Bullion Shortages Will Push Junior Mining Stocks Higher in 2020

The chart above shows the ratio of GDXJ/GDX. Although I don’t consider GDXJ to be a junior ETF per se, the GDXJ index does contain smaller cap, later-stage juniors and smaller cap producers. In that sense, it offers slightly higher risk/returns than GDX. That ratio has popped above the downtrend line that was established at the peak of the last bull cycle in the sector.  Prospectively, as long as it stays above that trendline and moves higher, it’s a great indicator that the precious metals sector will stage a big move higher for the next couple of years.

Trevor Hall and I discuss the physical bullion shortage developing in London and New York and why the precious metals sector will likely make a big move in 2020 – click on the graphic below or this link to listen:

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I cover several junior exploration stocks with upside that is several multiples of their current price. I also specialize in looking for value plays in larger cap producing miners as well as reviewing stocks to avoid.  You can learn more about this mining stock newsletter here:   Mining Stock Journal information.

NOTE: I do not receive compensation from any mining stock companies and I do not accept any precious metals industry sponsors. My research and my views are my own and I invest my own money in many of the stocks I present.

Stock Bubbles And Dutch Tulip Bulbs

“People were purchasing bulbs at higher and higher prices, intending to re-sell them for a profit. Such a scheme could not last unless someone was ultimately willing to pay such high prices and take possession of the bulbs. In February 1637, tulip traders could no longer find new buyers willing to pay increasingly inflated prices for their bulbs. As this realization set in, the demand for tulips collapsed” – “Extraordinary Popular Delusions and the Madness of Crowds,” Charles Mackay

“So yes, in a way I’m saying we can keep going up while at risk of reverting at any moment”NorthmanTrader.com

The market is melting up and indicators that a top is approaching are proliferating. This is one of the typical anecdotes that accompany markets nearing a top:   On CNBC last Wednesday morning the hosts plus a couple guests were discussing the market and one of the guests said that value doesn’t matter anymore “it’s all about momentum.” I almost fell off my chair when I heard that because the “fundamentals don’t matter it’s all about momentum” was one of the mantras in late 1999.

Chris Marcus (Arcadia Economics) and I discuss the current stock market melt-up and whether or not it can be shorted with success and how to manage the risks of being short:

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Some of the commentary above is  excerpted from the Short Seller’s Journal. Each weekly issue contains macro economic analysis, market analysis, and short ideas.  I  To learn more about this short-sell focused newsletter, click here:  Short Seller’s Journal info

The Fed Is Going All-In To Keep The System From Collapsing

Gresham’s Law in action: The diminishing availability of physical gold from the market (per several different accounts in London) corresponds to the proliferation of fiat currency printing and paper gold derivatives.

Since September the Fed has increased the size of its balance sheet by $414 billion or 11% in less than four months. It’s the fastest rate at which the Fed has printed money in its history.  The Fed insists that this “repo” program is not the reinstatement of “Quantitative Easing.”  In one sense the Fed is correct. This money printing program is a direct bailout of the big banks. And now the Fed is proposing to start bailing out hedge funds:

Federal Reserve officials are considering lending cash directly to hedge funds through clearinghouses to ease stress in the repo market. But that could be a tough sell for policy makers  (WSJ).

Yes, liquidity in the inte-rbank overnight collateralized lending system dried up in September.  But it’s not because of a shortage of cash to lend. The reason is two-fold.  First, banks needed cash/Tier 1 collateral to shore up their own reserves. Why?  Because bank assets – especially subprime loans – are starting to melt-down – i.e.  rising delinquencies and defaults. This is provable just by looking at the footnotes in quarterly bank 10-Q’s.  Second,  hedge fund assets – primarily the bottom half of CLO’s, credit default swaps, leveraged loans – are melting down.

The banks know this because these are the same deteriorating assets held by banks. In order to induce overnight repo lending, it would require a repo rate many multiples of the artificially low repo rate in order to reflect the risk of holding compromised collateral  overnight. This is why the repo rate spiked up briefly to 10% in September. That rate reflected the overnight interest rate desperate borrowers were willing to pay for an overnight collateralized loan.  Banks pulled away from lending in the repo market because they no longer trusted the collateral – even on an overnight basis. This is why the Fed was “forced” to start printing $10’s of billions and make it available to the repo market.

