Category Archives: Financial Markets

Extreme Disconnect Between Paper And Physical Gold

“The further a society drifts from truth the more it will hate those who speak it” – George Orwell

The western Central Banks, led by the BIS, are operating to push the price of gold and silver as low as possible.  It’s a highly motivated effort to remove the proverbial canary from the coal mine before it dies.  A soaring price of gold signals to the world that the Central Banks have lost control of their fiat currency, debt-induced profligacy.

“In the last 10 years,” George said, “the central banks have effectively shown that when there is a real crisis, gold actually goes down — and it’s so blatant, it’s a joke.” – Peter George, South Africa’s “Mister Gold,” at 2005 GATA conference

The signs of massive intervention abounded last week:   record levels of PNT and EFP transactions;  aggressive interventionary gold swap transactions by the BIS in January/February (per the monthly BIS statement of operations) – and presumably this month as well;  and a big physical dump of gold last Thursday at the p.m. London gold price fix which knocked down the gold price. These opaque Central Bank operations thereby triggered even more paper selling on the Comex.

The most overt signal of the disconnect between the physical and paper markets is coming from large international bullion coin dealers. I have seen three letters from large dealers (BullionStar, JM Bullion and SD Bullion) which detail shortages and an inability to replace what’s being sold.   Here’s insightful commentary from BullionStar sent out over the weekend:

“The bullion supply squeeze and shortages are getting worse and worse every day. We are working very hard to source metal but regret that we can not replenish most products as they sell out. We will be getting some additional inventory which is already on the way in transit to us by the end of March. Following that, our expectation is that we may not be able to replenish for months…

Paper gold is traded on the and on the in New York. Both of these markets are derivative markets and neither is connected to the physical gold market…By now it is abundantly clear that the physical gold market and paper gold market will disconnect. If the paper market does not correct this imbalance, widespread physical shortages of precious metals will be prolonged and may lead to the entire monetary system imploding.” – Torgny Persson, founder & CEO of BullionStar

The removal of supply/demand price discovery by the oppressive manipulation of gold and silver in the paper derivative markets has created a shortage in the availability of physical metal, with buyers currently willing pay 50% above the spot price of silver.

This is highly reminiscent of the price take-down that occurred in 2008, a few months head of Helicopter Ben launching his money helicopters AND the massive taxpayer bailout of the big banks.  Back then silver eagles were trading at 50-60% over the spot price. This preceded the remarkable 2 1/2 year price rally in gold and silver that took gold up to an all-time high.

Historically, official induced market intervention fails. And when it fails, it fails spectacularly.  Gold ran from $700 to $1900 and silver ran from $7 to $49 between late 2008 and mid-2011, before the bullion banks were able to gain control of  the price discovery mechanism.  This time around the systemic problems – notwithstanding the virus crisis – are far worse than the problems that erupted in 2008.

Barring some type of systemic debt and monetary reset – and I have no idea what something like that would look like –  gold and silver will eventually be trading several multiples higher than their current price.

Stocks, Bonds, Paper Gold – What The Hell Is Happening?

Make no mistake, the financial system is collapsing under one giant margin call being issued to banks and hedge funds. How big?  No one knows. The Fed obviously was preparing for something when it commenced its money printing in September. But it had no idea of the scale of the underlying systemic problems.  Coronavirus is not the cause of what’s unfolding in the markets – it merely served as the pin that pricked the biggest financial asset bubble in history.

The $1.5 trillion “repo” QE announced by the Fed today did a complete belly flop, as the Dow closed 400 points lower than where it was trading when the QE was announced.  This will take the Fed’s balance sheet well above its peak level during QE1-3.

Craig “Turd Ferguson” Hemke and I had a short discussion about the devastation in the stock and credit markets, including trying to make sense of the action in the precious metals sector – Use this link to access the podcast and TF Metals or click on the image below:

**************

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

Coronavirus Is Not The Cause Of Stock Market Turmoil

“The coronavirus could be the proverbial Black Swan event. No one saw that coming. We’ve seen everything else [up to this point] that’s coming. The Fed saw something coming in September and it wasn’t coronavirus.”

All it took was a 10% sell-off in the S&P 500. On Tuesday the Federal Reserve cut its benchmark interest rate by 50 basis points to a target range between 1% and 1.25% over fears the coronavirus will have a negative impact on the U.S. economy. I am confident that the rate cut was targeting the stock market because that’s all the Fed, the White House and Wall Street have as “evidence” the economy is fine. The bond market is suggesting otherwise, the yield curve has compressed to record low yields.

