* Gold drops for a fifth straight session
* Dollar around 11-month high vs basket of currencies
* Minutes showed Fed debated raising rates earlier
* Coming up: Eurozone and U.S. Markit manufacturing PMI (Updates throughout, changes dateline from SINGAPORE)
By Clara Denina
LONDON, Aug 21 (Reuters) - Gold slid to its lowest in two months on Thursday, extending losses to a fifth session as the dollar strengthened on indications from the U.S. Federal Reserve that it could raise interest rates sooner than expected.
Policymakers debated on whether interest rates should be raised earlier given a surprisingly strong jobs market recovery, minutes from the July meeting of the Fed's rate setting committee showed. Most officials, however, wanted further evidence before changing their view on when rates should be lifted.
Higher interest rates would dull the appeal of non-interest-bearing assets such as gold.
Spot gold fell as much as 1.2 percent to its lowest since June 19 at $1,276.90 an ounce. It was trading down 0.9 percent at $1,280.30 by 0952 GMT.
U.S. gold futures dropped as much as 1.6 percent to $1,274.90, also a two-month low.
"Gold was already on the defensive before the minutes as the tensions in Ukraine were easing and the market was paying less attention ... so you had other drivers like the dollar, which has been moving up since the start of the week," ABN Amro analyst Georgette Boele said.
"And then you had these dovish minutes which put extra pressure on gold and this is also ahead of tomorrow's speech by Yellen at Jackson Hole... The main topic should be employment and the way she sounds will be crucial."
The U.S. dollar traded just below 11-month highs against a basket of major currencies, buoyed by rising Treasury yields and the slightly hawkish tone in the U.S. central bank's minutes.
More data on Thursday on U.S. weekly jobless claims and eurozone and U.S. manufacturing data could trigger further sell-offs in gold.
Gold failed to gain support from a dip in global shares after a disappointing Chinese manufacturing survey stoked concern about the regional giant.
Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.9 tonne to 800.09 tonnes on Wednesday, the third straight daily increase.
Continued violence in Ukraine and the Middle East may be prompting investors to seek safety in gold. Although those conflicts have helped push bullion up around 7 percent this year, any impetus that they have provided has not lasted long, analysts said.
Silver fell 0.8 percent to $19.32 an ounce, having earlier touched a two-month low of $19.25.
Spot platinum was also trading at two-month lows of $1,415.20 an ounce, down for the ninth consecutive session in the longest losing streak since July 2008. Spot palladium , which hit a 13-1/2 year high of $900 earlier this week before falling back, rose 0.9 percent to $870 an ounce.
Sentiment: Strong Buy
Kitco Metals Inc.
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Intervention and The Misery of Fiat
Wednesday August 20, 2014 15:17
“This is a very important lesson. You must never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be.”
-U.S. Naval pilot and prisoner of war, James Stockton
Black swans have taken flight. World war is imminent as one new geopolitical flash point develops each week. Slowly, the underlying struggles are fomented by the greatest monetary intervention the world has ever seen.
The template for each crisis can be traced back to the storm created by the first ever grand scale, all encompassing and floating currency standards.
Faith is all we have to lean only while the seed coin disappears.
A continent away Ebola is out of control. Six months into the outbreak, fear is proving to be the most difficult barrier to overcome.
Fear causes contacts of cases to escape from the surveillance system, families to hide symptomatic loved ones or take them to traditional healers, and patients to flee treatment centers.
Fear, and the hostility it can feed, has threatened the security of national and international response teams.
Health-care staff members fear for their lives. To date, more than 170 health-care workers have been infected and at least 81 have died.
There is Rioting in St Louis
We've been in a quiet, brave new world-like depression for over five years. Sadly, things may become “Orwelllian” much faster than one might imagine.
Finance and fiat create the illusion of wealth. The idea that money should work for you is a reflection of the growing welfare state.
We end up with a severe dumbing down of the masses.
Political vacuums attract extremism. Ignorance and prejudice ignite hand in hand. The workforce is destroyed.
What is left of the productive element, the workforce, is not worth the cost of getting new trainees up to speed.
A generation rose out of the ashes of world war, riding subsidies that always end in slavery.
When the “smartest people” in the room are investment bankers and real estate owners, it's a sure sign that we are upside down and backwards.
Big finance fed by fractional reserve permanently alters the underlying economy. It cannot be fixed. There is no going back without blowing up.
The booms create the illusion of prosperity.
And the busts leave the majority worse off, and mostly holding the bag and fielding the blame.
Saving is punished. Capital, misallocated.
Inflation creates a visceral misery.
And yet the continuing rise of the .001% feeds a quiet desperation. Bread and circuses only fulfill short term needs.
As time goes on, security and the ability to self preserve is threatened.
Frustration builds under the surface - and then something triggers its emergence. The trigger will range from police brutality to a broken stop light.
A chronic state of suppressed emotion, fear, and anger develops.
Ultimately, emboli loosen their way into the system, and chaos is the result.
The build up of years of debt-based finance and culture is like cardiovascular disease. An industry arose around treating the effects and not the cause.
A “naturally backed” commodity currency would cure the inflammation before it damages the vessel wall.
Alas, the monkeys will keep trying to save the fish from drowning. And while nothing will ever save the fish, they will always try to do more.
A new monetary standard would be a veiled intervention, or an imposition at best.
Sadly, it would be like putting the fish back in the water. It would be like returning to precious metals. While obvious, it is furthest from the collective minds of power.
By Dr. Jeff Lewis
Sentiment: Strong Buy
Why Aren’t Gold Prices Rising?
Wednesday August 20, 2014 15:09
The numbers are in…
In the second quarter of 2014, world central banks bought 117.8 tonnes of gold bullion compared to 92.1 tonnes a year earlier—a jump of 28%. Central banks have been net purchasers of gold bullion for 14 consecutive quarters!
According to the World Gold Council, “Economic and geopolitical events throughout the world are sources of ongoing instability and uncertainty. Such events reinforce the requirement for appropriate risk management by central banks through holding gold reserves for asset diversification.” (Source: “Gold Demand Trends Q2 2014,” World Gold Council web site, August 14, 2014.)
Hog wash, I say. Central banks are buying gold bullion because they are slowly moving away from U.S. dollars as their reserve currency and replacing them with gold bullion.
In the second quarter, Russia purchased 54 tonnes of gold bullion, Kazakhstan purchased seven tonnes, and Tajikistan bought three tonnes. Combined, just these three central banks made up more than 54% of all the official purchases of gold bullion in the second quarter.
You won’t see the central banks of France or Germany buying gold bullion because they already have enough (that’s if Germany can ever get its gold back from the U.S.).
So if demand for gold bullion is rising, as evidenced by central banks buying more, gold coin sales near record highs, and gold demand in India rising again now that the government is easing tariffs on gold imports, the million-dollar question is why aren’t gold prices rising?
There is plenty of discussion on the Internet about gold manipulation and how prices are purposely being kept down. I can’t comment on that, but I can tell you three things about gold bullion:
First, the supply of gold bullion in the marketplace has declined this year because gold miners have pulled back on exploration. In 2011, mining for gold when it was at $1,800 an ounce made sense. Mining for gold in 2013 when gold was trading at $1,300 an ounce didn’t make a lot of sense for many mines, though, so they were closed down. Less supply, more demand (as we’ve just seen from the central banks) usually leads to higher prices.
Secondly, according to the International Monetary Fund (IMF), at the end of 2013 central banks around the world had total foreign exchange reserves of more than $11.0 trillion. If central banks use just 10% of these reserves (roughly $1.1 trillion) to diversify further into gold bullion, there will not be enough gold to satisfy the demand.
Finally, the stock prices of quality senior gold mining companies are trading at levels they haven’t been at in years. I continue to believe they offer an outstanding opportunity for “buy low” investors
Sentiment: Strong Buy
What's Your Exit?
Wednesday August 20, 2014 15:48
Are you prepared for an “exit”? If the Fed pursues an “exit” from ultra low interest rate policy, are you prepared for an exit from the stock market should things turn South? We discuss how investors prepare, noting the most common mistakes investors make along the way.Are you prepared for an exit?
No, you are not. We know because we meet investment advisers that have dropped their defensive strategies because they were losing clients. Those we meet that say they are prepared think they can get out at the right time should the markets topple over as the Fed exits; our guess is pigs will learn to fly before many will get that timing right. And those who don’t rely on luck are the first to tell us they don’t think they are fully prepared, as it’s rather difficult to predict how things will unfold.
Should you prepare for an exit?
There’s a group of investors that say an “exit” is ludicrous – there’s no way the Fed will pull off an exit.
It turns out we sympathize with that view, but think getting ready for a Fed exit is still paramount. As I wrote in my book Sustainable Wealth, a prudent investor plans for different scenarios. Any scenario that has a non-negligible probability with a potentially profound impact on one’s portfolio should be taken into account. We don’t really have to go much further than this, as all we have to do is look at today’s market: in today’s markets, risk premia are highly compressed. This may sound academic, but what it means is that investors downplay the risk embedded in risky assets. We can see that through investors bidding up junk bonds and buying debt of weaker Eurozone countries. We can also see it in the stock market, where volatility is lower than what has historically been considered normal (i.e. the VIX index is at an unusually low level). In plain English, this means markets may be priced to perfection. And that’s where the problem is: the world isn’t perfect. As such, just the hint of a Fed exit might cause havoc in the market, even if it is never actually pursued. Please read ‘Instability the New Normal’ for an in-depth analysis on how this may unfold.
Five common mistakes investors make
The much more difficult question is how does one prepare in earnest for an “exit.” After all, any strategy not fully invested in the stock market appears to have under-performed. What not to do is a lot easier to say than what to do. Five common mistakes investors make:
• Feeling like you’re losing out because you’re not keeping up with the stock market. No: you should develop a financial plan tailored towards your circumstances. You should not care how much the guy or gal next to you, or the “market” makes.
