Category Archives: Precious Metals

The Path Of Least Resistance For Gold Is Up

The price of gold has held firm at the $1460 (front-month contract basis, not the Kitco “spot” price) level despite the constant price attacks that have been occurring overnight and into the Comex floor trading hours since early November.

On an intra-day basis gold has managed to hold continuous aggressive attempts to push the price below $1460 for the last 6 trading days, including today.  Interestingly, last Tuesday (November 26) and Friday, gold shot up during the Comex floor trading hours in the absence of any news or event triggers.

Zerohedge attributed Tuesday’s spike in gold to the jump offshore yuan vs the dollar. But that day gold started moving before the yuan moved.  On Friday, gold soared as much as $14 from an intra-day low of $1459 while offshore yuan declined vs the dollar.  Zerohedge’s explanation for the mysterious movement in the gold price on two days thus lacks evidence.

The open interest in the December Comex contract remained stubbornly high through first notice day last Friday. The banks, which have an extreme net short position in Comex gold have exerted an enormous effort to force hedge funds either to liquidate long positions or to sell December contracts and move out to February, which is the next “front month” contract.

If an unusually large number of longs decide to stand for delivery, it would place an enormous amount of stress on the warehouse stock of gold that has been designated as available for delivery in Comex vaults. In addition India has been importing an enormous amount of gold starting in late October. This has provided strong price support from the physical market.

Also, the gold price has withstood a 43,000 contract liquidation in Comex open interest, including a 1-day record 127k contract liquidation in the December contract, much of which “rolled” out to February.  Historically a draw down in Comex open interest of this magnitude would have removed at least $50 from the gold price.

In the chart above, gold appears to be establishing a strong base in the $1460 area. The MACD shows an extremely oversold technical condition as does the RSI.  With the Central Banks, including the Fed, printing money at a furious pace right now, the conditions are in place for potentially a big move in gold.

The commentary above is a partial excerpt from my lastest issue of the Mining Stock Journal. In this issue I present an opinion on the Kirkland Lake acquisition of Detour Gold that may surprise some mining stock investors. The junior exploration stocks have been relentlessly pounded lower during this latest sell-off in the sector, especially relative to the shares of the mid-cap and large-cap producing miners. I believe several junior exploration stocks are trading at a price level which significantly reduces the risk and increases the potential ROR in these shares.

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 May Be Set Up For A Pleasant Holiday Season Rally

In what has become a recent routinized pattern in the price of gold (and silver), the market rallies during peak Indian gold market hours and then sells off when London opens. After the customary price take-down when the Comex floor trading opens, gold and (and silver) typically recoup the overnight sell-off. In short, there seems to be epic price discovery battle going on between paper derivative gold and the physical gold market and that won’t take much to ignite a massive move higher.

The recent sell-off in gold has triggered massive gold demand from India. Recall that India had been dormant since June, when the Government increased the import duty by 25% on imported kilo bars. But the lower price of world gold, combined with India’s peak seasonal gold buying period has unleashed India’s gold importation beast.

Based on premiums being paid for gold after taking into account the import duty, Indian importation is running full-tilt.

Despite repeated attempts to take the price of gold lower, Indian physical demand has put a floor under the market, at least for now, and poses a potential threat to the record level of net short interest in Comex futures by the banks and hedgers…The rest of my commentary came be found at  Gold-Eagle.com.

Did the Comex Just Create More ‘Paper Gold’ For Price Suppression?

A mysterious “pledged gold” entry has just showed up on the Comex gold warehouse report. The definition of this new warehouse stock classification for gold is provided in Chapter 7 of the New York Mercantile Exchange rulebook.

In brief, “eligible” gold is a gold bar stored in a Comex vault that meets Comex specifications (quality, size, purity, and brand).

A “registered” gold bar is one that has been designated for delivery and for which a warrant has been issued. This warrant is evidence of and specifies ownership title to the bar. Warrants facilitate the transfer of delivery under a Comex contract.

“Pledged gold” is a bar for which a warrant has been issued but for which the warrant has been placed on deposit at the CME Clearing House as part of a required performance bond.

The Chicago Mercantile Exchange (CME) has its own clearing division through which all trades are confirmed, matched (counterparties being verified), and settled (money changes hands). Each contract has a long and short counterparty.

A clearing member of the exchange is typically a bank, hedge fund, or commercial entity that has been admitted as a clearing member. The clearing mechanism is the “lubricant” that enables any securities exchange to function.