David Stockman perfectly describes the scenario facing the country: “The coronavirus is now exposing a far more deadly disease: Namely, the poisonous brew of easy money, cheap debt, sweeping financialization and unbridled speculation that has been injected into the American economy by the Fed and Washington politicians.” (LINK)

Chris Marcus of Arcadia Economics and I discuss the market forces causing the stock and bond market chaos of the last few weeks:

JP Morgan / Jamie Dimon Decide To Burn Their Bras

JP Morgan took the bold step  to “break a stigma” and announce that it planned to borrow from the Fed’s discount window.  The discount window in the context of modern finance has evolved into  an emergency source of liquidity.  This is nothing more than an attempt at reverse psychology to cover up the fact that JPM is preparing for the eventuality that it will need to tap into emergency sources of liquidity like the Fed’s discount window.

The Fed’s “temporary” repo money printing operations are not doing the trick. The big banks are in trouble from the same type of bad lending decisions that led to the 2008 crisis, only this time it will be worse. Chris Marcus (Arcadia Economics) and I flush out exactly what this means in a short podcast:

**************

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

Time To Accumulate Mining Stocks (Especially Juniors)

A few of my subscribers asked me recently about the lethargic action in the miners lately given that the price of gold has started moving higher again. But it helps to step back and look at a longer time-frame. For the last 52 seeks, the HUI has significantly outperformed GLD. I also ran the comps for 6 months, 3 months and 1 month. The HUI has outperformed gold for the last year up until the last 30 days. Nothing unusual with that. Assuming the current bull move in the metals sustains for awhile, the mining stocks will soon begin to outperform the metals again.

The myth is that the stocks lead the metals. But this is not true for periods when longer-term sustainable moves occur. Gold leads, typically followed by the larger cap miners, followed by silver. Bringing up the rear are the risky juniors, which can provide huge returns in a short period of time. Currently the mining stocks – and especially the micro-cap junior exploration “venture capital” stocks – are extraordinarily undervalued in relation to the prices of gold and silver. Chris Marcus of Arcadia Economics and I discuss this view in Chris’ podcast:

**************

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

Stocks And Gold: What Happened Last Week

The coronavirus crisis is perhaps the real “Black Swan” that no one saw coming.  While the virus pulled the trigger on the loaded weapon aimed at the stock market, it’s not the cause of the 2nd fastest 10% decline in the history of stock market.  Using “as adjusted” GAAP accounting applied to the current trailing 12-month SPX earnings to make them comparable to the GAAP standards applied to 1999 earnings, this was the most overvalued stock market in U.S. history.  While Fed officials and Wall Street story-tellers rejected the notion that the stock market was in a bubble, this table from Crescat Capital demonstrates the stock market’s extreme degree of overvaluation:

The SPX is at an all-time high in five of eight valuation metrics.  However,  I would argue it’s really 6 of 8. The “adjusted” P/E (CAPE) used by Robert Shiller is in the 96th percentile of high valuation.  But if the historical earnings of the SPX were adjusted using 1999 GAAP, the current “Shiller P/E” ratio would at an all-time high. This is because GAAP standards for recognizing income have become considerably more lenient over the last 21 years.

A metric more suited to comparable analysis across time is the median enterprise value (market cap + debt) to sales ratio. The revenue line is the least affected by GAAP.  For the most part (there are exceptions), sales are what they are.  Currently the median EV/sales ratio is 3.6x. This is double what it was at the peak of the dot.com/tech bubble.

It was just a matter of time before the stock market fell off its valuation cliff.  Meanwhile, the precious metals and mining stocks ripped lower last week. Several subscribers asked what was going on given the expectation that at least gold and silver should have benefited from cash seeking a safe haven.  But, as with the general stock market, the precious metals sector was set up technically for a correction.

When hedge funds face margin calls they start to dump anything in their fund that has a reasonable bid. The sheer force of the stock market sell-off took everything with hit.  Most NYSE stocks, including mining stocks, have a bid.  Most CME futures contracts, especially paper gold and silver, have liquid bids. Hedge funds have large leveraged positions in illiquid subprime high yielding garbage which have no bid in a highly turbulent market.  The Fed’s repo/QE operation since September has enabled hedge funds to maintain these morally hazardous illiquid investments rather than forcing the funds to pare back.

You’ll note, however, that most of the decline all week in the price of gold and silver occurred during Comex trading hours, when most of the rest of the world is done for the day. While the Fed/BIS/banks no doubt helped push on the metals in the paper market, hedge funds were extraordinarily long gold and silver futures going into this past week and gold and silver futures had a liquid short-cover bid conveniently provided by the banks who are clearing agents for the Comex.