• Feeling like you haven’t saved enough for retirement and as a result should invest in the stock market to make up the shortfall. No: Warren Buffett got to the point when he said: "The stock market has a very efficient way of transferring wealth from the impatient to the patient." The prudent investor waits to find good values; the impatient investor is bound to invest at the top by chasing trends.
• Feeling like you can’t invest more because you don’t make enough money. For most, spending, not income is the problem. Remember the days back in college when you could live off very little? Spending $80 a month on a phone bill is a luxury, not a necessity.
• Not spending any time researching investment options. Many spend more time researching which HDTV to buy than researching an investment. Just because you can buy the world with a push of a button, doesn’t mean you should. You worked hard to earn those savings; now spend a little time researching what to do with your savings.
• Not understanding true diversification. Diversification is not about labels, but correlation. When policy makers are very engaged in the markets, asset prices may no longer reflect fundamentals, but instead reflect the next perceived intervention by policy makers. In practice, this has meant that many investments have been highly correlated in recent years. Differently said: if everything has gone up in your portfolio of late, you have a problem.
How do you prepare for an exit?
All successful investment strategies I have encountered have in common that they are based on a plan. A plan that takes into account where one comes from, where one is planning to go; how one intends to get there, with appropriate checks along the way. If this sounds obvious, you would be surprised how few are adhering to these basic principles. And why would I mention these basic principles in the context of a Fed exit? Two reasons: first, one should not lose sight of basic investment principles in addressing any one situation; and second, the best of plans are impacted when others are not living up to their part of the bargain. What I’m referring to is that the Fed – which arguably has a profound impact on asset prices – does not appear to follow those basic principles in conducting monetary policy. The only thing we really know about the Fed’s so-called exit is that Janet Yellen would like to keep monetary policy accommodative to help the convicted felons get a job (as discussed in her first policy public speech since becoming Fed Chair). This characterization may sound unfair, but it’s the simplistic conclusion I have to draw when given her focus on employment, her expressed desire to help ‘Main Street,’ the fact she has never pushed back when being labeled a dove, and her rejection of a rules-based framework to monetary policy.
That said, let’s address these basic principles in the context of an exit:
Where we came from: This did not start in 2007 or 2008, but has long been in the making. For in-depth analysis over the past 10 years, please read up on our Merk Insights. For purposes of today, we shall note that investors were burned in 2000, as well as in 2008; wages for many have stagnated. We have endured years of low interest rates, making it difficult if not impossible for many pensioners to live off the income generated by their fixed income investments. Many investors have moved to embrace a riskier mix of investments than they are comfortable with, but stick with their allocations as long as they don’t get burned. To us, this increases the odds of a crash, as those investors may not stick around when the going gets rough.
However, we know a few things about this journey: geopolitical tensions have been rising. In ‘Instability the New Normal’, we argue that this is a symptom of the times as policy makers blame minorities, the wealthy, and foreigners when they have trouble balancing the books; rarely ever do they blame themselves. Government deficits are not sustainable; yet, there might not be enough wealthy to tax, either. In that environment, central banks may be pressured to keep rates lower for longer; in fact, we recently argued we might see negative real interest rates for years, even as nominal rates may rise. In a best-case scenario, as we have seen in recent years, this may inflate asset prices, but it may be foolish to base one’s long-term outlook on such gains to continue. Instead, financial repression may persist.
We live in an environment where both government and consumers are heavily indebted, with foreigners owning much of the debt, creating the perverse incentive to debase the value of the debt (through inflation or a weaker currency) to have foreigners that don’t vote hold the bag. As someone with savings, don’t trust your government to take care of you. This applies whether you are based in the U.S. or many other countries. You are on your own.
How to get there, with appropriate checks: If you just avoid the five mistakes listed above you are already in much better shape than most to achieve your goals. Checking one’s progress applies during good as well as during bad times. When times are rough, remembering one’s priorities (to cut back on unnecessary expenses, continue putting money aside for key goals) is important. When times are good, it’s important to take chips off the table, to rebalance one’s portfolio.
At times, I see investors be reasonably diligent about choosing an investment, but then fall into the trap of justifying one’s investment at any cost. A good cross-check of whether to keep an investment is whether the conditions that lead one to invest in the first place persist. Meaning, if one buys company ABC because of good management, then reflect on whether management is still good. If one buys it because of great earnings momentum, well, are earnings still growing? If one buys it because it was cheaper than its peers based on some metric, then, you guessed it, does that still apply? As you might imagine, buying a stock – or ETF - because some pundit recommended it on TV is a bad idea, as you are unlikely to be around when he or she changes his or her mind.
A great way to check one’s portfolio is to have it stress-tested against different scenarios. A great temptation in today’s social media driven world is to only listen / like / follow folks one agrees with. But to make a market, we need disagreement amongst voluntary participants. A key reason we publish so much is to engage the public in an effort to receive feedback, so that we can consider viewpoints we might have ignored. An extreme example of that was in the summer of 2012 when we published the Merk Insight ‘Draghi’s Genius’; we did not change our mind upon receiving an avalanche of disapproval, but it kept us on our toes. Similarly, we encourage anyone to look beyond their circle of friends to get out of their comfort zone when it comes to testing investment ideas.
Putting it to work
Just as former Fed Chair Bernanke was talking about his toolbox, investors may want to consider assembling their own tools to navigate what’s ahead. Note:
• Cash is an asset class. Investors don’t like to pay their advisers for holding cash. There are clear downsides, as I would even go as far as arguing that cash isn’t even risk free given that your purchasing power is at risk. Still, cash that should come with minimal interest rate and credit risk plays a role (I say “should” as not all ‘cash’ is created equal). If you manage your own money, don’t be afraid of cash; if you have someone manage money on your behalf, don’t hold it against them if they stay on the sidelines – they might be protecting you from potential losses elsewhere.
• If you are looking for diversification in today’s environment, consider alternative investments. At a recent conference on alternative investments, a large wealth manager argued – and I would agree – that 20% of alternative investments in a portfolio are advisable if one wants it to have a real impact on performance. If I look at the portfolio allocation of Harvard’s Management Company in 2013, they only had a U.S. equity allocation of 11%, but when it comes to alternatives, aside from a 16% allocation to private equity, they held a 15% allocation to absolute return; a 2% allocation to commodities; a 13% allocation to natural resources; importantly, they did not feel the need to chase yield, with a high yield allocation of only 2%. This isn’t investment advice and we are not suggesting everyone should replicate Harvard’s allocation, but this should give food for thought.
• Stocks might crash. Having just mentioned an asset allocated with an infinite investment horizon, it may be counter-intuitive to now caution about what may happen in the near to medium term. I can tell you that I’m personally concerned about a crash and am taking precautions. To the extent investors are exposed to stocks, I would encourage them to consider a strategy that employs some sort of hedging or protection; if, indeed, the markets continue to soar, this allows one to participate in some of the upward move. An alternative, of course, is to simply reduce the market exposure and leave the remainder un-hedged. It’s just that if you were to ask me for my favorite investment idea today, it is to get ready for a severe correction in the market; as such, at the very least, I like to have cautioned investors.
• Bonds might be one of the worst investments over the next 10 years. But aren’t bonds supposed to rise due to so-called safe haven demand? They just might, and year-to-date bonds have done rather well. But the math doesn’t add up. If I look out 10 years, I don’t see how we can finance our deficits. Something has to change. I’ll leave it for others to find value in bonds. Personally, I don’t want to touch them with a 10-foot pole.
• The action may be in the currency markets. If I’m wrong on bonds it’s likely because central banks succeed in keeping rates low. But if they keep rates at artificially low levels, two things will happen: first, bonds won’t compensate investors for the risks they take. And second, there ought to be a valve, as the market can’t be fooled in the long-run. That valve may well be the currency markets. If bonds plunge central banks could step in to contain their decline, the currency may act as a valve. If you think this is only a problem for Japan, think again, as the U.S. is vulnerable to similar pressures. This is the key reason why we have made the currency markets our home turf, so that we may be able to stay a step ahead of policy makers as currency wars evolve.
• Gold as insurance? We may think the currency market is where the action is, but while investors have a (all too often misguided) view about the euro and the yen, it’s difficult to get investors excited about the Swedish krona. Frankly, we also like to keep it simple. And the simplest insurance against the mania of policy makers may well be gold. That doesn’t mean gold will always go up; it doesn’t even mean gold will go up more than, say, silver. But gold is influenced by fewer dynamics than other commodities because of its comparatively low industrial use. The fact that it’s ‘just a brick’ is a feature rather than a bug: because it’s not the gold that’s changing, it’s the value of the dollar or currencies. For more details as to why I own gold, please download “Why I Own Gold”.Axel Merk
President, Chief Investment Officer, Merk Investments,
Manager of the Merk Funds
Sentiment: Strong Buy
Charles Nenner’s very credible work says we are in a longer-term bottoming pattern for gold that should end no later than Sept. 30, 2014. So far in August, our monthly average gold price is $1,298, which compares with an average of $1,311.25 in JulyOf course the month of August is still young. Yet the likes of Dr. Robert McHugh as well as Charles Nenner think we could get one more dramatic decline. McHugh is saying the “ideal” from a technical point of view would be for gold to approach $1,100. But he isn’t ruling out the possibility that the bottom is in. In his view, if we get above $1,385 we can be relatively sure we have seen the bottom and the next major move for gold will be underway.
The T-Bond charts on your left, compliments of the great technical analyst J. Michael Oliver, show that U.S. Treasuries are once again defying the conventional wisdom by breaking out to the upside, sending yields once again to the lower side.
Some analysts are suggesting this renewed decline in yields indicates that deflationary waves are picking up again. With the real cost of staying alive somewhere at 6% to 10%, I’m not exactly buying the deflation argument but I do think there is a fear of another credit crash in the making. But I also think Chris Whalen is right when he suggests that there are simply too many dollars created looking for a safe home. When stocks fall and risk is off, money flows into U.S. Treasuries. And sometimes when gold rises during major declines in stock prices, some analysts and pundits suggest gold is a safe haven as well.
