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The Fed Goes Full Dove – Get Long Gold, Silver And Mining Stocks

Silver and gold have been under intense attack in the paper silver/gold derivative markets (Comex, OTC derivatives) and the London unallocated phony physical bullion market since August 2020. But I believe that is about to end. The precious metals sector was technically overbought after the massive Q2 2020 rally, making it easy to push the sector lower. But the effort to suppress the prices of gold and silver provides cover for the Fed’s lascivious money printing policy. And that policy is going to get a considerably more lascivious.

WallStreetSilver invited me to discuss the implications of the latest FOMC policy decision and the reasons why it will lead to much higher price level across the precious metals sector:

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The mining stocks are once again historically cheap.  At some point this year I will be raising the subscription price, though existing subscribers will be grandfathered at the current monthly rate.   If you would like some ideas for investing in mining stocks, take a look at my  Mining Stock Journal.

The Fed Goes Full Dove: Rocket Fuel For Gold, Silver and Mining Stocks

I ordinarily do not spend time reading the FOMC policy statement after it’s released, saving that brain damage for CNBC. But I read the June release to assess for myself whether or not the Fed had tilted toward a more “hawkish” policy stance and decided that it had not. Because I’m starting to turn bullish on the precious metals sector, I decided to read the July release as well and compared it to the language in the June statement to see if the language had shifted. The degree to which the policy stance has moved back to 100% “dovish” has been understated by the mainstream media.

As an example, the Fed removed the dollar amount of its monthly Treasury and mortgage purchases ($80 billion and $40 billion). In its place it said that it would continue buying these securities “at least at the current pace.” I interpret this language – and the removal of the specific dollar amounts – as opening up the possibility of increasing the amount of monthly QE. In other words, removing the specific dollar amount levels is a subtle way to remove the boundaries on the dollar amount. The Fed also minimized its view of price inflation by referencing “muted inflation pressures.”

I have said all along that the Fed would eventually be forced to print a lot more money and I believe the new language and phraseology of the latest policy statement is setting up this eventuality. This will be rocket fuel for gold and silver.  Craig “Turd” Ferguson invited me onto this Thursday Conversation podcast to discuss the Fed and the precious metals sector – click on the graphic below to access the fun:

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The mining stocks are once again historically cheap.  At some point this year I will be raising the subscription price, though existing subscribers will be grandfathered at the current monthly rate.   If you would like some ideas for investing in mining stocks, take a look at my  Mining Stock Journal.

Microstrategy, Bitcoin And A Drunken Saylor

“MicroStrategy Acquires Additional Bitcoins and Now Holds Over 105,000 Bitcoins in Total” – June 22, 2021

Michael Saylor, CEO of Microstrategy ($MSTR), has completely mortgaged the fate of Microstrategy on Bitcoin. Starting in August 2020, Saylor used $250 million of shareholder cash to buy Bitcoin. Since then MSTR has issued $2.2 billion in debt – $1.7 billion in converts and a $500 million debenture – to buy $2.2 billion more in Bitcoin. Through June 21, 2021, the date of its latest Bitcoin purchase announcement, MSTR owns 105,085 Bitcoins at an average cost of $26,083 – at least if you believe Saylor’s disclosure. As of today the Bitcoin holding is worth $3.97 billion. Through the end of it Q1, based on a 10-Q disclosure, the cumulative impairment expense of MSTR’s foray into Bitcoin is $264.8 million. Perhaps not the best use of shareholder capital.

I question the integrity of MSTR’s 10-Q disclosure because Saylor has a track record of accounting fraud going back to the dot.com bubble era, when MSTR was founded. By way of background MSTR’s CEO, Michael Saylor, during the dot.com bubble was investigated by the SEC for inflating MSTR’s earnings and improper revenue recognition. Saylor settled the allegations without admitting or denying any wrongdoing. Fast-forward to now, MSTR has had four CFOs over last two years. I’m sure if I really dug through the footnotes of MSTR’s latest 10-Q, I would find more red flags.

When I was trading junk bonds on Wall Street in the 1990’s, one of our big clients was a white shoe Boston Brahmin. He used to say regarding the lowest rated junk bonds, “when you lie down with dogs you wake up with fleas.” MSTR’s issuer credit rating by S&P is triple-C and Michael Saylor has fleas.

Since peaking at $1272 (closing price) at the height the Bitcoin price bubble in early February, MSTR is down 50.6% through today. MSTR has always been a momentum-chasing retail daytrader favorite and Bitcoin is an effigy of speculative excess. Because Saylor has leveraged the Company’s balance sheet to an extreme degree to buy Bitcoin, MSTR is Bitcoin on steroids. If you are looking for a leveraged vehicle to short Bitcoin, MSTR is the perfect security.