Furthermore, the HGNSI (Hulbert Gold Newsletter Sentiment Index) had jumped over 70. The mining stocks and gold/silver ALWAYS correct when the HGNSI is over 60. The week before last the entire precious metals sector went straight up in a “flight to safety” move. With sentiment off the charts, the pullback is healthy because it sets up the next big move, especially as it becomes obvious that the Fed will attempt to fight a bear market in the stock market by taking the Fed Funds rate to zero and upsizing its current QE money printing agenda.

The Dow could drop to 17,000, which is where it was trading when Trump labeled the stock market “a big, fat ugly bubble” in late 2016, and still be egregiously overvalued based on fundamentals. India’s massive gold appetite was muted this past week after the big move gold had made the previous week thereby making it easier to push gold and silver lower. This is characteristic of India’s buying pattern. With the smash in gold, India will back in play next week which should at the very least insert a floor under the precious metals sector.

The Fed seems to time its reinsertion of the Fed put strategically at a time when the stock market is technically highly oversold. December 26, 2018 is a perfect example. Of course it’s no coincidence that the Fed caved in on Friday and posted a notice on its website BEFORE the stock market closed that it would use its tools and “act as appropriate to support the economy.” Translation: “we’re telling you we’ll print money to support the stock market and we wanted to get the ball rolling on Friday before the market closes with the Dow down 900 points.”  Of course, the Dow proceed to  rally over 500 points going into the close.

I expect a dead-cat bounce in the stock market that may or may not last all week. If the Fed increases the amount of money spewing from its printing press it might extend the DCB longer than a week. The precious metals sector should benefit from this and it might even continue higher when the stock market inevitably takes another turn for the worse and heads toward “bear market” territory.  For precedence on this pattern, see the fall of 2008.

**************

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

Coming Soon: More Money Printing And Higher Gold Prices

Two economic reports were released which demonstrate that the money printing is not helping the economy. In the fourth quarter of 2019, U.S. household debt pushed over $14 trillion, reaching an all-time record high. This was fueled by a surge in mortgage and credit card debt. Much of the the new mortgage debt consisted of cash out” refis, which helped exacerbate the last housing bubble/collapse.

Second, the U.S. Treasury announced that the Government spending deficit for January was $32.6 billion. This was considerably worse than the $11.5 billion deficit expected. The cumulative deficit for the first four months of the Government’s Fiscal 2020 year (which starts in October), surged to $389 billion, or an annualized rate of $1.16 trillion. The four month cumulative total was 25% higher than a year ago and was the widest since the same four month period of time in 2011.

Make no mistake, the Fed is printing money to keep the fragile financial system glued together and to monetize new Government debt issuance. The economy will continue to contract with or without the help of coronavirus. The Fed knows this, which is why several Fed officials including Jay Powell are already telegraphing more money printing.

The good news is that you can benefit from this – or at least protect your wealth – by moving a significant amount of your investible money into physical gold and silver that you safekeep yourself. I joined up with Arcadia Economics to discuss why the Fed is compelled to further crank up the printing press:

**************

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

Gold Signaling A Financial System Disaster Will Hit

And it’s not just gold. The Fed is already hinting that more money printing is coming.  Powell suggested at his semi-annual Congressional testimony that QE would be used in the next recession.  A couple other Fed officials this week confirmed that the FOMC is preparing to crank up the printing press even more than it has been running since mid-September.

But why does the Fed feel compelled to warn us that more money printing/currency devaluation is coming if, as Powell told Congress, “the economy is in a good place?”

To begin with, money printing is not stimulating economic growth. The economy has been sliding into contraction for quite some time. Since the “repo” operations began, that pace of contraction has increased.

Make no mistake, the Fed is printing money for two reasons. First and foremost to plug the widening chasms in bank balance sheets brought on by taking on highly risky lending and derivatives risks.  This why the bank excess reserve account has drained steadily since late 2014:

Why was QE restarted? This article partially explains the reason:  Banks Stuck With Billions In Risky Leveraged Loans As Investors Flee The formal term for this is “moral hazard.”  The second reason is to monetize the flood of new Treasury issuance that began in the fall of 2019. Currently the Fed’s Treasury holdings are nearly as high as its peak during  of the first period of money printing (QE1-3).

