Category Archives: Precious Metals

Repos, Money Printing and Paper Gold: It’s One Massive Manipulation

The paper gold derivative open interest on the Comex continues to hit success all-time highs.  This is no coincidence, as the Fed has restarted the money printing press in what ultimately will be a catastrophically failed effort to prevent the coming global credit and derivatives melt-down.  The successive daily all-time highs in the stock market, believe it or not, is evidence that the wheels are coming off the global financial system.

The melt-up in paper gold contracts mirrors the melt-up in the Dow/SPX – both are frauds. Kerry Lutz me invited onto this FinancialSurvivalNetwork.com podcast to discuss the truth behind the repo programs and why the asset bubbles blown by the Fed could be getting ready to pop:

Click on this LINK or on the graphic below to listen/download the show:

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

The Real Stock Market Is Declining

The major stock indices – the Dow, SPX and Nasdaq –  have wafted up to all-time highs on a cloud of Central Bank printed money.  Interestingly, most of the stocks in all three indices are below to well below their all-time highs.  Breadth of the move is shockingly thin.  Very few stocks are responsible for pushing the indices higher. The Dow’s move last Friday, for instance, was primarily attributable to AAPL (by far the biggest contributor), MSFT, HD, UTX and JPM. Of those, only AAPL, UTX and JPM hit their all-time high on Friday.  MSFT and HD were close.

Many of the Dow stocks are down significantly this year. If you find this hard to believe, run the 1yr charts of the 30 Dow stocks. I’m certain the same is true for the SPX and Naz.

Despite the appearance of the stock market moving higher, most of the stocks that make up the 2800 stocks on the NYSE are well below their all-time and/or YTD highs. There’s plenty of money to be made shorting stocks despite the headline, mainstream media and White House’s euphoria over the stock market’s performance. Moreover, short interest in the SPY ETF has plunged to a level that has, in the past, led to sharp sell-offs in the stock market.

And then there’s this, which is the best measure of the real rate of return stocks:

Over the past 52 weeks through November 6th, the S&P 500 has declined 10.5% when measured in terms of gold – i.e. real money.  Money printing at a rate in excess of real wealth output diminishes the marginal value of the currency.  Because the price of gold moves inversely with the inherent value of the dollar, the chart above reflects the effect of dollar devaluation on financial assets.

Thus,  the real upward movement of the stock market highly deceptive in terms of both the number of stocks in the NYSE participating in move higher and in terms of using real money to measure the price of stocks.

Sleepwalking Toward A Crisis – Got Gold?

“By sticking to the new orthodoxy of monetary policy and pretending that we have made the banking system safe, we are sleepwalking towards that crisis.” – Mervyn King, former head of the Bank of England in a lecture at the IMF’s recent annual meeting

The market levitates higher on phony economic data from the Government, Trump tweets, Fed money printing and hedge fund algorithms chasing headline and twitter sound bites. Currently the stock market, dulled by money printing and official interventions, could care less about economic reality and rising global systemic geopolitical and financial risk. Corporate headline earnings “beats” are considered bullish even if the earnings declined YoY or sequentially.

But for those who don’t have their head in the sand, clinging desperately to the “hope” offered by the misdirecting Orwellian propaganda, it’s difficult to ignore the message signaled by the legendary levels of insider selling.

Someone is not telling the truth – The Fed once again last week increased the size of both the overnight and “term” repo operations. Starting Thursday (Oct 24th) the overnight repos were increased from $75 billion to “at least” $120 billion and the term repos (2 week term) of “at least” $35 billion were extended to the end of November, with two “at least $45 billion” term repos thrown in for good measure. The Fed is also outright printing helicopter money for the banks at a rate of $60 billion per month (via “T-bill POMOs).

At the height of the last QE/money printing cycle, the Fed was doing $75 billion per month. So whatever the problem is behind the curtain, it’s already as large or larger than the 2008 crisis.