Turning to the “Drunken Saylor” referenced in the title to this post, on June 22nd “Doomberg” wrote a must-read essay on Saylor and his Bitcoin experiment at MSTR using shareholder and bondholder money. Here’s a snippet:

Saylor has fully converted MicroStrategy into a bitcoin holding company at this point. He continuously makes wildly outrageous statements about the value of bitcoin, none of which are protected by safe harbor laws. These statements have a direct impact on the value of MicroStrategy’s stock, and by extension Saylor’s personal wealth. He encourages people to risk their entire life savings and follow him into the bitcoin abyss. It is truly a grotesque situation.

And here’s the rest:  A Drunken Saylor

Are You Ready For The Next Big Move In Gold, Silver And Mining Stocks?

The precious metals sector has been extremely irritating, if not outright agitating since May. Compounding the frustration is the fact that the fundamentals supporting the sector have never been stronger. These factors include negative interest rates, the Fed’s non-stop money printing and the parabolic debt issuance at every level of the economy (Government, corporate, household). For as bad as the sector “feels,” gold (and silver) remain in a powerful uptrend.

Tom Bodrovics at Palisades Gold invited me onto his podcast to discuss why I believe the precious metals sector may be setting up for a big move. We also discuss Basel Three, the stock market bubble, the mysterious reverse repo activity and Central Bank Digital Currencies:

The mining stocks are once again historically cheap.  At some point this year I will be raising the subscription price, though existing subscribers will be grandfathered at the current monthly rate.   If you would like some ideas for investing in mining stocks, take a look at my  Mining Stock Journal.

How To Drain The COMEX Silver – Part 1

The Achilles’ Heel of the fractional, unallocated bullion system is when the physical gold and silver falls short of derivative obligations to deliver real physical metal to the end-user buyer. By delivery I mean move the bars from London or NYC vaults and ship them to the receiving entity (often times its Central Banks that are repatriating their gold bars from London or NY).

Since Bretton Woods, there’s been three times when the physical market fell short of demand for deliverable physical metal: 1) the London Gold Pool in the 1960’s; 2) the attempt by France to convert all of its Treasuries into gold from the Fed and that led to Nixon closing the gold window; 3)and the Hunt Brothers run on the physical silver at the Comex.  In the latter two instances, the entities making a run on the physical metal had figured out that there was more paper outstanding than physical gold/silver available to support the conversion of the paper claims. I think we are headed into the fourth – and final – time a run occurs on physical gold and silver. The market began transmitting signals in March 2020.

Inflation, Stock Bubbles And Economic Disaster

“The foundation of our entire financial system – and really the economic system – is based on being in a bubble”

Rising prices are not “inflation.” They are the evidence that the money supply has been inflated at a rate in excess of the marginal wealth output of an economic system. Real GPD since 2008 has been negligible but the money printing has been at times parabolic. It’s not that the value of the goods being purchased are rising in value, it’s that the value of currency used to purchase the goods is declining. Since 1971, the US dollar has lost 99% of its value vs gold, evidenced by the fact that it took $35 to buy an ounce of gold in 1971, it now takes $1800.

Rob Kientz (GoldSilver Pros) invited me discuss the Fed money printing, inflation, the stock market and the precious metals sector:

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Now is a great time to put together your list of favorite mining stocks to own as the precious metals sector emerges from the 11-month downtrend/pullback/consolidation. The next move will be powerful and take most market participants by surprise. The mining stocks are once again historically cheap.  At some point this year I will be raising the subscription price, though existing subscribers will be grandfathered at the current monthly rate.   If you would like some ideas for invedsting in mining stocks, take a look at my  Mining Stock Journal.

After The Reset Silver & Gold Won’t Be Priced in Dollars

“April 2021 money supply and monetary base growth continued to explode” – John Williams, Shadowstats.com

Williams is referencing the “base” monetary aggregates which are compiled monthly. The Fed’s balance sheet grows by the week, hitting $7.935 trillion as of June 3rd. It’s doubled plus another 13% since September 2019, when “QE” was restarted.

The rate of growth in the money supply is unprecedented in history. The price inflation effect of the money printing showed up first in the financial markets:  stocks, bonds and housing prices (yes, because most homes are purchased using a high loan-to-value mortgage, homes can be considered financial assets). Now the devaluation of the dollar is showing up – uncontrollably – as price inflation across goods and services.