The Fed created the problem in the first place by holding interest rates artificially low and leaving several trillion of its first series of QE operations in the banking system. This in turn fostered  a catastrophic level of morally hazardous investing by banks and hedge funds. Now the Fed will try to monetize this – it has already hinted that the “repo” bailout will be extended now to April.  Absence this Fed intervention, 2008 x 10 will ensue – which will happen eventually anyway.

Ultimately, it will be a tragedy if the Fed bails out the the banks and the hedge funds – especially the hedge funds. Who benefits from this?  Bank and hedge fund operators should be penalized for making reckless investment decisions – not bailed out by  what will end up to be taxpayer money.  We already saw in 2008 that banks take the bailout funds and continued to pay themselves huge bonuses despite making lending decisions for which they should be penalized.

And a bailout of the hedge funds would reward hedge fund managers for investments that would never have been made had the Fed let a free market determine the true cost of making those investments.

I said back in 2003 that the Fed would print money and monetize debt until the elitists had swept every last crumb of middle class wealth off the table and into their own pockets before letting the system collapse. The bank bailout in 2008 and now the bank/hedge fund bailout is an example of this wealth transfer process.  The only question that remains in my mind is whether or not the current bailout operation will be the last “sweep.”

Only In America And Banana Republics

Many of these people get to worry now about putting food on the table and providing clothing for their children as they watch this criminal CEO walk away from Boeing with $62 million in severance compensation: Boeing’s fired CEO Muilenburg walks away with more than $60 million

Muilenberg isn’t “sorry.” He’s sorry he got caught covering up a defective product and withholding data from the FAA about a plane that turned out to be a flying death trap -he’s sorry he had to face extreme humiliation in public:

“This airplane is designed by clowns who in turn are supervised by monkeys…I still haven’t been forgiven by God for the covering up I did last year.”

“These newly-released emails are incredibly damning,” Rep. Peter DeFazio, D-Ore., said in a statement Thursday night. “They paint a deeply disturbing picture of the lengths Boeing was apparently willing to go to in order to evade scrutiny from regulators, flight crews, and the flying public.”

Not counting Bernard Madoff, the last corporate CEO to spend any jail time in this country was Joe Nacchio for enabling fraudulent accounting at Qwest -that was over 15 years ago. Many people reading this have never head of Nacchio.

Rule of Law is dead for good in this country as it applies to politicians and corporate CEOs.  I would love to be proven wrong about this with an indictment of Muilenberg for overseeing a cover-up that destroyed the lives of more than 300 families and will result in the loss of thousands of jobs.  Sadly,  I am confident no such accountability will occur…

Time To Buy Gold And Silver On Every Pullback

The soaring paper gold open interest on the Comex is just one indication of a shortages developing in the physical gold bullion market. It’s no coincidence that just prior and accompanying the sell-off in gold this week that Exchange for “Physical” and Privately Negotiated Transactions (EFPs and PNT) volume spiked up on the Comex. EFPs and PNTs are “derviative” transactions which enable the bullion banks to settle futures with cash or some other form of gold derivatives like shares of GLD.

There are other indications as well, which Chris Marcus and I discuss this week on his Arcadia Economics podcast:

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I recently found another “golden nugget” large mining stock contrarian play the December 12th issue of my Mining Stock Journal. This stock should be an easy double over the next 6-12 months.  You can learn more about this mining stock newsletter here:   Mining Stock Journal information.

QE Madness: Is It Worse Now Than In 2008?

Unequivocally, the “repo” operations by the Fed is “QE.” Well, let’s just call it what it is because “QE” was coined in place of “money printing.”  The socially correct posture to assume on Wall Street and in DC at the Fed is to label the current bout of money printing “repo operations.”  In fact, based on all of the underlying data I scour daily, let’s just cut to the chase and call this a de facto banking system bailout.