That escalated quickly – When the repo operations started in September, the Fed attributed the need to “relieve funding pressures.” At the time the public was fed the fairytale that corporations were pulling funds from money market funds to pay quarter-end taxes. Well, we’re over five weeks past that event and the repo operations have escalated in size and duration three times. Someone is not telling the truth…

The rapid increase in Fed money printing in just five weeks reflects serious problems developing in the global financial system. Actually, the problem is easy to identify:   At every level – government, corporate and household – the level of debt has become unsustainable, with not insignificant portions of that debt in non-performing status (seriously delinquent or in default). Thus, the Central Banks have had to resort to money printing to help the banks manage the rising level of distress on their balance sheet and to monetize the escalating rate of Treasury debt issuance.

The quote at the beginning is from the former head of the Bank of England, Mervyn King. King is warning that the global financial system is headed toward a crisis and that money printing ultimately won’t save it.  While it’s pretty obvious that a disaster waits on the horizon, when the former head of a big Central Bank delivers a message like that instead of Orwellian gobbledygook, the world should pay heed.  I would suggest that the Fed’s money printing signals that the risk of a crisis intensifies weekly.  Got Gold?

With The Return Of QE, Mining Stocks Are Cheap

There’s a strong probability that the Fed’s “non-QE” QE operations will morph into a full-blown money printing program that will exceed the one implemented starting in late 2008. The same fundamentals variables that fueled a massive move in the the precious metals sector from late 2008 thru mid-2011 have resurfaced with a vengeance.

The pullback in gold, silver and the mining stocks that began in early September appears to have run its course. Currently the entire sector is technically and fundamentally set-up for a big run into the end of the year. The re-activation of Indian imports last week for the first time since June will give the coming bull move a powerful boost.

Bill Powers of MiningStockEducation.com invited me back onto his podcast to discuss some of the stocks that I believe will outperform the sector. These three ideas are among several that I cover in my Mining Stock Journal:

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

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.

Subscriber feedback: “I am a professor of aerospace engineering. I have studied and invested in junior mining stocks for 25 years. I have learned much about this sector. The stocks that you have recommended since starting MSJ have outperformed the other junior investment services that I follow. Perhaps one reason is that, because your service has a smaller circulation, you can find and recommend smaller companies that have not been discovered and cannot be recommended by services with huge circulations.”

What Is The Fed Hiding With Its “Repo” Operations?

I’m not sure why Trump continues incessantly to harangue the Fed about cutting the Fed Funds rate. The Fed is printing money and sending it to the stock market via the banks. It’s a much more effective policy tool to accomplish Trump’s number one policy agenda, which is to drive the stock market inexorably higher.

I put “repo” in quotes because the term is a thin veil for what is indisputably the return of “QE” money printing.   The statement posted on the Fed’s website announcing the $60 billion per month T-bill purchase operation “explained” that the move is “to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation.”

I use quotes around “explained” because the policy statement is nebulous. The non-reserve liability on the Fed’s balance consists primarily of the money it prints and releases into circulation. Increasing “non-reserve” liabilities is a fancy term for “printing money.” The T-bill “operation” is funded by printing money. The Fed transmits this money into the banking system – not the real economy – by purchasing the T-bills. Presumably as the T-bills mature, the Fed receives the new T-bills printed and issued by the Treasury used to refinance the existing T-bills. The T-bill operation permanently injects money into the financial system.

I surveyed some friends/colleagues who know at least as much as I do about money market fund operations.  None of us can figure out  the nature of the potential  “money market pressures” referenced by the Fed.  Perhaps the Fed fears a run on money market funds by corporations and the public?  Anyone…Bueller?

The original repo operations in September were supposedly to address third quarter-end liquidity pressures because corporations need cash to pay taxes.  Since the passing of the third quarter, the repo operations have escalated to more than double the size of the original repo operation.

I’m not the only one who has noticed the Fed’s furtive behavior. Pam and Russ Martin – Wall Street on Parade –  encountered the same roadblock I ran into this past weekend when I tried to pull up the Markets & Policy Implementation and the repo operations web pages: “Site Maintenance – the page you are looking for is temporarily unavailable.”  The pages were “temporarily unavailable” all weekend.

I have yet to encounter one reasonable explanation for the reimplementation of money printing – money printing which accelerates in size and frequency almost weekly.  Make no mistake, the Fed-apologetic  Wall Street analysts have no clue what’s happening or why.