Part of a clearing member’s responsibility is to assume “full financial and performance responsibility for all transactions executed through them and cleared by the CME.” If you execute a trade on the Comex and fail to pay, the firm that took the other side of your trade is on the hook if you don’t pay for the trade. Or if you have elected to take delivery of a gold bar but can’t pay for it, the Comex member that has the other side of your contract is on the hook for the money.

Each clearing member is required to post a performance bond, a specified minimum amount of funds or collateral value that functions as a reserve to reinforce a clearing member’s obligation to guarantee the trades the clearing member executes. Think of this as a margin requirement.

A warrant that has been issued, which signifies titled interest in a gold bar, can now be used as collateral for the performance bond requirement. A warrant used this way is the “pledged gold” in the warehouse report. The gold bars connected to a warrant being used as collateral cannot be used to satisfy contract delivery requirements of the entity using the warrant as collateral. But the gold connected to warrants is still counted as part of the Comex gold stock.

Additionally, Comex clearing members can use what is called “London gold” as performance bond collateral. The CME rulebook does not define “London gold.” Presumably these are the standard 400-ounce London Bullion Market Association bars stored in a London vault.

But the term “London gold” remains unexplained and nebulous, and recently the CME tripled the amount of “London gold” that can be used by a clearing member as performance bond collateral, increasing it to $750 million from $250 million.

Why has the exchange tripled the amount of “London gold” that can be submitted as performance bond collateral and included Comex gold bar warrants as assets considered acceptable collateral?

As has been well documented, the open interest in Comex gold contracts has just reached a record high. The current open interest, more than 716,000 contracts, is 85 times greater than the “registered” gold stock on the exchange and almost nine times more than the total amount of gold in Comex vaults, including “pledged gold.”

As a technical matter “pledged gold” should not be considered part of warehouse stock because it cannot be delivered. The financial risk assumed by the Comex CME clearing members escalates with each new contract of open interest, especially to the extent that the open interest is “uncovered,” meaning the Comex lacks enough gold to bear the risk of a delivery default.

For this reason the size of the performance bond posted by each clearing member increases pro-ratably with the rising value of the gold contract open interest. (That is, clearing members that process an increased amount of contracts require higher margin deposits.)

This raises the question of the quality of “London gold” as collateral. The issue with “London gold” is whether the gold is verifiably sitting in a London vault or if the posting bank — for example, HSBC — even has legal title to the bar.

Hypothecation is when a bank borrows a gold bar held in its custody for a client, a bar owned by someone else, and uses that bar for another purpose like a delivery requirement or perhaps for posting it as collateral on the CME.

What process is in place to verify that the bank has the right to use that bar, or to verify that the bar even exists?

Even if the entity posting “London gold” as collateral may have some type of documentation showing rights to the bar in London, that bar may have been borrowed — that is, hypothecated by the London vault custodian and sent to Asia or India to satisfy a delivery requirement.

Keep in mind that the Bank for International Settlements now allows “gold receivables” to be counted as gold in custody. This hypothecated bar may exist only as a receivable entry on the books of the London vault operator.

Finally, there is the question of big bank liquidity. The “repo” and money printing recently undertaken by the Federal Reserve Bank of New York reflect a liquidity squeeze in the banking system. I would prefer to receive cash as collateral against a performance bond if I were in the business of extending credit for trading activities. Anyone with a brokerage account is required to use cash as margin equity. Try using a piece of paper that says you have titled interest in a gold bar.

It’s quite possible that the ongoing squeeze in big bank liquidity has forced the CME to triple the amount of “London gold” said to be available to the exchange and to include Comex gold warrants as acceptable collateral in lieu of requiring cash or Treasury bonds. This is the only way the CME could present the appearance of financial integrity and security with respect to the soaring gold contract open interest — open interest that is created by bullion banks and hedge funds and that bears almost no relation to the underlying stock of physical gold — to help contain the gold price.

The timing of the expansion of the collateral package is curiously correlated directly with the rapid escalation in gold contract open interest and the recent liquidity squeeze in the banking system.

The tripling of the use of “London gold” and the inclusion of warrants as collateral suggest that the CME and its Comex are preparing to allow an even greater expansion in Comex gold open interest to increase the ability of Comex banks to engage in gold price manipulation. Why else would the CME allow the open interest in gold contracts to dwarf the actual physical gold in Comex vaults?

Ultimately, the use of “London gold” and Comex warehouse warrants expands the fractional-reserve gold banking system and further weaponizes “paper gold” in support of the longstanding bullion bank and central bank campaign to suppress the gold price.

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:

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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.

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:

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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.