The technical details on why the “plumbing” in the banking system is getting “clogged” is mere surface analysis.  The underlying systemic problems are similar to the problems that pulled the rug out from under the financial system in 2008.  Bank assets, specifically subprime lending assets, are melting down again.

We’ve seen this movie before and the “regulators” were supposed to have blocked the banks from engaging in financial pornography. But, of course, just like teenagers who discover Pornhub, the greedy bankers undeterred by superficial legislation and an absence of independent regulatory oversight (every senior regulatory official has either worked on Wall Street or worked a law firms who get paid to keep Wall Street bankers out of jail) couldn’t help themselves.  CLO’s, 100% LTV lending, non-income verification consumer loans and OTC derivatives with orgasmic fees have re-emerged in full force.

As an example, Citibank is now sitting on top of nearly $1 trillion in credit default swaps – see this, which has the appropriate links:  Citibank CDS.   The article notes that:  “the New York Fed secretly hid from the public’s view that it had funneled $2.5 trillion (yes, trillion) to Citigroup and its trading units from December 2007 to at least July 21, 2010. That last information only became public after more than two years of court battles with the Fed.”

In the minutes released from the last FOMC meeting, the Fed is now discussing extending the money printing operations to April. Imagine that, what started as giving corporations a little help to pay quarterly taxes in September has morphed into and is on its way to half a trillion dollars of printed money handed over to the banks. Doesn’t seem strange that all the money created for corporate tax payments has not  found its way into the Treasury Department’s bank account? How do we know?  Because  a large portion of the money printed has financed new Treasury debt issuance.

Wall Street on Parade is making a motivated, if not valiant, effort to dredge up the truth with regard to to re-start of the Fed’s massive money printing operation. But I hope the Martens are not holding their breath on getting a response without an expensive legal battle:

On October 2, 2019 we filed a Freedom of Information Act (FOIA) request with the New York Fed. We requested “emails or any other forms of written correspondence from the Federal Reserve Bank of New York to JPMorgan Chase or any of its subsidiaries or affiliates containing any of the following words or phrases: ‘repo,’ ‘repurchase agreements,’ ‘overnight lending,’ or ‘reserves'”…

Our FOIA request was acknowledged by the New York Fed as received on October 2. We should have had a meaningful response on November 1. Instead, we received an email advising that we would not hear further from the New York Fed until December 5, 2019…Instead of the mandated 10-day extension that is allowed under law, we were given more than a month-long extension. On December 5, the New York Fed emailed us to say it was extending the time to respond to January 9. – Fed Balance Sheet Explosion

Make no mistake, the melt-up in the stock market, the majority of which is confined to just a handful of stocks – AAPL, MSFT plus a few insanely overvalued unicorn-type stocks (TSLA, SHOP, etc) – does not reflect a “booming economy.” Rather, it’s evidence that the financial and economic system is melting down beneath the propaganda.  With its bailout policies, the Fed has made a complete mess of the financial markets. And it’s worse this time  than it was in 2008.

Aside from some select shorts in stocks like TSLA and AAPL, buying gold and silver (physical bullion not paper derivatives – yes, GLD is a derivative) and mining stocks is the no-brainer trade of 2020.

The Comex Is A Complete Joke

Comex gold contracts were brought to life in 1974. Correspondence between senior officials in, and advisors to, the Nixon Administration discussed the need to create an “investment” vehicle to “capture” institutional investment money directed into gold in order to prevent the rapid rise in gold after Nixon closed the gold window. If you are curious, the letters are posted in the GATA archive (GATA.org).  For instance:  LINK.

Since the introduction of paper gold, the Comex – gold and silver trading – has evolved into what can only be described as a caricature of a “market.” The open interest in gold contracts is nearly 10x the amount of physical gold reportedly held in Comex vaults; it’s 60x the amount of “registered” gold, or the gold designated as available for delivery.

Total open interest on the Comex as of last Thursday is 787k contracts representing 2,459 tons of paper gold.  Global annual physical gold production is around 2,700 tons.  The net short position of the Commercial trader category per the current COT report – “commercials” are primarily the banks which make markets on the Comex – is 134k contracts, or 418 tons of paper gold.