Yes, the appearance of coronavirus is going to exacerbate the systemic problems engulfing the world. But Corona has NOTHING to do with the fact that the U.S. is overleveraged at every level of the economic system (Government, corporate, household) and China, Japan, and  EU are overleveraged at the Government and corporate level.

EU and U.S banks are  highly stressed from holding non-performing assets (subprime loans primarily) compounded by derivatives connected to those assets, which are deteriorating rapidly in value. The global economy was sliding into a nasty recession well before corona hit the scene. Corona merely will hasten the inevitable. The that fact that the global economy can’t withstand this particular exogenous shock reflects the extent to which the global economic/financial system was already headed toward the cliff.

With the stock market broken (i.e. its price discovery mechanism removed by Central Bank money printing), gold soaring despite heavy intervention attempts, the 30-yr Treasury bond yield hitting an all-time low and the Fed telegraphing even more money printing is coming, something really ugly is going to surface and cause financial system destruction similar to what occurred in 2008 – only this time it will be worse.

For now my front-runner in the race to collapse is HSBC. Deutsche Bank seems to have been somewhat stabilized from massive intervention by the ECB, Bundesbank and German Government (though that “appearance” of stabilization likely is deceptive). Judging from its stock chart, which has woefully underperformed the sector since mid-2018 and has substantially underperformed DB since mid-December, HSBC appears to be on the ropes. It may be more insolvent than DB now.  HSBC is loaded up on overvalued, illiquid Hong Kong real estate loans among many other reckless investments.

I think whatever coming at us is going to make things unpleasant for everyone. But you can help protect your financial situation by buying physical gold and silver that you safekeep yourself.  Gold broke out in a major way in mid-June. It sniffed out the systemic problems starting to surface well ahead of the reimplementation of money printing in September.

Gold raced to a 6-year, 11-month high last week. It’s only a matter of time before it assaults the previous all-time high of $1900. Though inexplicably underperforming gold, silver is percolating to make a move like the current move in palladium. And last but not least, the junior mining stocks are setting up for a move that will make the current tech-mania bubble seem tame.

Gold Chases The Money Supply Higher

Q: “Why is the Fed reluctant to let the boom-bust nature of markets play out?”
A: “Because it what’s they’ve always done [since the Fed was founded in 1913]…Once you’re in power, you’re going to do what you can to defend the system as it is”

The best official measure of the money supply created by the Fed was M3.  “Was” because the Fed under Helicopter Ben removed M3 from public view.  But the “effective” money supply is the currency printed plus the “spendable” currency created by debt issuance. Currency from a loan behaves like printed money until the loan is repaid.  But for the last 10 years the amount of the loans outstanding, and therefore the supply of “spendable” currency,  has risen at an increasing rate.

Gold can “smell” these reams of fiat paper currency being printed and then fractionalized and leveraged by the Central Bank. The “fractionalization,” of course, is the process by which loans (including repos) creates spendable currency.

SilverBullion invited me back onto its SBTV podcast to discuss the markets in the context of the QE4 and what it means for the gold, silver and mining stocks:

**************

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

Greed Unbounded: “A Slow-Motion Looting”

I made the observation back in 2004 that the elitists would keep the financial and economic system from collapsing using printing money and debt for as long as it took for them to sweep every last crumb of middle class wealth off the table and into their own pockets.  “Middle class” in this context is defined as anyone without enough cash lying around to purchase their own Federal politician, judge and regulator.  If you were not invited to Davos or the annual Bilderberg meeting, you are middle class.

The Huffpost has written a must-read essay describing the vision I had back in 2004 as it is unfolding in real-time:

Country-club nepotism and Gilded Age avarice are nothing new in America, of course. But the rich are enjoying a golden age of impunity unprecedented in modern history…Elite deviance has become the dark matter of American life, the invisible force around which the country’s most powerful legal and political systems have set their orbit.

“OVER THE LAST TWO YEARS, nearly every institution of American life has taken on the unmistakable stench of moral rot. Corporate behemoths like Boeing and Wells Fargo have traded blue-chip credibility for white-collar callousness. Elite universities are selling admission spots to the highest Hollywood bidder. Silicon Valley unicorns have revealed themselves as long cons (Theranos), venture-capital cremation devices (Uber, WeWork) or straightforward comic book supervillains (Facebook). Every week unearths a cabinet-level political scandal that would have defined any other presidency. From the blackouts in California to the bloated bonuses on Wall Street to the entire biography of Jeffrey Epstein, it is impossible to look around the country and not get the feeling that elites are slowly looting it.”

Read the rest of this here: A Slow-Motion Looting