But the establishment absolutely must continue to keep the notion that gold is a logical safe haven out of the hearts and minds of masses of Wall Street investors and the public in general, or else it will be “game over” for the ruling elite who make U.S. monetary, fiscal, and geopolitical policies. In short, if masses of Americans trade their fraudulent, counterfeit dollars in for the money that free markets have chosen to use as a medium of exchange for thousands of years, the ability to continue to rob the American people and wage wars around the globe will be all over. And the perpetuators of this very real but clandestine reallocation of wealth—from those who create it to those who print the money used to take it away—will have their comeuppance. So you can count on the establishment fighting like hell to keep you and me disinterested in gold, by using all manner of the paper money futures markets shorts and mainstream propaganda that they have at their disposal.
Gibson’s Paradox Explains It All
Consider the fact that the only thing that is holding a very sick economy together now is artificially low interest rates, which relieves pain in the short term but serves to wear down the vital economic organs of our society in the longer term. In my recent interview with GATA’s Chris Powel I was reminded of the work of a couple of Harvard boys, namely, Robert B. Barsky and former Treasury Secretary Larry Summers, titled “Gibson’s Paradox and the Gold Standard” ( You begin to realize why the major bullion banks keep hammering the virtual gold price down through casino-like futures markets in London and New York.
Whereas at one time, before Americans and others in the Western world were made ignorant about gold, these futures markets were legitimate. It was where people who really wanted to buy and take delivery of gold (like jewelers) and people who wanted to sell gold (like gold mining companies) made futures contracts with the intention to actually exchange the metal. But now, major bullion banks like J.P. Morgan, Goldman Sachs, Scotia Bank, UBS, HSBC, and perhaps a couple others, almost never have any intention of taking delivery or handing over physical gold through the COMEX.
What this means is that the major bullion banks having easy access to hundreds of billions of dollars created out of thin air by the Fed (which the bullion banks own to a great extent) have almost unlimited manipulation power to push the gold price down or up, depending on which way they want it to trade. I’m not saying they have complete control of the gold price, but when you see a massive smack down and when a huge amount of futures markets selling comes in (which by the way is highly leveraged) such that there are only a couple of the major players with that kind of fire power, there can be no doubt that the price of gold is being knocked down.
The Gibson’s Paradox study by Barsky and Summers tells us for sure that the people with their hands on the Fed’s printing press know very well that they must suppress the gold price when real interest rates are low because otherwise there would be a stampede into gold once a momentum out of paper assets into gold began. Indeed it was the increase in interest rates by Paul Volcker in 1980 that suddenly put an end to what was turning into a massive stampede out of paper into gold as gold rose from just $35 a few years earlier to $850 by January 1980.
So, what we have is a massive deception going on to manipulate the hearts and minds of investors from straying out of the dollar, because if they did so, it would not only be the end of our economy as we know it now, but it would also result in the end of the American empire. When some major world trauma sends stocks reeling to the downside and money flows into Treasuries, some pretty, young, well-spoken lady can sit next to a Princeton Ph.D. and agree that “Gold just is no longer a safe haven.” End of story!
The charts above from Michael Oliver suggest the con game is continuing and that U.S. Treasuries are breaking out to the upside and that gold simply is no longer a safe haven asset. But I have been listening to that story for more decades than I care to admit.
Ultimately, I think very soon—keep your eye on Nenner’s deadline—the system will break down and on its way to doing so, assuming it doesn’t happen overnight, we are going to see the price of gold cut through the old high of $1,900 like a hot knife through butter.
What Might End This Dollar Deception?
First of all, let me preface what I’m about to say by telling you I do not want what I think will happen to happen just so I can see my gold investments rise in price. No one in their right mind wants the cataclysm that lies in front of us to happen. But I fear we are approaching very quickly a tipping point, in which the lies of the Western world will no longer be taken as truth.
You can only fool nature for so long. Glenn Downs, the Chief of Staff of Congressman Jones from North Carolina, sent me a clip to a very interesting speech delivered by Roger Boyd at the Energy Systems Conference. Boyd talked about how the banking system and the energy industry have formed a very strong codependence. Both the financial system and the energy system are in big trouble for the following reasons:
The financial system has never left the emergency room since 2008. Trillions of dollars has been pumped into the system and none of it has left. Tapering is only a reduction in the amount of new money that is transfused into the arm of the still-sick financial patient. In order to keep the patient alive, artificially low interest rates must stay alive. But Boyd, correctly in my view, said that continuing to pump money into the system and keeping rates low is akin to the following medical example: A farmer has his leg crushed by a heavy machine. When he enters the emergency room, he is told that the only way the bleeding can stop is to amputate his leg. But not having the heart to do it, the hospital keeps pumping blood into his body with the result that the patient eventually dies. In other words, our financial system will, given time, self destruct if the same artificial means of keeping our economy and banking system alive are continued. The energy system is in trouble because it is taking more and more capital to find the kind of major oil and gas supplies required to keep the economy growing, which is an absolute necessity to keep the sick financial system alive. Boyd pointed out that major oil companies are finding it impossible to keep levels of production up. They have taken on huge debt loads to explore but are now cutting back on exploration because they simply are not getting the returns on investment to justify those capital expenditures. The chart above illustrates the problem. As you can see, with higher oil prices, exploration expenditures have grown dramatically with very little increase in oil production. More and more often as the easy-to-find oil has been found and extracted, the amount of energy required to lift oil out of the ground is equal to or exceeds the value extracted.
So here is the problem. Energy was required to provide the standard of living we enjoy today. Energy production made possible economic growth, and the banks absent the gold standard were able to leverage up and make massive amounts of loans that were not based on real capital but on phony capital from fractional reserve banking. Banks provided financing in general to the economy and to the energy industry, and as long as oil could be extracted cheaply, the big oil companies could grow big profits and pay the loans.
But now, with the costs of lifting oil from the ground rising dramatically and with the financial system still in the emergency room, we are facing a moment of truth in which both the codependent financial and energy systems are about to croak. The financial system could go first, because it will die if the “blood transfusions” continue, and there is every indication that is what Jane Yellen intends to do. Although the implosion of our financial system is only a matter of time, it could quicken with the demise of the energy sector. First, Boyd noted that major oil companies are seeing their own balance sheets weaken and they are cutting back on exploration, and hence the future supply of oil is likely to stop growing, as indeed seems to already be the case in the chart above. A decline in supply would be expected to increase oil prices when the global economy remains very ill. That in turn would likely start to trigger more bad loans, which would send a financial system that is already on the edge of the abyss plummeting into the next major financial crisis.
Certainly with wars raging in various parts of the world where abundant supplies of oil and gas exist, further reductions of supplies might result. Moreover, sanctions placed against Russia are already starting to hurt profits of many companies. That might not only threaten the financial system by adding problem loans to the balance sheets of banks, but it could tip the already overvalued equity markets cascading downward, which in turn could cause margin clerks to begin calling in loans. In short it could trigger a domino effect in the financial markets.
The bottom line as far as I’m concerned is that I we are getting very close to a time when the existing propaganda machine may not be able to fool Wall Street much longer including the gold market. If important commentators on Wall Street start to see the gold market being manipulated on the downside, as Dennis Gartman seems to finally be acknowledging, the realities of Gibson’s Paradox may well be the catalyst to send financial assets lower and gold prices on to new highs.
“Regarding gold, of course it is strong: War is in the air and when war is in the air gold goes bid. What else can gold do? Capital is fleeing to the safe corners of the world, and when that happens it flees to gold. So we begin our discussion this morning noting this simple fact.
“We note secondly that this shall be an important day for gold and for gold's future, for whoever or whatever has been the seller of gold on Fridays in recent days, weeks, and months cannot allow gold to trade upward through $1,325 and certainly it cannot allow gold to trade upward through $1,350 for that would send an inflationary fright through all other markets in all other places.
“Hence -- and let's call this group The Force -- The Force will have to work very hard today to defend its authority. The question shall be: Will it?
“The Force has already lost one very important battle: it has lost the battle at E975/oz., with gold trading now at or near E982 and with the truly psychologically and technically important E1,000/oz. level only just a bit ahead.
“Once E1,000 is taken out -- and we think that it shall be, if not today, then next week if the geopolitical events unwind as badly as we fear they might -- then there is nothing that stems the advance until E1,100, noting that the peak for gold in euro terms was E1,350 back in late 2012.”
What’s remarkable about what Dennis said above is the use of the words “The Force,” meaning some mysterious manipulation process. Dennis has often scoffed at GATA, but it looks to me like he may be “coming around,” though I suspect he would never admit that or give GATA credit for being ahead of this most important manipulation story long before Gartman could ever believe it was true. Gibson’s Paradox requires gold to be suppressed to keep this fraudulent system from dying. But the death of the system is guaranteed, at which point, manipulation of the gold markets through Fed and bullion banks will be impossible.
Then what happens? If history is our guide, it means gold will rise to unbelievably high levels as the masses seek to rid themselves of the big lie they carry around in their pockets. But it will be like trying to manage the volume of water flowing over Niagara Falls through a garden hose. That’s why NOW is the time to buy gold and gold shares. As I have recently said, I have never seen a better time than now to buy gold and good quality gold shares, many of which are mentioned in this letter.
By the way, I would strongly suggest you watch Mr. Boyd’s speech talking of the energy and financial system codependence. Jay Taylor
Sentiment: Strong Buy
Björn Paffrath, a fund adviser, is so convinced we've seen bottom in the mining sector that he's launching a new gold/silver fund in Europe. A Gold Report interview. The Gold Report: Do you expect a broad market correction over the course of the next two years or so?
Björn Paffrath: Since the crisis in 2008, most of the well-known indexes, such as the Dow Jones Industrial Average or the German DAX, have almost doubled, and many individual companies have performed even better. Of course it is all liquidity driven, but it's at a level where we have to ask: Is it still justified or are we already in the next bubble?
On one side, indexes skyrocketed on the liquidity provided by the central banks. But interest rates and bond yields are so low that they are not keeping pace with inflation, so people put their excess cash in the stock market. And more money exited the underperforming mining sector as the general markets went up.