We know that the Fed used printed and Taxpayer money to bail out the banks in 2008.  These “Too Big To Fails” would have collapsed without the bailout.  The Fed is going out of its way – with help from the Wall Street and media sycophants – to obscure the truth.  But it’s pretty obvious, at least to me, that big bank balance sheets are starting to melt down again.

Repo Operations, Money Printing, Gold And Mining Stocks

The Fed is printing money again – this time disguised as “repo operations” instead of “QE.” The price of gold and silver rallied over the summer anticipating an easier monetary policy. The economic problems and financial system excesses are two to three times larger than in 2008. This will necessitate a money printing/QE/balance sheet expansion operation that dwarfs the $4.5 trillion printed the first time around. Plus most of the money printed from 2009 to late 2014 is still in the banking system.

The scale of the inevitable money printing policy will not stimulate economic activity but it will act as rocket fuel for the precious metals market – gold, silver and mining stocks. Ten years of Central Bank money printing has pushed debt issuance, malinvestment, moral hazard and fraud to levels that well-exceed the levels when Lehman collapsed.

Craig “Turd Ferguson” Hemke invited me back onto his “Thursday Conversation” podcast to discuss the the Fed cranking back up its money printing machine and the implications for gold, silver and mining stocks. Click on the link above or the graphic below to listen:

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

In the latest issue of the Mining Stock Journal, I review several junior mining stocks plus I recommend a larger cap silver/gold/lead/zinc producer that has been sold off irrationally and which will report great earnings in Q3 and Q4 vs the same quarters in 2018.

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

The Dutch Central Bank Endorses The Gold Standard

“De Nederlandsche Bank (DNB) holds more than 600 tonnes of gold. A bar of gold always retains its value, crisis or no crisis. This creates a sense of security. A central bank’s gold stock is therefore regarded as a symbol of solidity Shares, bonds and other securities are not without risk, and prices can go down. But a bar of gold retains its value, even in times of crisis.” – DNB’s Gold Stock

The quote above is from the “Payments” section of the Dutch Central Bank’s website. Incredibly, it goes on to suggest the possibility of  a systemic collapse: “If the system collapses, the gold stock can serve as a basis to build it up again.”

It’s been 48 years since the U.S. Government unplugged the gold standard, thereby enabling the world’s Central Banks to plug in their fiat currency printing presses. This in turn gave rise to a series of asset bubbles and unfettered credit creation. Don’t forget that the junk bond bubble in the 1980’s led to an acceleration in the creation of paper money, which in turn fueled the internet/tech stock bubble, followed subprime debt/real estate bubble and  the current “everything” bubble.” Which may the last bubble…

The chart below,  shows M3/M2 vs the “real” GDP since 1971 and  illustrates the problem:

Note that the Fed discontinued publishing the M3 money supply data in 2006. The U.S. at the time was the only major industrialized country that refused to publicly disclose M3. Also note that “real” GDP is calculated using the Government’s highly muted measure of price inflation. A real real GDP line would be shifted down on the chart and project at a lower trajectory.

The difference between the two lines somewhat measures the degree to which the U.S. fiat currency has been devalued or has “lost its purchasing power.”  However, the graphic does not capture the creation of credit.  Debt issuance behaves exactly like money printing until the debt is repaid. Think about it.  A dollar borrowed and spent is no different than a dollar created by the Fed and put into the financial system.

But think about this:  since 1971, the U.S. Government has never repaid any of the debt it  issues. It has been increasing pretty much in perpetuity.  This means that $22 trillion+ issued and outstanding by the Treasury Department should be included in the money supply numbers – until the amount outstanding contracts – which it  never will…

Alasdair Macleod, in “Monetary Failure Is Becoming Inevitable,” summarizes the eventual consequence embedded in a morally hazardous currency system:

If history and reasoned economic theory is any guide, the demands for credit by the state will terminate in the destruction of government currencies. For the truth of the matter is inflation of money and credit has created the illusion we can all live beyond our income, our income being what we produce.