It’s ludicrous for the Fed to promote the idea that the spike up consumer prices is “transitory.” Just like it was absurd for Ben Bernanke in 2007 to proclaim that subprime mortgage defaults were “contained.” As long as the Fed’s balance sheet keeps expanding and the money supply continues growing, price inflation will get worse.

It many not feel like it because of the volatility in the sector and because of the hype in the media about the general stock market, but gold is up 12.7% and silver is up 15.3% since March 30th. Since March 1st, GDX is up 30.3% while the S&P 500 is up 7.9%. If the SPX had risen 30.3% since March 1st, the anchors on CNBC would be doing naked cartwheels on live television.

The point here is that the precious metals sector, in spite of the intense manipulation right now, is starting to reflect the soaring rate of dollar devaluation/price inflation. After the run in the precious metals starting in March, it’s likely we’ll get a brief period of technical consolidation with some two-way volatility. But more money printing and deficit spending will be generated to prevent the economy from falling apart again, which will be rocket fuel for the precious metals sector.

Gold is now making a serious run at the $1900 benchmark and silver is challenging $28. I expect both metals to undergo two-way volatility around those two key technical and psychological price levels for at least a few weeks. But I would not be surprised of both price levels have been left in the rear-view mirror by the July 4th holiday.

Wall Street Silver invited me back on to their excellent podcast to discuss ongoing developments in the precious metals sector and the factors that will drive the price of gold and silver much higher than the current price level:

The Fed’s Reverse Repo Madness

Let me translate – We at The Fed have to pretend that we might one day stop QE, but we know in truth that that we can’t. The last time we tried tapping our foot lightly on the brake we blew up the markets. We are trapped. We know it. You know it. But we need to pretend otherwise. – Albert Edwards, Global Strategist and noted bear, in response the FOMC minutes released this past Wednesday in which some FOMC members said it might be “appropriate” to begin discussions on tapering QE in upcoming meetings

The rapid escalation of the Fed’s Reverse Repo activity has garnered a lot of attention and commentary.  While no one outside of the Fed’s inner circle can say for sure what it going with this, it’s highly unlikely that the activity is a pre-cursor to and eventual tapering of the Fed’s money printing policy.

Repos and Reverse Repos (RRPs) traditionally are tools the Fed uses to implement its monetary policy in order to maintain its target Fed funds range, currently 0% to 0.25%. Interestingly, the Fed’s overnight RRPs activity has grown rapidly in volume since early March.

In response to several requests, I’m going to a take stab at what I think is going on with the RRP activity. Dissecting the nature of the RRP transaction should help to understand the reason for the sudden implementation of RRPs to manage monetary policy along with the implications for the stock market. But my analysis is based only on an educated guess.

There’s a lot to unpack, and a lot of moving parts, when trying to analyze and interpret unusual Fed activity. The Fed hopes that the mainstream explanation – a pre-cursor to a taper – will be accepted at face value, in the hopes that only a few people will dig around to see if there’s more than meets the eye.

The Fed is walking a thin tightrope between fighting off financial asset deflation (a stock and bond market crash).  To do this it needs to continue printing enormous sums of money.  But it also has to avoid the money printing from translating into Weimar-scale hyperinflation and a crash in the dollar.  Along with this, the Fed also needs to prevent the Fed funds rate from going negative. The RRP mechanism is the Fed’s attempt to “mop up” the excess liquidity that has accumulated in large pools at the spectrum of financial intermediaries (banks, money market funds, GSEs).

Repos traditionally give banks needed liquidity on a short term basis. In a Repo operation, the Fed “lends” cash to counterparties, usually banks, and the counterparties collateralize the loan with Treasuries or agency mortgages (FNM, FRE). The traditional use is to prevent the Fed funds rate from moving above the top end of the Fed funds target range. “QE” is a “non-traditional” long term, if not permanent, form of this transaction.

With an RRP, the Fed exchanges its Treasury/mortgage holdings for cash held in reserves by the banks in the Fed’s excess reserve account. For an overnight or over weekend operation, the transaction temporarily removes liquidity from the banking system. The next day the counterparty sells the Treasuries back to the Fed at a slightly higher price on terms that give the counterparty a higher return from participating in the RRP than holding cash. That’s the counterparty’s incentive to participate in RRPs. While the percentage interest earned is tiny, applied over $10’s of billions it’s not an insignificant amount cash interest earned.

The Fed engages in RRPs when it has determined there is an excess supply of cash in the banking system. If the banking system is awash in liquidity, it presents the danger that the Fed funds rate will drop below the low end of the target range. In the context of the current target range, it would mean the Fed funds rate goes negative and the Fed would be paying banks to borrow money.