At some point we will have a painful correction of 30% or more. Maybe it started already, but it's tough to say because there is still a lot of liquidity in the market. There is a good chance that after the correction the bull market could run quite a bit longer. But we all know that we only bought time in Europe and the United States. A lot of Western countries have excessive debt. The painful end will definitely come at some point.
Outside events or black swans also could trigger it. Tension rises between Russia and the Ukraine almost daily now. In the Middle East there are uprisings in Turkey and Libya, Israel and Hamas are battling and there is a civil war in Syria. And Iraq is more and more lost to the IS-terrorists. Any of those events getting out of control could trigger further events on the market side.
TGR: Where should investors look for the first signs of problems?
BP: You have to first watch the U.S., then Europe and China. The U.S. made it out of the recession, but how sound is the foundation without the money that the U.S. Federal Reserve is pumping in? That money will probably stop this year, but my guess is that the Fed will find other opportunities to pump more money into the market. We have to watch the U.S. closely.
Europe came late to the bond-buying game and the peripheral countries—Spain, Portugal, Greece—are not in great financial shape. The Portuguese recently used bailout cash to shore up Banco Espirito Santo, and Greece will likely require a third bailout. Europe put a curtain on the debt crisis. Everybody is happy with the stock market, but we didn't solve any problems.
China, the future engine of the world, certainly of the mining industry, also has a problem. The central bank there recently warned about a real estate bubble. We never can really trust the economic numbers from China but if the Chinese volunteer information on some potential problems, we have to watch carefully. China could cause a lot of problems for the global economy.
TGR: How should investors plan ahead?
BP: Investors have to find a way to still participate in the buoyancy of the market, yet be hedged against trouble. How do you hedge yourself? If you made good money in stocks, you should buy a hedge like precious metals. It's insurance. You may lose a few percentage points a year but you sleep better knowing you have it. You have insurance for your house, your car. Why shouldn't you have insurance for your portfolio? Warren Buffett said: "Be greedy when others are fearful, and be fearful when others are greedy." We don't know where the Dow Jones or DAX will be in a year. At least take some of your big wins off the table and find a sector that is undervalued. In our case, that's mining.
TGR: You're a fund adviser based in Switzerland. Tell us about yourself.
BP: I am an adviser to Stabilitas GmbH, a group of resource funds in Germany. Also I consult to various Swiss or German portfolio managers on the institutional side with regard to mining investments. Smart money with deep pockets thought it is the right time now for investments into the mining sector, so we launched a new gold and silver equity fund for them in Lichtenstein. We plan to cap it at around $100 million ($100M) with a soft closing because we still want to play the junior and midtier stocks.
On top of that, we work with some wealthy private investors who look to invest not only in mining equities, but also in production streams. Therefore, we created a new loan fund to work with smaller companies to help them finance through to production. In most cases we have an 8–12% bond. Then we negotiate a royalty stream or financing fee for 10–15 years. Our money helps small companies with low share prices that can't raise sufficient funds in the equity market.Our latest investment is Inca One Resources Corp. (IO:TSX.V) in Peru.
I also write a subscriber-based newsletter called Cashkurs Gold, which mostly covers large-cap precious metals producers, $400–500M and up. Cashkurs roughly translates to "money direction." We educate mostly German and European retail investors on how the mining sector works and what constitutes a good investment. We also run a real portfolio there.
TGR: In an interview prior to the 2014 Prospectors and Developers Association of Canada (PDAC) conference in Toronto, you said the junior mining market had bottomed. Where is it now?
BP: In 2012, and especially in 2013, we saw one or two good breakout months. We all thought that maybe that could be the turnaround, but it wasn't. The biggest difference this time is that the volumes are picking up. Volumes on the Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.MKT) are increasing and we know that people are bringing fresh capital back to the sector. It's not a lot but there is inflow. It might be traders or generalists seeking value in gold and silver stocks but I think we have seen the worst in the junior sector.
We focus on the small producers and near-term producers. Most of the exploration stocks still have liquidity problems. Last year, brokers and banks did a lot of bought deals. So money is still there and some people are taking advantage of undervalued assets.
TGR: Is that where the smart money is headed?
BP: It's still a small amount. The people who look for sector rotation see that the sector is beaten up. When we look at the long-term chart for the Philadelphia Gold/Silver Sector Index (XAU), there were buying opportunities in the early 2000s, and 2008, of course. We actually had a bottom-building phase here at similar levels. That means we really have a chance. Banks and other institutions, are investing into our new fund now in order to find the right investments. They want to get back into real assets; ultimately they know almost everything around us comes from mining. Before you own it, it's mined. So the smart money is starting to very carefully turn toward the mining sector. But if we combined the value of all the stocks in the Philadelphia Gold/Silver Sector Index and compared it to the market value of Apple Inc. (AAPL:NASDAQ), it's a tiny market. It doesn't need much capital to raise it 10–20%. Even this year we have seen nice gains already.
TGR: One of the common complaints among investors is that junior mining equities have little to no liquidity. How important is that?
BP: That is key. These companies need to have experienced management that earns the trust of investors and large institutions to fund their activities. Look at Detour Gold Corp. (DGC:TSX). It needed more and more money, but it is going to make it in the end. The latest quarter wasn't great, but that was expected.
If no one will give you more money, especially in the junior sector, someone will take you out or you will go in default and someone else will take your assets. The gold will still be in the ground. Liquidity is almost as important as management, geology and jurisdiction.
TGR: What's your pitch to investors?
BP: In general we tell people that mining is an important part of their lives. It's a great investment if you know how to play it, and if you do so at the right time.
We like gold and silver equities right now. That's why we launched a new gold and silver fund at what we believe is the bottom of the market. Even if the gold market drops a bit more, there are companies out there with all-in sustaining costs around or below $1,000 per ounce ($1,000/oz), which means they can still make good money and survive at $1,300/oz gold, and are well positioned if gold goes higher.
TGR: What are some gold and silver equities you're following?
BP: In the short run we like some large caps like Goldcorp Inc. (G:TSX; GG:NYSE), but we see the biggest potential in the junior market. We prefer the smaller producers that have been hammered down due to the market.
We like Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL), and Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT)and Lake Shore Gold Corp. (LSG:TSX) are some of our bigger positions.
Timmins had another great quarter. It recently fended off a move by Sentry Investments to take over the board. In my view, Sentry only wanted to sell it. CEO Bruce Bragagnolo did a fantastic job during that struggle. He does not come from a mining background but he runs that company better than most people I see in the mining industry. At around $2/share, Timmins either buys something else, which it needs, or gets taken out. On a pullback, it's a great buy, even if you only want to speculate on a takeout.
TGR: The rumor is that Argonaut Gold Inc. (AR:TSX) is going to make a bid for Timmins Gold. Your thoughts?
BP: I know the rumor, but I am not so sure about Argonaut, if I look at its stock price. Everybody's darling has fallen quite a bit. This may not be the right time for it. But of course there's a chance of a takeover by other companies. There are certainly a few sniffing around. In general, Timmins would be a nice fit at 120,000–130,000 ounces (120–130 Koz) gold annually. It would have to be a company where adding 120–130 Koz significantly increases its production profile and also the region has to make sense. Timmins probably can't lower its all-in costs much more but it has some healthy margins at the moment and even more if the gold price rises. Even at $1,300/oz gold, Timmins added another $11M to the cash balance last quarter. I think management is building up the cash to find a good takeover target itself; Timmins appears to be very selective, and that's probably because there are not many options out there that make sense.
TGR: You mentioned Lake Shore Gold. It's up 155% year-to-date. Is there any room left to climb?
BP: Good question. Maybe it's a little pricey right now, but it has some great assets. Lake Shore turned things around on the cost side at its Timmins West complex and now has free cash flow even after paying back some debt. It's sustainable at that level. It is building bullion and cash. President and CEO Anthony Makuch has done a great job. Of course, we were shareholders much earlier. You have to believe in management. It stumbled, but stood up and changed its course.
Lake Shore must eliminate its debt and it still has to prove in the next quarter and beyond that the expansions will continue to work. I would put it on a watch list and wait for a buying opportunity.
TGR: You mentioned that Inca One was the latest investment with your loan fund. Tell us more about that story.
BP: Years ago Dynacor Gold Mines Inc. (DNG:TSX) started the toll milling business in Peru because it is a country with a lot of high-grade ore and small miners who need a processor for that. We own Dynacore and like it a lot. It's a good model, if you have the right people and connections. We were looking for the next play there and came across Inca One. We liked the management—CEO Ed Kelly, COO George Moen. They are not mining people, but they found the right partners in Peru. We have been to Peru a couple of times to check everything out. We liked what we saw so we made sure it does not have to worry about any financing in the near term so that it can build the plant.
TGR: Inca One says it wants to be the processor of choice in Peru. Is there much competition?
BP: There are lots of small miners but Peru recently changed its laws because it lost a lot of revenue on gold that was being smuggled out of the country. Since then a lot of small processing plants were shut down by the military. We have followed the Inca One story for more than a year. We wanted to be involved, learn about the process and make sure our investment was sound. The business is about how you treat the miner—how quickly you process the ore, pay him back and what the discount is to the spot price. But first Inca One has to build a 300-ton-per-day (300 tpd) refinery. The company started with a pilot plant to make sure everything was formalized and that it had the right team. Hopefully, it is at 100 tpd by Q1/15. Once it's there, it should have no problem getting access to more capital. The stock already went up to $0.17/share but the price will follow operational performance. We're happy with what we see so far.
TGR: What are some other miners that you have positions in?
BP: We like to find sweet spots in the gold space. About six months ago we took a position in Caledonia Mining Corp. (CAL:TSX), which owns 49% of the Blanket gold mine in Zimbabwe. I met the management in London and I was convinced that these people were doing a great job. The stock was about $0.70/share with a great dividend, and nice, steady small gold production. Now, it is above $1/share. At some point we probably have to think about a sell but right now there is lots of room to grow, so we're quite happy.