“Destruction of Government currencies” is really just a politically/socially polite phrase for “systemic collapse.”

Whether intentional or unintentional, the Dutch Central Bank has alluded to this possibility, which I see more as an inevitability, with just the issue of timing yet unresolved.  I would argue, however, that the financial system liquidity issues currently addressed by the reimplementation by the Fed of repo/extended repo operations – and the inclusion of foreign banks in the liquidity injections – reflects the growing instability of the global financial system.

Furthermore,  the suddenness of these systemic “tremors,” suggests that the Central Banks are losing control of a system dependent on fiat currency and credit creation that expands at an increasing rate in perpetuity.  Unfortunately for the paper money maestros running the Central Banks, the value of fiat currency approaches zero as the supply of currency and credit heads toward infinity.

In all likelihood, the recent rise in the price of gold, which has been driven by escalating demand for physical gold – notably by eastern hemisphere Central Banks – reflects the increasing visibility of an inevitable collapse in the global fiat currency system.  The Dutch Central Bank has made it clear that it sees gold as an ideal asset for wealth protection when the next crisis erupts.

Fed Balance Sheet Expansion, Unicorns, Unintended Consequences and Gold

The Bank for International Settlements (BIS) – the Central Bank of Central Banks – released two reports on “unconventional policy tools” – e.g. QE/money printing and interest rate suppression. It concluded that the extreme Central Bank interference since 2008 has had a negative impact on the way in which financial markets function.

While Jerome Powell and his “Gang That Couldn’t Shoot Straight” at the Fed prefer to use the term “balance sheet growth” in reference to money printing, the big-thinkers at the BIS call it UMPT (Unconventional Monetary Policy Tools).”

“Last month’s spike in short-term US borrowing costs was just the latest in a series of market shocks that have fueled investors’ suspicions that this radical monetary policy is having an impact on how financial markets function.” (Financial Times)

“Moral Hazard” is defined as the “lack of incentive to guard against risk where one is protected from its consequences.” In economics (real economics, not the Keynesian psycho-babble of the current era) this would refer to the egregious misallocation of investment capital caused by the unfettered creation of fiat currency injected into the global financial system.

Additionally, unprecedented permissiveness by the regulators, who are charged with enforcing laws originally established to prevent or at least contain the escalating financial fraud that accompanies asset bubbles, further enables and accelerates the formation and inflation of investment bubbles.

The BIS report of course neglected to discuss the extreme moral hazard engendered by the trillions in money printing. The “unicorn” IPOs are the direct evidence of this. The extreme  overvaluation of the equity in the ones that have sold stock into the public markets reflects the complete disregard of historically accepted tools and guidelines used for business model appraisal and financial valuation analysis. “But it’s different this time.”

The losses racked up by these companies, the ones with public equity plus the ones yet to be IPO’d, will aggregate well into the $100’s billions, possibly trillions before this era dies. A journalist from The Atlantic, in an article titled “WeWork and The Great Unicorn Delusion,” correctly asserted that “most [of these companies] have never announced, and may never achieve, a profit.” But he lost me when he asserts that these companies are “extraordinary businesses with billions of dollars in annual revenue and hundreds of thousands, even tens of millions, of satisfied global customers.”

Quite frankly, the business model of almost every Silicon Valley unicorn is predicated on building revenues and gaining market share by selling products and services for a significant discount to the all-in cost of production and fulfillment.

Every single unicorn IPO’d over the last several years that I have evaluated is not only highly unprofitable, but also burns legendary amounts of cash. Of course there are “millions of satisfied customers” globally – the unicorn business model functions in a way that is the equivalent of selling $1 bills for 75 cents.

The more relevant proposition is that, in all probability, many of these companies would have never  spawned if the Central Banks had not inflated the global money supply well in excess of real economic growth generated by the global economy.

I find it difficult, if not impossible, to refer to these appallingly unsustainable businesses models as “extraordinary” when in fact most if not all of them are nothing more than the product of the extreme moral hazard created by the Central Banks’ printing presses running overtime.