The banking system would be awash in cash liquidity resulting from excess money supply created by the trillions of QE money printing since March 2020. The Repo system is set up to enable banks with excess cash to lend on a short term basis to banks that need cash for business activities, with the Fed as the intermediary. But in an environment in which the real economy is not expanding, business demand for loans is low. This is confirmed by looking at the demand for commercial/industrial loans, has been falling since April 2020:

Contrary to the blaring mainstream media propaganda, the economy is not improving. If the economy were improving that chart above would be the opposite of what it is. We know banks have excess liquidity earning a near-zero rate of interest sitting at the Fed, so why is it not being loaned to businesses? Lack of demand for the loans, perhaps?

If real economic activity is not expanding, businesses do not have the need to borrow money to expand their operations in order to meet the demands of expanding economic activity.  As a result, banks are left sitting on an “oversupply” of cash that earns close to zero percent (the interest on excess reserves paid to the banks by the Fed is 0.10%, while the 3-month T-Bill rate on paper used by money market funds and GSE’s is 0.02%).

We know the Fed has to continue expanding its balance sheet by printing more money to help fund new Treasury issuance in order to prevent the 10yr Treasury yield from spiking up to a level that would torpedo the financial markets – primarily the stock market – and send the economy into a depression. The last time the 10yr Treasury yield was above 2%, the SPX was over 20% lower than where it is now.

Thus, the Fed is faced with a conundrum. It needs to expand its balance sheet by printing money to buy new Treasury and mortgage issuance and to maintain “orderly” financial markets – i.e. to mute as much as possible the price discovery mechanism of free markets. But the Fed also needs to prevent its money printing from translating into price inflation. Price inflation results from an oversupply of money relative to the wealth output of an economic system.

Several MSM commentators have suggested that the RRP operations are being conducted in advance of an eventual move by the Fed to taper QE and eventually to begin reducing the size of its balance sheet. But this is not a “taper warm-up” exercise in my view. Why? Because the Fed’s balance sheet has continued to grow in size over the two-month period that the RRP activity took off:

Per the historical data available on the Fed’s website, the RRP activity began in size on March 18th at $26.5 billion and 25 counterparties. The size of the RRP operations has expanded progressively and rapidly. The size crossed the $100 billion level on April 26th. On May 12th the RRP operation size was $209 billion, with 39 counterparties. By May 20th it jumped to $351 billion, with 48 counterparties, up from $293 billion and 43 counterparties the day before. Currently the RRP activity is running close to $500 billion per day.

In the context of the two charts above, the size of and breadth of the RRP operations has rapidly accelerated while, at the same time, the Fed’s balance sheet continues to grow. The RRPs are not removing liquidity from the banking system per se. Rather, the operations shift printed money back and forth between the Fed and the banking system on a daily basis at an increasing rate.  Note: it’s important to understand the the overnight RRPs do not remove liquidity from the market.

By “breadth” I mean the number of participants allowed to participate in the RRP operations, as well as the size of the transaction limit per participant. In addition to banks, the Fed began to include money market funds and GSE’s in the repo market party 2009 (there’s several GSE’s in addition to FNM, FRE and FHA) – RRP Counterparties
The Fed also implemented the “tri-party” repo system which, in a way, brought money market funds (MMFs) into the banking system. This is important background information because, even though MMFs are now allowed to “break the buck,” it sends a negative signal to the markets if this happens. MMFs break the buck – NAV falls below $1 – when its interest income falls below operating costs. This would occur when interest rates fall too low or go below zero.

MMFs are meant to be “riskless.” Currently there is a shortage of short term Treasuries as a result of the Fed’s QE. Because of this, MMFs have and excess amount of cash relative the amount of available short term yield-bearing investment options. Including MMFs in the RRP mechanism enables the Fed to “sweep” cash out of MMFs in exchange for short term securities in the Feds SOMA (QE) portfolio, thereby avoiding, or at least deferring, the possibility that MMFs break the buck and lose money for their investors.  The RRP is structured to give MMFs a higher short rate of return than they would earn on T-Bills.

On April 30th this year, the Fed reduced the AUM size requirements for money market funds to participate in RRPs. It also removed entirely the AUM requirements for GSE’s to participate: NY Fed Operating Policy. Then, on March 17th, the Fed increased the transaction limit for each counterparty (banks, money market funds and GSE’s) from $30 billion per day to $80 billion per day: NY Fed Operating Policy.  This enabled the Fed to expand the size of the RRP operations by a considerable amount.