TGR: There is incredible value across the junior gold and silver space. Why would you willingly take on exposure to Zimbabwe and Robert Mugabe's regime?
BP: As we listen to the company and checked out the setting of the mine and how it fully indigenized, we got a very good and positive feeling for the investment. It's one of the opportunities most of the people miss. We always like to learn, right? Also the mine brings a lot of value to the locals and it treats the miners very well. This mine helps the local community. We watch the company closely, but so far it always has delivered and that builds trust in the management.
TGR: What about some other smaller gold plays?
BP: With the recent success Osisko Mining Corp. CEO Sean Roosen had with the takeout by Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) and Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), Quebec's Abitibi region started getting more traction. We like Falco Resources Ltd. (FPC:TSX.V), with its huge project database. Also we think that a few big names bought into the stock through a transaction from QMX Gold Corp. (QMX:TSX.V), which had to sell a block of 7M Falco shares. A privately owned Ontario company took it. No names where disclosed, but I think we have a pretty good idea who is behind it. There's absolutely a chance this company could be taken out sooner than later. It's certainly a great buy at these levels.
Balmoral Resources Ltd. (BAR:TSX; BAMLF:OTCQX) President and CEO Darin Wagner is on the Falco board, too. Balmoral itself had a huge run. It was presenting in Europe at $0.50–0.60/share; now it is around $1.90. You never really lose money with Darin. I like him very much. He's not overpromising or underdelivering. He has a good nose for the right asset. The latest high-grade discoveries are very promising and also the nickel deposit was a nice add on. Let’s see how long the company will be around.
TGR: Parting thoughts?
BP: For an investor who looks for a good opportunity, the mining sector is the place to be. You have to have patience so that you don't get shaken out on the pullbacks, but I would be quite surprised if you are not making a lot of money in this sector within the next two or three years.
TGR: Thank you for your insights, Björn.
Sentiment: Strong Buy
Aug. 19--Despite a mutual agreement in principle between the market regulator and gold traders, a gold exchange will not start operating this year, say gold traders after a discussion yesterday.
The Stock Exchange of Thailand (SET) and seven gold futures dealers held a meeting on how to format a spot gold exchange market in accordance with their principles.
The seven dealers -- Globlex Holding Management, Classic Gold Futures, GT Gold Bullion, YLG Group, Ausiris, MTS Gold and Hua Seng Heng Commoditas -- control 90% of the country's gold trading market in terms of both physical gold and gold derivatives markets.
Gold Traders Association chairman Jitti Tangsithpakdi said even though each GTA member expected gold trading to decline without a local spot gold market, details about trading, the management structure of the exchange and regulation still required further study.
"Building a spot exchange is quite sensitive, so we need to be careful and seriously discuss the matter with all traders," he said.
Mr Jitti said it would take more than six months for an exchange to be ready for operation, but it is essential if Thailand wants to maintain its leading trading position in the region.
Thailand has had the world's fifth-largest gold futures board and been Asean's largest gold importer for two years now, but Singapore last year introduced an unofficial gold exchange that is gaining ground.
Early next month, the SET and the GTA will visit the Shanghai Gold Exchange, a non-profit and self-regulating exchange in China, following a recent visit by the gold traders to Hong Kong's century-old bullion exchange.
"The Hong Kong gold exchange is the largest bullion trading board in Asia-Pacific at 500 times Thailand's trading volume, so we can learn from them," said Mr Jitti.
SET president Kesara Manchusree said her bourse would design the initial model for the new exchange by adapting the operation and management structure of the advanced Chinese markets, but some details would be adjusted to fit Thailand's more liberal environment.
"We expect to see a clear structure for the gold exchange this year," she said, adding that the traders still had some conditions requiring approval from all stakeholders.
Mrs Kesara said the gold exchange was part of plans to develop the commodities and derivatives markets in terms of product variety and trading values.
The idea to set up a spot gold exchange in Thailand was initiated last year by the Bank of Thailand to regulate physical gold trading after it found discrepancies between spot market trades and the US-dollar value of transactions.
Sentiment: Strong Buy
Gold futures were little changed near the key $1,300-level on Tuesday, as investors continued to monitor the situation in Ukraine while awaiting U.S. data for further clues about the timing of future interest rate hikes.
On the Comex division of the New York Mercantile Exchange, gold for December delivery tacked on 0.08%, or $1.00, to trade at $1,300.30 a troy ounce during European morning hours.
Prices held in a narrow range between $1,298.20 and $1,301.50 an ounce.
A day earlier, gold futures shed 0.53%, or $6.90, to settle at $1,299.30 as U.S. stocks surged on the back of upbeat U.S. homebuilder confidence data and amid easing concerns over the conflict in eastern Ukraine.
Futures were likely to find support at $1,293.00, the low from August 15 and resistance at $1,316.50, the high from August 15.
Ukrainian Foreign Minister Pavlo Klimkin met Russian counterpart Sergei Lavrov for more than five hours of talks in Berlin on Monday, in hopes of reaching a ceasefire or a political solution to the four-month old conflict in eastern Ukraine.
Meanwhile, Russia said a dispute over its humanitarian aid convoy to Ukraine had been resolved.
Concerns over the conflict between Russia and Ukraine escalated last Friday after Ukraine’s military attacked and destroyed a number of armored vehicles that entered the country from Russia.
U.S. and European officials had previously warned that Moscow could use a humanitarian convoy as a pretext for an invasion.
Gold is often seen as a haven investment in times of geopolitical uncertainty.
Apart from geopolitics, investors were looking ahead to U.S. inflation data later in the day for further indications on the possible future path of monetary policy.
Later in the week, market players will be keeping a close eye on Wednesday''s release of minutes from the Federal Reserve''s July policy meeting as well as comments from the Fed''s three-day conference in Jackson Hole, Wyoming, which starts on Thursday.
The spotlight will be on Fed Chair Janet Yellen, who will speak on Friday in her first appearance at Jackson Hole as head of the U.S. central bank.
Also on the Comex, silver for September delivery dipped 0.06%, or 1.2 cents, to trade at $19.62 a troy ounce.
Elsewhere in metals trading, copper for September delivery inched up 0.25%, or 0.8 cents, to trade at $3.117 a pound.
Sentiment: Strong Buy
MOSCOW (AP) — Ukraine claimed Monday that rebels in the east of the country fired rockets and mortars on civilians trying to flee from the region's intense fighting.
"Many people were killed, among them women and children," Col. Andriy Lysenko, a spokesman for Ukraine's national security council, said at a briefing. He did not say how many people or vehicles were in the convoy.
The barrage took place between the towns of Svitlivka and Khrashchuvate, which lie on the main road leading from the besieged city of Luhansk to Russia. There were no immediate further details.
That road is likely the one that a convoy of Russian humanitarian aid would take if Ukraine allows it into the country.
The International Committee of the Red Cross, which is to take responsibility for the aid convoy when it enters Ukraine , has demanded security guarantees from all sides, including the rebels, for the mission. As of midday, there was no indication that the guarantees had been given.
Russia's foreign minister earlier said he expects the extensive humanitarian aid mission for eastern Ukraine to enter the country in the near future.
Speaking at news conference in Berlin, where he met a day earlier with his counterparts from Ukraine , France andGermany, Sergey Lavrov said Monday that all questions regarding the mission had been answered and that agreement had been reached with Ukraine and the ICRC. It was not clear if Lavrov was referring to the security guarantees.
The humanitarian aid convoy from Russia has been watched with suspicion by Ukraine and Western countries, who suggest it could be used to spirit in weapons for the separatists, who are gradually losing ground to Ukrainian forces.
Sentiment: Strong Buy
The Shanghai Gold Exchange plans to start bullion trading in the city’s free-trade zone on Sept. 26, according to three people with knowledge of the matter.
The people asked not to be identified because they aren’t authorized to speak to the media. Gu Wenshuo, a spokesman for the exchange, confirmed that the trading system is being tested, without giving further details.
Shanghai wants to become a regional bullion-trading hub, giving foreigners access to the world’s largest physical-gold market, Xu Luode, the exchange’s chairman, told a conference in Singapore in June.
The gold contract will be priced and settled in yuan and the infrastructure is in place for trading to start in the third quarter, Xu said in June. The zone will have a vault capable of holding 1,500 metric tons of gold, which can either be imported into China or be in transit to other markets, Xu said.
China is seeking to open up its bullion markets just as domestic demand weakens. Consumption contracted 19 percent in the first six months of the year, according to the China Gold Association. Bullion of 99.99 percent purity traded on the Shanghai Gold Exchange climbed 8.7 percent this year, damping demand which reached a record in 2013.
Sentiment: Strong Buy
Gold analysts and traders are bullish on the metal for the third-consecutive week, the longest run since February as geopolitical tensions continue to support the safe-haven demand. In addition, the weekly Bloomberg survey shows analysts are the most bullish in seven months after rockets were fired from Gaza before the 72-truce expired, and Ukraine reported it attacked a destroyed portion of a Russian military convoy entering Ukraine.
Klondex Mines reported strong second-quarter results, its first full quarter of operations. For the quarter, Klondex generated $7.4 million in free cash flow, setting it apart from both junior and senior peers, which have struggled to generate free cash flow at current gold prices. The company also reported earnings per share of $0.04 on record revenue generation. Analysts’ expect costs to decrease even further in the third and fourth quarters on lower mine-development costs and higher production from long stopes.
Midway Gold updated its mineral resources estimate at its Spring Valley project in Nevada, boosting gold grades by 20 percent to 0.55 grams per tonne. It also boosted total measured and indicated resource by 102 percent to 4.37 million ounces of gold. Barrick Gold has agreed to carry Midway to production in exchange for a 75-percent stake in the project. Similarly, True Gold received funding for up to $120 million from Franco Nevada and Sandstorm, which fully funds remaining development and construction at the Karma project in Burkina Faso.
