price of gold since the end of May are clear indicators.

The global financial system is unsustainably over-leveraged. This problem is compounded by the massive increase in OTC derivatives. The U.S. financial system, in exceptional fashion, leads the way. Trump calls it “the greatest economy ever.” Yet the Fed was unable to “normalize” the Fed Funds Rate back up to just the historically average level without crashing the financial system. In fact, the Fed couldn’t even get halfway there before it had to reverse course and take rates lower plus hint a more money printing.

Phil Kennedy of Kennedy Financial hosted me plus Larry Lepard (mining stock fund manager) and Jerry Robinson (economist and trend trader)  to discuss what appears to be a giant margin call on the global financial system and where we think the price  of gold is headed:

NOTE:  I will be analyzing the signal being sent by the soaring repo rate this week and why it may be evidence that the fractional reserve banking fiat currency system is collapsing in my Short Seller’s Journal this week. You can learn more about my newsletters here  Short Seller’s Journal  and here  Mining Stock Journal. Two weeks ago I presented ROKU as a short at $169 and last week Tiffany’s (TIF) at $98. So far my put play on ROKU has been a home run.

Negative Rates, Money Printing and Gold

“As well as being modified by its specific supply and demand conditions, Gold’s time preference is essentially for its moneyness, represented by its use as a medium of exchange and store of value. The moneyness aspect links it to its exchange value for all commodities, and it is this aspect of gold’s qualities that should warn us that a backwardation in gold, emanating from negative dollar interest rates, will herald a general backwardation in commodities as well.” – Alasdair Macleod, Negative Rates and Gold

The “perfect storm” is forming that will push gold to record highs in U.S. dollars. In 2008 a near-perfect storm hit the global financial system that drove the price of gold to record level in just about every currency including dollars. The only missing ingredient back then was negative interest rates. The same financial excesses that caused the previous financial crisis have reformed only now they are much larger in scale. Most of the western hemisphere has already implemented negative interest rates. Now Trump has opened that Pandora’s Box in the U.S.

Chris Marcus of Arcadia Economics invited me onto this podcast to discuss the implications of Trump’s proposal and how it will affect the precious metals sector:

Massive Bull Run In Gold And Silver Is Just Starting

Several Central Banks already buy stocks and bonds with printed money, including the Bank of Japan, Swiss National Bank and the PBoC.  It now looks like Germany’s Bundesbank is going to begin dabbling in the German stock market, extending  its market invention beyond the bond market.

I’m certain the United States’ Exchange Stabilization Fund buys at least stock index futures, if not the shares of companies deemed essential to “national security.”   Given Trump’s tendencies toward dictatorial decrees (see “The Wall” debacle), I suspect eventually he’ll order the Fed to print money and buy stocks directly rather than by proxy via the ESF in an effort to keep the stock bubble from blowing up in the context of a deepening economic recession.

Bill Powers invited me onto his Mining Stock Education podcast to discuss why I believe the move in the precious metals this summer is just beginning.  We also discuss why it will pay off to focus on junior exploration “venture capital” companies, many of which will throw off 50-1000% returns (or more) if gold and silver continue to move higher:

If I’m right, and if the metals continue moving a lot higher, we should start to see stocks like AG move well above their 2016 highs. Eventually many of the juniors will be 3-5x higher than their current level. We got a taste of the type of moves juniors will start to make this week.

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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.  You can learn more about this newsletter here:   Mining Stock Journal information.

Gold, Silver, Mining Stocks: Quo Vadimus? (Where Are We Going?)

The chart above was sourced from spiralcalendar.com with a couple edits of mine. It shows the S&P 500/gold ratio going back to 1980, when the 1970’s gold bull market culminated. I believe before the a complete financial “reset” is imposed on the global financial system, we could see the SPX/gold ratio fall to the level it hit in 1980.

A subscriber asked me if I thought that the fact that stocks like AG, EXK and HL, among many others, are only 50% as high in price as they were when silver hit $20 in the summer of 2016 is a red flag.

I said that I do not see it as red flag for the sector. Rather, I see it as just one measure by which mining shares are extremely undervalued relative to gold and silver and to the rest of the stock market. I always thought that the mining shares ran up in price too quickly during the 2016 rally. The GDXJ rose 300% in six months and investor sentiment had become far too frothy.

In my observation of the moves in the sector from 2001 to mid-2006 and from November 2008 to mid/late 2011, gold and silver lead the sector at first, followed by the large cap producers, with the juniors lagging and then outperforming gold/silver/large caps. That seems to be the progression unfolding now.

If I’m right, and if the metals continue moving a lot higher, we should start to see stocks like AG move well above their 2016 highs. Eventually many of the juniors will be 3-5x higher than their current level. We got a taste of the type of moves juniors will start to make this week.

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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.  You can learn more about this newsletter here:   Mining Stock Journal information.

“Thanks for today’s latest issue. It’s value to me is increasing with time.” – From “Greg”

What’s Driving The Price Of Gold and Silver?

Fear, Greed and Reality. Also Bill Murphy’s “Commercial Signal Failure,” which occurs when physical demand for deliverable gold and silver overwhelms the paper derivative short positions used by the western Central Banks to manage the price of gold and silver.