The economic losses incurred by the Silicon Valley unicorns are funded by the “private equity” funds which have managed to harness a significant share of the cash flowing from Central Bank money-spigots and transmitted through the primary dealer banks into the financial system. Little noticed is the fact that since 2014, roughly $1.3 trillion has drained out of the banks’ excess reserve account at the Fed and disappeared into the financial system’s “black hole.”

The 2008 Great Financial Crisis – which was a de facto financial system collapse until money printing bailed out banks and reckless investors – was fueled by the easy monetary and credit policies of Alan Greenspan and Ben Bernanke. Those policies stimulated huge mortgage, housing and general stock market bubbles. The unintended consequences bankrupted a large swathe of households and banks.

But that decade’s reckless Central Bank policies pale in comparison to the current era of unfettered money printing cranked up by Ben Bernanke (recall that he was affectionately called “Helicopter Ben”). The ensuing widespread asset bubbles have fomented into a financial Frankenstein that has broken free from its chains as evidenced by the sudden implementation of the Fed’s repo program, which has yet to be accompanied by a credible explanation.

Jerome Powell yesterday (October 8th) asserted in a speech that “balance sheet expansion is not Quantitative Easing.”  But make no mistake, the repo operations function as emergency room triage until the Fed and the Treasury Department formalize another round of money printing, or QE or whatever you want to call it. At this point it is nothing more than a game of Orwellian semantics.

If you’re curious as why the price of gold has risen 37% since the end of May, look to the events unfolding at the Fed and in the banking system. Just like in late October 2008, the price-action in gold is sending a loud alarm that is no longer containable with manipulative efforts in the paper derivative gold market. Eventually the Government’s Working Group on Financial Markets will be helpless in coaxing the hedge fund trading robots to help hold up the stock market.

***********

The commentary above is an excerpt from the next issue of the Short Seller’s Journal (Sunday). I’ll be reviewing several unicorn short ideas over the next several issues. To learn more about this short-sell focused newsletter, click here:  Short Seller’s Journal info

Fed Delivers More QE “Light” And Gold Responds

On October 4th, as I expected would happen, the Fed announced that it was extending its overnight and term repo operations out to November 26th (the November 12th two-week term repo matures on the 26th).

The Fed added 7 more 2-week  “term repos, ” plus a 6-day “term repo,” with the next three operations upped to $45 billion. It extended the overnight repos until at least November 4th.  Well then, I guess the “end of quarter” temporary liquidity issue with corporate tax payments was not the problem.

Follow the money -The Fed’s repo operation extension further validates the analysis in my last post in which I made the case that an escalation in the non-performance of bank assets (loan delinquencies and defaults and derivatives), caused by contracting economic activity, has created a liquidity void in the banking system that is being “plugged” by the Fed. The Fed’s balance sheet has increased $186 billion since August 28th.

Not only did the Fed end “QT” (balance sheet reduction) two months earlier than originally planned in January, the Fed has effectively reversed in the last 5 weeks all of the QT that occurred since March 28th.

The evolution of Orwellian propaganda terminology for “money printing” has been quite amusing. It seems that the Fed has subtly inserted the phrase “balance sheet growth” into its lexicon. While Jerome Powell referenced “organic balance sheet growth” in his press circus after the last FOMC meeting,  expect that it will be considered politically/socially incorrect to use “QE” or “money printing” instead of “balance sheet growth” in reference to this de facto banking system bailout.

Meanwhile,  thank the Fed for providing the amount of money printing/currency devaluation needed to offset China’s absence from the physical gold market for the last week:

Given the technical set-up in gold plus the enormity of the Comex bank/commercial short position in paper gold, many gold market participants, including me, expected a much bigger price-attack on gold during Golden Week than has occurred. In fact, gold has held up well, with the December future testing and holding $1500 three times in the last week. Business activity in China, including gold and silver trading, resumes tonight.

The Fed’s QE Light program will likely transition into outright permanent money printing before the end of 2019. The November meeting is scheduled for the end of this month (Oct 29-30). But I doubt the Fed will turn its repo money printing into permanent money printing – aka “POMO” or “balance sheet growth” – until the December FOMC meeting (Dec 10-11).

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:

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

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