Gold demand in China shrank in the second quarter as consumers in the largest global gold market purchased fewer bars, coins and jewelry amid a clampdown on corruption. For the three-month period ended June 30, China purchased 192.5 metric tonnes of gold, a 52-percent decrease from a year earlier. Fortunately, the decrease has been offset by the lack of physical gold exchange traded fund (ETF) liquidations. In India, official statistics show significant drops in consumption, which are questionable given the government has allowed multiple grey market participants to thrive.
Ernst & Young, in its latest quarterly report on mergers and acquisitions (M&As) for the mining sector, shows M&A activity subdued in the second quarter despite a strong deal pipeline and sizeable private capital funds sitting on the sidelines. The report highlights 112 deals worth $9.5 billion for the quarter, or a 21-percent decrease in deal volume from the previous quarter, 41 percent lower than the second quarter of 2013. Ernst & Young explained that commitment to capital discipline, together with lack of urgency given the lack of competition for assets, are reasons for the reduced deal volume.
Centamin reported second-quarter earnings that were nearly cut in half as a result of lower mine grade at its Sukari mine in Egypt. Earnings fell 49 percent to $32.6 million from a year earlier, while revenue fell 24 percent for the same period.
Oppenheimer’s analysts believe gold stocks can soar more than 40 percent from current levels. As the chart below shows, after underperforming gold since 2006, gold miners have begun to outperform as of late, breaking out from the long-term downtrend. Voicing similar comments was Dennis Gartman, highly respected and neutral gold market commentator. In his letter, Gartman asserts that the force keeping gold prices depressed may be well near defeat, leading a wave of big fund managers back into the sector.
Paul Singer, founder of the $24.8 billion Elliot Management Corp., said in a letter to investors dated July 28, that gold presents a “unique and not really very expensive” trading opportunity, anticipating a rise in gold prices on mounting inflation concerns. Not surprisingly, 13F reports published this week by all major hedge funds show John Paulson’s Paulson & Co., the largest investor in physical gold ETFs, held its stake over the period, while Soros Fund Management increased its exposure to gold miners.
Macquarie U.S. Economics research argues underlying inflation continues to be dependent on wage growth, which it expects to accelerate, consistent with reduced labor slack. According to its research, current wage growth dynamics appear comparable to the second half of 2004, a period soon followed by accelerating wage growth. With 10-year government bond yields setting yearly lows this week, any acceleration in wage growth and inflation would translate into substantial negative impacts to real yields, and a strong tailwind for gold prices.
A new PwC report shows the productivity of Australia’s open-pit mining equipment is so poor it only ranks above African mining. After peaking in 2007, Australia’s productivity has trended down consistently, and now sits behind North American, Asian and South American productivity levels.
Imperial Metals’ shareholders are considering a class action lawsuit against the company as a result of the disastrous tailings breach at its Mount Polley mine in British Columbia. Meanwhile, Alaska’s senior U.S. senator asked the U.S. Secretary of State to reiterate “concerns about large scale mining in British Columbia, which has the potential to adversely affect downstream fisheries and communities in Southeast Alaska.”
China and Russia, which are already making bi-lateral agreements to trade their currencies and bypass the U.S. dollar, are progressing to challenge the dollar hegemony in world trade. Interestingly, the two countries hold the smallest proportions of their total foreign-currency reserves in gold. This may explain why China, and especially Russia, have made significant investments to increase domestic gold production. Russia is likely to overcome Australia as the world’s second-largest producer of gold. The positive side is that gold produced will be purchased by their central banks and not released into the open market.
CEO and Chief Investment Officer
Sentiment: Strong Buy
I believe he is entitled to his opinion just like you are entitled to post your BS. But I am putting you back on ignore because you don't post anything of value as far as I can see, just #$%$ about what others post
Precious Metals Consolidate Before Fateful September
Friday August 15, 2014 15:22
Why could September be fateful for the precious metals complex? First, consider its history within the current secular bull market. The years 2005, 2007, 2009 and 2010 have seen very important breakouts in either or both Gold and gold stocks in the month of September. Conversely, September marked important peaks in 2008 as well as in each of the past three years! Currently, Gold and more so the gold miners are consolidating their recent gains just below very important resistance. This consolidation figures to end before the end of September which means September will produce another important inflection point.
Last week we noted that Gold has started to show strength against the stock market, commodities and notably foreign currencies. Bears expected Gold to decline below $1280 due to the rally in the greenback. Instead, Gold stabilized in part because of foreign buying. The following chart plots Gold and then Gold priced against the major currencies. The 200-day moving average is shown. Every plot is trading above its 200-day moving average. Take a careful look at these charts and you will notice how the character of the market has changed. These charts show the April 2013 crash followed by a decline to a new low. That final low was retested at the tail end of 2013. In every chart Gold had a strong rally to start 2014 and after a correction has worked its way back above its 200-day moving average which is no longer sloping down. The action of the past month has been critical. Gold kept its higher low intact and remained above its 200-day moving average.
The action in the stocks should prove more telling as they have led this bottoming process and remained well above their 200-day moving averages. We plot our Top 40 index with GDXJ in the chart below. Both indices remain entrenched in a consolidation. After Thursday’s decline the bias over the coming days could be down. There is also an obvious change of character in the trading of the miners. First, compare the recent peak to the previous peaks (March 2014 and August 2013). At both peaks GDXJ shed 20% within 10 trading days. GDXJ and the top 40 have consolidated for over one month yet haven’t declined more than 10%. In addition, the 200-day moving averages, which were sloping down and resistance in 2013 are now sloping up slightly and figure to provide support if need be.
As I indicated last week, we are positioned for a breakout. My only concern has been the weakness in Gold. However, it held $1280 and is showing increasing relative strength against currencies, equities and commodities. Meanwhile, the miners have remained in a tight consolidation for weeks. They are digesting huge gains in a bullish fashion. If this breakout occurs in September then it truly will be Old Turkey time. Then the key for us speculators and investors will be company selection much more so than trading. We invite you to learn more about our premium service in which we highlight the best junior companies and trade and invest a real portfolio for subscribers benefit.
Jordan Roy-Byrne, CMT
Gold prices have moved well up from solid losses seen in earlier trading, but are still trading below unchanged, as news reports have surfaced that a Russian convoy headed for Ukraine has been engaged by the Ukrainian military. Reports are sketchy but some said the Ukrainian military "eliminated" some of the Russian convoy. If this situation turns out to be serious, and it's too early to tell as of this writing, then gold prices will continue to move higher. December gold was last down $8 at $1,307.00.
By Jim Wyckoff,
Sentiment: Strong Buy
Friday August 15, 2014 3:32 AM
KAMENSK-SHAKHTINSKY, Russia (AP) — Russia let Ukrainian officials inspect an aid convoy on Friday and agreed to let the Red Cross distribute the aid around the rebel-held city of Luhansk, easing tensions and dispelling Ukrainian fears that the aid operation is a ruse to get military help to separatist rebels.
In violation of an earlier tentative agreement, Russia had sent the convoy of roughly 200 trucks to a border crossing under the control of pro-Russia separatists, raising the prospect that it could enter Ukraine without being inspected by Ukraine and the Red Cross. Ukraine vowed to use all means necessary to block the convoy in such a scenario, leading to fears of escalation in the conflict.
Adding to the tensions, a dozen Russian armored personnel carriers appeared early Friday near where the trucks were parked for the night, 28 kilometers (17 miles) from the border. Andriy Lysenko, a spokesman for Ukraine's security council, said some Russian military vehicles crossed into Ukraine — a charge Russia denied.
Despite mutual distrust, the two sides reached an agreement Friday morning, and 41 Ukrainian border guards and 18 customs officials began inspecting the Russian aid at the border crossing, defense officials in Kiev said in a statement. Sergei Astakhov, an assistant to the deputy head of Ukraine's border guard service, said Red Cross representatives would observe the inspections.
Both sides also said that the aid deliveries themselves would be carried out exclusively by the Red Cross.
Laurent Corbaz, the International Committee of the Red Cross' director of operations in Europe, described a tentative plan in which the trucks would enter Ukraine with a single Russian driver each — as opposed to the crew of several people currently in each truck — accompanied by a Red Cross worker. In line with Red Cross policy, there would be no military escort, he said.
Corbaz said the plan foresees the aid being delivered to a central point in rebel-held territory, then distributed through the region. It was unclear how long the operation might last, but "it's not going to be solved in one week," he said.
The details were still being negotiated by all sides, including the insurgents, Corbaz said in Kiev, and the Red Cross still had not received the security guarantees it needs to proceed.
The presence of aid distribution points in Luhansk and other rebel-held areas could have the effect of dampening the force of the assault by Ukrainian government troops.
The German and Russian foreign ministers discussed the possibility of declaring a truce to ensure the safety of the aid convoy, Russia said. In a telephone conversation, Frank-Walter Steinmeier and Sergey Lavrov also discussed broader efforts aimed at political settlement of the conflict.
German government spokesman Steffen Seibert said the Ukrainian accusation of Russian military vehicles crossing the border is very serious.
"It is very clear that if this report turns out to be true, Russia would be urgently called upon to withdraw these vehicles across its border at once," Seibert said.
Russia's Federal Security Service said in a statement that Russian forces are patrolling the border area, but denied that military vehicles have moved into Ukraine.
Meanwhile, Ukraine proceeded with its own aid operation in the Luhansk area. Trucks sent from the eastern city of Kharkiv were unloaded Friday morning at warehouses in the town of Starobilsk, where the goods will be sorted and transported further by the Red Cross. Starobilsk is about 100 kilometers (60 miles) north of Luhansk.
The aid missions from both Ukraine and Russia come as the eastern rebels appear to continue to lose ground against Ukrainian forces. According to a map released by Ukraine's security council on Friday, the city of Luhansk is now surrounded by Ukrainian forces. The map shows Donetsk, the largest rebel-held city, in a pocket cut off from the larger swath of rebel territory.
Jim Heintz and Peter Leonard in Kiev, Ukraine; Lynn Berry and Vladimir Isachenkov in Moscow and Geir Moulson in Berlin contributed to this report.