The naked short position in paper gold and silver is so big that any government or central bank with a substantial FX surplus could pull the plug on it by trading enough Treasuries, or even euros or yen, for real metal. Russia and China, among several other eastern hemisphere Central Banks are doing just that.

Silver Doctor’s James Anderson invited me to discuss the factors behind what appears to be a major move higher in the precious metals, possibly leading to the eventual geopolitical and financial systemic reset (Silver Doctors/SD Bullion):

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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

Don’t Let The CPM Group Feed You A Bag Of Brown Stuff About Silver

The CPM Group and its proprietor, Jeffrey Christian, has operated as one of the “analytic” fronts for the western Central Banks’ paper derivative gold and silver manipulation scheme for many years.  Someone sent me the CPM Group’s latest commentary on silver in which it expresses the view that the price of silver will “fall dramatically” after the September silver contract “roll” on the Comex is over. You can read the brief report here:

CPM Market Commentary 2019-5, Who Is Buying Silver, It’s The Comex Shorts, 2019-08-28

To begin with, the paper price of silver is not being driven higher by short-covering on the Comex. In fact, the big banks/commercials, as well as the “other reportables” and retail traders per the last COT report added over 10,000 contracts to their short position last week. Let’s be clear on one thing, and the years of evidence supporting this is overwhelming, the only time “short covering” drove the price of silver higher was in early 2011 when the big banks were forced to scramble for cover and ran the price of silver close to $50.

The price of silver drops when the big banks short thousands of contracts in an effort to cap a price rally or drive the price lower.

CPM makes the argument that physical demand for silver is not a factor in the recent move higher in the price of silver based on demand for US Silver Eagles per the U.S. Mint report.  This assertion is an insult to the intelligence of anyone who studies the silver market thoroughly. U.S. retail investor silver eagle demand represents less than 5% of the amount of silver produced annually. Industrial demand plus jewelry/ silverware use accounts for roughly 75% of the amount of silver “consumed” annually. It can be argued that U.S. retail demand for coins has very little, if any, influence on the price movement in silver.

Finally, the “roll” of Comex silver open interest from the expiring front month to the next front month – in this case September to December – affects the price of silver maybe to the extent that a significant portion of the expiring front  month open interest does not “roll” out to December and instead sells outright.  First notice day is tomorrow, which means any account holding contracts must either roll or have its account funded to receive delivery of physical silver as early as this evening (the day before official 1st notice).

You’ll note in the report that Christian states that there’s “226.5 million ounces of September open interest to be rolled forward…” This is incorrect – egregiously incorrect in fact. As of Wednesday’s close per the CME’s open interest report, there were 91,109 contracts open in September. Anyone who’s traded Comex paper silver knows each contract represents 5,000 ozs. The o/i at the end of Wednesday was 97,109 contracts, or 485.5 million ozs of paper silver. In all likelihood at least 1/3 to a half of that – or more – will have rolled or sold by the close of Comex pit trading today.

But Christian uses the big numbers to make the situation sound extremely bearish for silver. It’s not. In fact, it will be interesting to see how many contracts will be left standing after today.  Liquidation of September silver contracts by hedge funds (“managed money”) is likely causing the price decline in silver and gold today.  We’ll know for sure tomorrow when the CME o/i report is released. I would not be surprised if more the 50% of the September o/i has liquidated today.

The amount of silver designated as available for delivery (“registered”) as of Wednesday was 91 million ozs.  If just 20% of the open September silver contracts stand for delivery (which is unlikely) the Comex will have a supply problem. However, in all likelihood, most of the open contracts after today’s close will either liquidate – if they are not noticed – or agree to settle in cash (an EFP or PNT). The bottom line is that the September/December “roll” will  have little to no affect on the directional movement of the silver price.

Jeffrey Christian’s CPM Report on silver is little more than  fear propaganda which is woefully short on  facts and long on fairytale-based analysis.  He concludes that “weak investment demand created short positions on the Comex and weak investment demand suggests that prices will not continue to rise.”  Not one letter of one word in that assertion contains even the smallest shred of truth.  Certainly just the flow of capital into the various silver ETFs over the summer contradicts Christian’s absurd claim.

What is driving the price of silver higher? Physical demand from India and China.  Both countries are implementing large-scale solar power build-outs.  Furthermore, India’s population has shifted a considerable amount of demand from gold buying to silver purchases since the Government raised the import duty on gold bars.

Similarly, China’s consumption of silver has likely soared after the Government restricted the supply of gold into the SGE in order to “feed the beast” –  i.e. what is likely massive unreported gold accumulation by the PBoC.  It’s impossible to track China’s real demand for gold and silver since 2014, when the Government opened up Shanghai and Beijing for gold and silver importation.  The amount of metal that flows through those ports is not published by design.

In truth, the inexorable rise this summer in the price of gold and silver is being driven by enormous physical demand not from retail minnows but by large entities primarily in the eastern hemisphere which are accumulating an enormous amount of physical gold and silver. Certainly “footprints” in the snow on the LBMA would support this conclusion.  Do not be bamboozled or scared into selling your physical gold and silver or your mining stocks by charlatans like Jeffrey Christian.

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