That the open interest in paper gold contracts is nearly equivalent to  the amount of actual gold produced yearly by gold mines is an absolute joke. The purpose of the Comex, period, is to give the western Central Banks – primarily the Fed – the ability to control the price of gold.  Based on the preliminary o/i report for Friday, the paper gold interest has spiked up to approximately 800,000 contracts.

But the good news is that rapid escalation of open interest in paper gold on the Comex is evidence that the banks are losing their ability to keep a lid on the rising gold price.  Bill Powers invited me onto this Mining Stock Education podcast to discuss this issue, my outlook for the price of gold in 2020 plus some of my favorite mining stocks:

A few of the stocks I follow, recommend in my Mining Stock Journal and invest in myself have doubled or more since the May 2019. Several more are poised for big gains in 2020. You can learn more about  Investment Research Dynamics newsletters by following these links ( a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   Mining Stock Journal subscription information

NOTE:   I do not receive compensation from any mining stock companies and I do not accept any precious metals industry sponsors.  My research and my views are my own and I invest my own money in many of the stocks I present.

Money Printing And Physical Demand Will Drive Gold Higher

I’m growing more confident that we’re on the cusp of a big move higher in the precious metals sector because of the Fed’s massive money printing. Also, because the money printing and near zero interest rates are visibly not stimulating economic growth, we’re at the point at which unless the Fed continues increasing the amount of money it puts into the system, the melt-up in the stock market is completely unsustainable.

This is very similar to late 1999/early 2000 when Alan Greenspan tried to reverse his Fed’s massive money printing operation ahead of that notorious boogieman, the Y2k Bug. Not only did the tech stocks collapse then, but also the precious metals sector transitioned from the end of a 19 year bear market into the current secular bull market.

From what I’m hearing – and something that’s been referenced by Alasdair Macleod and Egon von Greyerz – a shortage of physically deliverable gold is developing in London. The action this past week fits the information. Given the size of the derivative short position (futures, LBMA forwards, leased gold, OTC derivatives, hypothecated gold) in London and New York, if obligated counterparties begin to default on delivery demands, the precious metals sector could become explosive next year.

The paper gold open interest continues to hit new all-time highs almost on a daily basis. The current open interest is 765.5k contracts. That’s 76 million ozs of paper gold. The quantity is a little less than double the average open interest on the Comex over the last 10 years.  The amount of open interest has nearly doubled since the end of 2018,  with record o/i levels almost every day since October 29th.

Never in the recent history (last 20 years) has the Comex  sustained this many open interest hit  record highs without being followed by a significant price take-down.  Hidden factors seem to preventing this as evidenced by the inability of the Comex banks to implement a run-of-the-mill open interest liquidation price attack operation. These used to be good for over $100 of downside in a short period.

The Comex gold vaults reportedly hold 8.6 million ozs of gold. That figure has remained fairly constant with perhaps 10% variability up or down for at least the last 10 years. If just 10% of the open interest  stands for delivery in any given month, there would be a short squeeze of Biblical proportions in the price of gold.

Notwithstanding that, the soaring open interest in paper gold in relation to the amount of underlying physical gold on the Comex is evidence of the degree of effort required for the banks to at least regulate the rate at which the gold price is rising.

Circling back to rumors of a growing shortage of physical gold in London – see this analysis for instance:  GATA – it’s interesting to note that every attempt to push down the price of gold when the LBMA and Comex trading floors are open is quickly repudiated.

But there are other signs.  I don’t monitor the LBMA a.m./p.m. fix on a daily basis, but I’m apprised of it when there’s unusual activity.  It required 19 iterations for Friday’s p.m. price fix operation to balance out heavy bidding with enough offerings.  The price of gold rose  from the start to the finish.  I have never observed even close to this many iterations needed to establish a price-fix in either the a.m. or p.m. sessions.   Some entity wanted to buy a lot physical gold on Friday afternoon and it took time and effort to find enough offerings to fill the bids.

Of course, smart money has been quietly accumulating large positions in the speculative micro-cap junior exploration stocks for the last three years via private placements or direct investments in many of these companies.  As well, there’s been a rise in gold and silver mining company M&A.