Sentiment: Strong Buy
NATO Boss Says Alliance Observed Russian Incursion
Friday August 14, 2014 10:28 AM
COPENHAGEN, Denmark (AP) — NATO secretary-general Anders Fogh Rasmussen says the alliance has observed a Russian "incursion" into Ukraine, which Russia denies.
During a visit to Copenhagen on Friday, Fogh Rasmussen told reporters: "I can confirm that last night we saw an incursion (into) Ukraine." Rasmussen did not give details of the alleged incursion but said "what we have seen last night is the continuation of what we have seen for some time."
Andriy Lysenko, a spokesman for Ukraine's security council, said some Russian military vehicles had crossed the border into Ukraine. Two British journalists said they saw Russian armored personnel carriers cross the border.
Russia's Federal Security Service said Russian forces are patrolling the border area but denied that military vehicles had moved into Ukraine.
Sentiment: Strong Buy
U.S. Retail Sales Disappoint. Again!
Good Day! . And a Tub Thumpin' Thursday to you! Geez Louise, I think I slept wrong the night before, because as yesterday went on, my neck and shoulder began to tighten up. Do the tighten up, everybody's doin' now. Hello, I'm Archie Bell and the Drells and we're from Houston Texas. Ahhh, remember that one? Do the tighten up. Anyway, what I'm saying is it is painful to just sit here and attempt to type! UGH! No worries, I'm not going to bag the Pfennig today because of some tightness and soreness in my neck and shoulder. But brother does it hurt, when I type! Doc, it hurts when I do this. Then don't do that!
It's hurting the euro to be associated with Eurozone GDP this morning. Specifically, German GDP, which for the 2nd QTR, printed negative. OUCH! Now that's going to leave a mark! Remember the other day when I told you that I thought that the reason the German GDP report was delayed in printing was because something was wrong? Well, I would think that German 2nd QTR GDP printing at a negative -.2%, would qualify as something wrong, eh? France's 2nd QTR GDP report was flat, so the euro had to get in bed with these two GDP reports and guess what happened? The euro got sold. once again.
The forecasts for German GDP did have it printing negative, but at -.1%, the negative -.2% was worse than expected and when that happens, the associated currency, which in this case is the euro, gets taken to the woodshed. Yesterday, after the rotten U.S. Retail Sales report (more on that later) the euro rallied all the way up to 1.3415. But just as fast as it rose, it fell back. I'm not sure what traders were doing there. But, it does show to go ya, that the euro still has the ability to rise quickly!
The dollar is mixed again this morning, with the Aussie dollar (A$), kiwi, loonie, franc and rupee all booking gains VS the dollar. Pound sterling, which got whacked yesterday after Bank of England (BOE) Gov. Carney commented that interest rates will not rise this year (another case of, see I told you!), is still spending time on the selling blocks this morning. I really think that the selling in pound sterling might be a bit overdone, but then the rise in the currency was quite significant and was all based on the belief that Carney would hike rates sooner than later.
Kiwi is pushing higher for the first time this week after a strong 2nd QTR Retail Sales report printed in New Zealand. The S. Korean Central Bank cut interest rates last night. This is a very illiquid currency, but I wanted to make note of the rate cut in Asia. And the Russian ruble finally saw some love overnight, getting back below 36 for the first time in a couple of weeks. I was reading James Grant's Interest Rate Observer, and while I can't quote him from the letter, I will say that he had kind things to say about values in Russia.
Well, two Asian "powers" reported some reserves data last night. Front and Center, China's Trade Surplus grew at a rapid pace in July to $47.3 Billion. Exports were very strong is an understatement, given they grew at a pace that was the fastest in 15 months! I would have to think that given the China's nearly $4 Trillion in reserves is waiting for something to do, and the economy seems to have troughed, that the People's Bank of China (PBOC) will begin to allow appreciation in the renminbi / yuan at a regular pace to the end of the year.
The other "Asian Power" to report reserves. India reported that their reserves have grown by 26 Billion this year, putting the total at an all-time high of $320 Billion. Given the fact that India's Current Account Deficit, which was at the center of attention last year, is really on 2% of GDP, and the reserves are strong, the rupee maybe can get back to rallying like it did the first 1/2- of this year.
Notice that I said, "Maybe"? Well, that's the way it has to be these days, folks. You see, fundamentals haven't been used exclusively since pre-2008. And Central Banks have taken the reins from the markets on the currencies, just like they did on stocks and bonds. It is believed by many people that the markets are bigger than any Central Bank. But not when that Central Bank has a printing press, like the one that former Fed Chairman, Big Ben Bernanke, reminded us that was in the Fed's possession. Of course that's using old terminology since money isn't really printed, for mass use like QE, any longer. It's simply an entry on a computer. Now, doesn't that make you feel better? HA!
That's right! An entry on a computer, and Billions are created. But what's behind them to support them, to guarantee the holder that the currency they hold won't lose purchasing power? Well, as Edwin Starr sang. Nothing, absolutely nothing, say it again! And since the U.S. Fed has made more computer entries in the past 6 years than anyone else, that should give you a nice warm and fuzzy about holding dollars, eh?
Sure the Eurozone is suffering through a recession, but that's all it is. The U.S. has been in a depression for 6 years, the officials just won't admit it! There are no soup lines like the ones in the "great depression", but that's no longer necessary. The Gov't mails checks, credit cards, or makes automatic deposit into accounts so they can pull the wool over our eyes, for when the Gov't is questioned about the economy, they can say, "There are no soup lines".
OK.. I had better stop there! This could have really become a Butler Patio discussion in a heartbeat, but see how the new "kinder, gentler, Chuck, is in the Pfennig? Yes, I've been successfully spayed and neutered. But every once in a while I have a reoccurrence of the former Chuck. HAHAHAHAHAHA! I'm just playing around here, I sure hope you didn't think I was serious!
The Norwegian krone is still garnering the love of traders 3 days after their CPI report stunned the crowds. To me, I think this is way overdue, for there's no reason the krone and the krona for that matter, should be dealing with the weakness they have this year. The euro has gained VS the dollar, what the heck was going on in Norway and Sweden, for they used to be able to run faster than the Big Dog euro.
There's been no follow up to the Chicken Little story that surfaced last week and I talked about, regarding the dropping of the Hong Kong Dollar / honkers peg to the dollar. I told you all when the honker was under so much pressure that the Hong Kong Monetary Authority (HKMA) had the firepower to defend the peg, and apparently they did so this time without major angst. The honker peg to the dollar will eventually fall, I truly believe that to be the case, but it wasn't time this time. But I have to say that I think those that are looking at this as an opportunity to buy honkers while the peg is still in place, thus limiting their downside exposure, and holding it for a drop of the peg, are quite astute to what I've been saying.
This reminds me of 12 years ago, when the rumors swirled daily about how China was going to drop their peg to the dollar. And there were writers and analysts that went out on a limb saying it was going to happen on "X", and then "X" came and went without any drop of the peg. 3 years later in July of 2005, when everyone had given up on the drop of the peg, The Chinese dropped the peg to the dollar, and moved to peg to a basket of currencies. (supposedly, Chuck thinks that the Chinese just manage the currency to the level they want and just use the basket of currencies as a "prop"). I kept telling people in 2002,& 2003, that it just wasn't time for the peg to be dropped yet. And now we have the honker peg. history may not repeat itself, but it does rhyme.
The price of Gold rose a bit yesterday after the rotten Retail Sales report in the U.S. But is down a couple of bucks this morning. Silver, Platinum and Palladium are all flat to up by pennies. So, basically flat this morning. I have more on Gold in the FWIW section today, which I found on Ed Steer's letter, so I won't get into Gold here.
Well, looky there! The BHI hit the Retail Sales bang on, now didn't it? For all of you who have missed class recently, I told you last week that the BHI suggested to me that the July Retail Sales for the U.S. would be disappointing. And that's exactly what we had! July Retail Sales printed at no growth, zero, zilch, nada, nothing, and so on, following a .2% gain in June. Uh-Oh. You don't think the lack of liquidity in the markets, is starting to rear its ugly head do you? That's a difficult call to make, so I won't go out on a limb and say it's a lack of liquidity that's already beginning to show up in the economy. But worry not, for the lack of liquidity is still on its way! Instead I would like to focus on this piece of data that a dear readers sent me yesterday.
The types of jobs lost the last 6 years paid nearly $62,000 per year, on average. The jobs gained during the past six years pay only about $47,000. That is a 23% shortfall that adds up to about $93 billion in lost wages per year - money not being spent because it vanished from the economy. Aye, aye, aye! YIKES! Heavens to Murgatroyd! And so on. That was reported on Yahoo Finance, should you want to make sure I have those numbers correct! HA!
The Yahoo Finance article also has this to say: "This is a pernicious problem that can't be easily fixed by policy prescriptions or Federal Reserve maneuvers. The Fed has said repeatedly it sees "slack in the economy", and the income shortfall could be a prime example of what the Fed means by "slack". Yet even the Fed continues to hold interest rates at super-low levels, it's not clear that would help boost pay or living standard for ordinary people."
You know the great economist: Henry Hazlitt said it best when he said that "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." Notice he says for "all groups". The ZIRP (zero interest rate policy) certainly hasn't helped "all groups" now has it?
But, let's get back to the Rot on the Vine in Retail Sales. This marks the 3rd Consecutive month of disappointing Retail Sales in the U.S. So, apparently, the weak Retail Sales reports in January & Feb were disappointing because of bad weather. So, what's the excuse now? There certainly is no "pent up demand" is there?
Before I head to the Big Finish, I have a funny for you, well, it was funny to me. Did you hear what the President in Ecuador said when he was questioned about Ecuador's exports of agricultural products to Russia? Here it is: "I want to immediately say that we don't need to get anybody's permission to sell products to friendly countries: as far as we know, Latin America isn't a part of the European Union."
That's right! You tell 'em!