The bottom line is the Fed knows that it has to keep expanding its balance sheet – i.e. printing money and buying Treasuries and mortgages – while keeping as much of the printed money inside the closed banking system in an attempt to prevent it from escaping the circular path between the banks and the Fed and translating into accelerating price inflation. The move to widen the circle of RRP participants is evidence of the Fed’s intensified effort to maintain as much control over the excess cash it has printed as possible.

The “taper warm-up” argument is a non-starter. If is dropping the term “taper” in its FOMC policy statement as propaganda mechanism used to support the dollar.  The Fed has already tried to taper. This led to a sharp draw down in the stock market and rise in interest rates at the long end of the curve. By September 2019 the Fed resumed printing money under the thinly veiled guise of “term repos.”

In essence, the Fed is running a Ponzi scheme using it’s own printed money as the source of funds to keep the scheme from collapsing. Compounding the problem is the progressive devaluation of the dollar caused by the Fed’s interminable money printing. The RRP operation is an attempt to prevent the Ponzi scheme from generating Weimar-scale hyperinflation without curtailing the size of the QE operation.

The rapid escalation in the RRP operations signals the enormous financial system imbalances created by the Fed’s money printing. I believe the RRP operations is the Fed’s attempt to prevent the excess cash from translating into uncontrollable price inflation. It is direct evidence that Fed’s Ponzi scheme, supported by its enormous money printing, is quickly becoming unmanageable. Watch for more overt advertisement and implementation of the well-telegraphed “Yield Curve Control” policy in the coming months.

The inevitable conclusion is hyperinflation followed by a collapse of the dollar and the stock and bond markets. My bet is that it is too late to prevent the inevitable.

Whether my analysis and conclusion is mostly correct or even just somewhat correct – in terms of what is going on with the sudden increase in RRP activity – it brings out two important points to consider when evaluating your investment decisions – long or short. First, the Fed has created a large reservoir of excess liquidity which it is working on trying to control.

Second, unless the Fed removes the liquidity permanently, price inflation will not only not be transitory but it will get much worse. In order to remove that liquidity permanently and reduce the size of its balance sheet, the Fed would need to exchange its Treasury/mortgage holdings for the cash it created and then destroy that cash, not keep rolling forward the RRPs.

So if the Fed continues printing more money to fund Government debt issuance (MMT) and tries to control it with RRPs, at some point the devaluative effect on the dollar on the money printing will trigger a rapid decline in the dollar. This might initially give the Dow and SPX a boost, but tech stocks hate inflation and the Nasdaq will tank hard.

Third, if my analysis is wrong and the Fed does indeed embark on a taper and balance sheet reduction program, the stock market will likely crash and interest rates at the long end of the curve will spike up. This is why the Fed stopped tapering over the summer of 2019 after it had reduced its balance sheet just 10%. The stock market became turbulent with a 19.5% draw-down starting in October 2018 and another 6% selloff starting in May 2019.

In addition, if the Fed tapers instead of increasing QE to fund the coming deluge of new Treasury issuance, interest rates at the longer end of the Treasury curve will spike up. Housing prices will contract sharply to the extent that buyers in the last 5 years who used high loan-to-value mortgages or did cash-out refis will find themselves underwater, in a significant negative equity position. A taper thus would be a disaster for the markets, interest rates and the economy.

The above commentary was published in the May 23rd issue of my Short Seller’s Journal.  I also presented some short ideas that went along with the analysis. In each issue I analyze the economy and the markets as well discuss short ideas. I also provide a weekly update on Tesla.  You can learn more about this newsletter here:  Short Seller’s Journal Information. 

With Inflation Raging, Mining Stocks Are Cheap

“April 2021 money supply and monetary base growth continued to explode” – John Williams, Shadowstats.com

Williams is referencing the “base” monetary aggregates which are compiled monthly. The Fed’s balance sheet grows by the week, hitting $7.922 trillion as of May 19th. It’s doubled plus another 13% since September 2019, when “QE” was restarted.

Gold is now making a serious run at the $1900 benchmark and silver is challenging $28. I expect both metals to undergo two-way volatility around those two key technical and psychological price levels for at least a few weeks. But I would not be surprised of both price levels have been left in the rear-view mirror by the July 4th holiday.

Bill Powers of Mining Stock Education invited me on to his podcast to discuss my outlook for gold, silver and the mining stocks, including some of my favorite stocks right now:

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I also recently started a “mid/large cap corner” in which I present some shorter term trading ideas in larger producing miners when I believe the market has made a mistake in taking down the price of specific stocks. This would include call option ideas if applicable.

The mining stocks are once again historically cheap.  At some point this year I will be raising the subscription price, though existing subscribers will be grandfathered at the current monthly rate.   If you would like some ideas for investing in mining stocks, take a look at my  Mining Stock Journal.