Just like in the early 2000’s, October 2008 and December 2015, we will wake up one day to the start of  a long streak of incessant daily gold and silver price moves higher in the overnight market. Those who are not positioned ahead of this will find themselves running for the train as the doors close and it pulls out of the station.

Part of the above commentary is an excerpt from the latest issue the Mining Stock Journal. You can learn more about this newsletters, which focuses on speculative junior exploration stocks as well as find in value in producing miners, here:   Mining Stock Journal info

 

 

Mining Stocks Are Historically Cheap

Early 2000 was the last time the the Amex Gold Bugs Index (HUI) / SPX ratio was as low as it is now. That bottom occurred as the tech/dot.com bubble was popping. Oh, what a coincidence.  By many indicators, the current stock market bubble will likely pop soon and it looks like the precious metals sector is on the cusp of a massive cyclical bull move.

While the micro-cap junior exploration stocks are by far the cheapest segment of the mining stock sector in terms of potential risk/reward, investor distaste and market inefficiency occasionally feeds prospecting mining stock investors an expected “golden nugget,” if you will.  Fortuna Silver is a current example. Chris Marcus invited me onto his Arcadia Economics podcast to discuss why I put a strong buy on FSM in July when the rest of the market was dumping the shares:

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I recently found another “golden nugget” large mining stock contrarian play the December 12th issue of my Mining Stock Journal. This stock should be an easy double over the next 6-12 months.  You can learn more about this mining stock newsletter here:   Mining Stock Journal information.

Gold May Be On The Cusp Of A Big Upward Price Reset

Precious metals investors may be getting an unexpected Christmas present this year, beginning with the sudden $25 jump in gold on Tuesday and Wednesday. From what I’m hearing, a shortage of physically deliverable gold is developing in London. In fact, Alasdair Macleod and Egon von Greyerz have both alluded to this development.

The action this past week fits the information. Given the size of the derivative short position (futures, LBMA forwards, leased gold, OTC derivatives, hypothecated gold) in London and New York, if obligated counterparties begin to default on delivery demands, the precious metals sector could become explosive next year.

The ability to suppress the price of gold has become problematic for the western bullion banks as evidenced by all-time high open interest in Comex gold, especially relative to the amount of gold reportedly held by Comex vaults. As of Monday, the open interest was 734k contracts representing 73.4 million ozs of paper gold. This is 8.4x more than the total amount of gold reported to be in Comex vaults as of Tuesday and 58.5x more than the amount “registered” gold, which is gold that is designated as available for delivery.

In the last few years the open interest has averaged around 450k (ballpark) contracts. When the price of gold ran toward $1900 in 2011, the highest weekly open interest was 542k the week of July 17, 2011. The last time gold was trading around the $1500 level, which was March 2013, the open interest was in the 420k area. The point here is that an increasing amount of paper gold is required in order for the banks to contain the rate at which the price of gold discovers price discovery.

More significant, every aggressive attempt this year by the bullion banks to push the gold price lower has been countered with a swift rally: “For months the usual central bank-inspired smashes in the gold futures markets have not been having much effect, even as GATA consultant Robert Lambourne has reported increasing intervention in the market by the Bank for International Settlements” – Chris Powell, GATA.

The quote just above is from a must-read essay by GATA’s Chris Powell in which he lays out the case supporting the view that the New York and London gold markets are getting squeezed:

“The Comex has just quickly authorized a vast expansion in what bullion banks can use as collateral for their selling — ‘pledged gold’ held off the exchange, supposedly in London, for whose existence and unimpairment there is no public evidence.

Amid these indications of shortages, the open interest in gold futures on the Comex keeps hitting record highs. The bullion banks selling the contracts seem to be acting as if the gold supply itself is infinite, not just the supply of gold paper.”

I highly recommend reading the rest of Chris Powell’s article:  The signs swirl all around us, so is the reset at hand?   If the theory, which is supported by evidence, of a developing shortage of physical gold on the Comex and the LBMA is correct, the prices of both gold and silver could become explosive in 2020.