For What It's Worth. While I surfing Ed Steer's letter this morning, I found something that I thought was interesting. He found it on Goldseek.com, and it's an interview of James Rickards, who is always a good read (I'm currently reading his book: The Death of Money) the interview was a video, so I had to take snippets from it.
So, when asked about The U.S. Gold Reserve, Rickards said, "The U.S. Gold Reserve has been leased out but has not left its vaults. The leased gold consists of certificates of title that have been hypothecated many times, creating a vast supply of imaginary Gold that is undeliverable.
If called for delivery, those certificates will be nullified by a bullion bank's claim of "force majeure" and settled with yesterday's now-much discounted cash price. The Gold exchange traded fund was essentially looted of 500 tonnes last year to smash the Gold Price down but this cannot be done again because that Gold is gone too. The Gold and the Gold Market are moving to Asia."
Chuck again. So, that's all scary stuff, and you might be wondering how James Rickards would know all this about the U.S.'s Gold holdings/ reserves. Well, he explains how connected he is to Washington, the Fed, the markets, and so on in his book: Currency Wars. In the end, of the interview, Rickards talks about owning physical Gold. Which plays well in the sandbox with what I'm always telling you!
To recap. The dollar is mixed again this morning, with the A$, kiwi, loonie, krone, and rupee among the few that are gaining VS the dollar. The euro leads the other side down as German GDP contracted in the 2nd QTR, more than expected, and France's was flat, so the 2 largest economies of the Eurozone printed weak GDP reports and the euro was taken to the woodshed. China reported their Trade Surplus for July, which was off the charts again, and Chuck thinks that the Chinese will get back to a more frequent appreciation of the renminbi to the end of the year.
Currencies today 8/14/14. American Style: A$ .9315, kiwi .8498, C$ .9175, euro 1.3375, sterling 1.6680, Swiss $1.1035, . European Style: rand 10.5620, krone 6.1465, SEK 6.8680, forint 233.50, zloty 3.1240, koruna 20.7990, RUB 35.93, yen 102.45, sing 1.2460, HKD 7.7510, INR 60.76, China 6.1545, pesos 13.11, BRL 2.2810, Dollar Index 81.54, Oil $97.33, 10-year 2.41%, Silver $19.88, Platinum $1,468.06, Palladium $880.50, and Gold. $1,310.17
That's it for today. Man this "thing" in my neck and shoulder is a pain! If it's not one thing it's another with me, eh? I sure wish that wasn't the case! The Allman Bros. are singing their song: Statesboro Blues on the IPod right now, and it seems very apropos to me. That's me. I woke up this morning, I had those Statesboro Blues. The Cardinals got out of Miami with a win (finally!) last night and return home where they had better wake up and realize there are only about 43 games left! Or they'll be hitting the golf courses in October. Have you seen the newest craze? The Ice bucket challenge? It's all to help ALS, which is fine, but I told Mike yesterday morning, it sure is better than the last craze where young kids were setting themselves on fire for giggles. Crazy! Glad that's something that Alex and his friends didn't try. I would like to think that they are smarter than that, but then I have these flashbacks to when I was his age, and the stuff I did. Lucky is the word for him and me! My second quarter dept. review went well yesterday, those things give me the willies going into them! Well, I just put the finishing touches on our newest product, it has gotten legal approval, and it's almost ready to be brought out of the bag. Are you ready for it? I gave you a hint in this month's Review & Focus. Be sure to stay tuned for our big announcement! And with that, I thinks it's time. I hope you have a Tub Thumpin' Thursday! Now, where's the ice pack I keep here?
Sentiment: Strong Buy
WILD you clearly have a reading comprehension problem.I have no suggestion as to a cure, but you certainly appear to want to give the three stooges competition for the stupidest statement made
Sentiment: Strong Buy
Global Policy Divergence - Really??
Wednesday August 13, 2014 12:40
Last week, European Central Bank (ECB) head Draghi talked about the de-coupling of the ECB and the Fed’s policies, of policy divergence. Lots of pundits have suggested the same. With due respect to their views, my analysis of the data suggests they are wrong. If you own dollars, the euro or gold, you might want to pay attention to this one.
What could possibly be wrong with conventional wisdom? It shouldn’t be a surprise that pundits merely regurgitate what others say. But why would Draghi join the fray? It turns out, he has a vested interest in the ‘policy divergence’ view, as promoting it might help to weaken the euro. If indeed the U.S. interest rate path is upward, while rates in the Eurozone stay lower for longer, it might justify a weaker euro.
So, sure enough, at first blush, they have a point:
The above chart compares the “2-year swap rates” for the U.S. dollar and euro. In essence, this chart shows the market expects short-term rates to be higher in the US than in the Eurozone over the next two years. It also shows that the gap has generally been widening in recent months.
But this only tells us part of the story. That’s because the above chart reflects nominal rates to be rising, but reflects nothing about real interest rates (i.e., interest net of inflation).
If we only looked at German 10-year real yields versus U.S. 10-year real yields, U.S. yields are higher. However, the Eurozone is more than just Germany (and the ECB’s mandate is to keep Eurozone inflation close to, but below 2%). Only Germany, France and Italy have inflation protected securities akin to the TIPS available in the U.S. that are commonly used to determine market expectations for real yields. As the Italian real yield line above suggests, a blend of Eurozone yields will be higher. On a real basis, Eurozone 10 year yields are higher than U.S. yields.
While looking at 10-year real yields is an interesting exercise, let’s take the discussion closer to the present where current prices are determined:
The chart above shows that real interest rates in the U.S. are not only lower than in the Eurozone, but also that the divergence has been growing in the opposite direction of nominal rates. The Eurozone is holding steady, whereas U.S. real rates are falling. Please also see our recent analysis on the course of the Fed (Fed Exit a Blue Pill?).
So what is it now? In this currency war, one might be excused for not recognizing who is the most dovish of them all. Basically, the market currently prices in that nominal interest rate hikes might indeed be coming. But our interpretation is also that inflation, at least in the short-term is higher in the U.S. than in the Eurozone. If inflation indeed is picking up and central banks stay put, they will be “behind the curve,” meaning real interest rates may continue to be negative for a very long time.
Now let me ask you this: is the U.S. or Eurozone more vulnerable to inflation? In the U.S., the banking system is much healthier than in the Eurozone. While Fed Chair Yellen preaches we can’t have inflation given the slack in the economy, former Fed Chair Volcker has said the inflationary experience of the 1970s had proven this argument wrong.
Contrast that with the Eurozone where many banks continue to be impaired. While policy makers work hard to improve the banking system there, the short of it is that – at least in our assessment – it will be much harder for inflation to gain a foothold.
Having said that, if we do get inflation to gain a foothold in the U.S., I have little doubt that it will also be exported to other regions in the world. However, our analysis suggests that inflation may have a much easier time to build in the U.S. than Eurozone.
So while pundits, experts, policy makers – you name it – jump on the bandwagon of a U.S. “exit” and “policy divergence”, we can’t join the fray:
• An environment where real interest rates are negative, and trending to be more negative, and where Fed Chair Yellen has indicted she will be slow in raising rates is not an “exit.” In our assessment, this is financial repression as far as the eye can see.
• We see real interest rates higher in the Eurozone than in the US for the foreseeable future, even as nominal rates might be diverging. Nominal rate increases make for good headlines, but might make for poor investment decisions.
In the introduction, we mention implications for the dollar, euro & gold. If real rates stay negative for an extended period, this may bode well for gold and poorly for the U.S. dollar. And while Draghi has had the upper hand in weakening the euro for a couple of weeks now, this streak may come to an end. If you haven’t done so, make sure you sign up for this free newsletter.
President and Chief Investment Officer,
Sentiment: Strong Buy
Gold and Silver - From Manipulation to Hyperinflation
Wednesday August 13, 2014 12:45
The precious metals are lynch pins. They are nagging and persistent counter-parties to money printing gone wild.
It's been this way for as long as commerce was semi-civilized. (Though given the amount of financial fraud, violence, and chaos in the world, the term "civilized" might need to be reconsidered)...
When prices began to fly, the point of no return will be long since passed.
I believe we are living in limbo at the moment. We've passed the point of return, but have yet to move into the next (collective) phase.
If you look at conservative (academic) standards and assessments of hyperinflation, money velocity is the only variable left; the last variable needed to push us over the dividing edge between a failed currency and outright collapse.
We have Debt GDP well north of 100%. That's always a part of each hyperinflation.
Real (GAAP-derived) accounting puts ($6 Trillion) deficits at least five times tax revenue in the U.S.
Most modern hyperinflations started with only 2x deficit revenue.
We have falling real gross national product (and GDP). (GNP is more accurate.)
Jobs, energy use, and real inflation are major (misery) indicators that we are in massive decline.
The only variable left to ignite is money velocity.
While it appears to be in massive decline - it's actually tough to gauge, given the decline in participation across the economy. In other words, money velocity has an underground component that cannot accurately be measured.
Hyperinflation is a process. It can play out over years. Based on the above, we are probably in it now, though the final collapse will happen overnight.
If we go back to 1980's methodology, inflation is well north of 8%.
Compound that figure over a few years, and we're talking about scary numbers - boiling water.
Everyone can see energy and food inflation.
Maybe college tuition and health care costs don't cut across a large enough cross section, but they are significant.
And of course, the Fed is now the major buyer of U.S. debt...
Not a week goes by without another nail in the dollar reserve coffin. Anywhere from 20 to 100 sovereign are officially moving away from the U.S. dollar.
And the drum-beats of war continue to echo an underlying currency conflict and race to debase.
I remember having a conversation with a very wealthy patient of mine sometime late last year.
He is/was a well-respected investor. Very much accustomed to people asking him for his opinion of economic/financial matters.
Most people want to know about stocks...
I never ask directly. I kind of know the answer.
Nonetheless, I am always probing, testing. I'm not supposed to know what the heck is going on.
He launched into an unsolicited mini-lecture about how everywhere you go in the world -people still look up to the U.S.
They want to be just like us. They would rather move here than stay where they are.
I get what he is saying. And it may be true - to a degree.
But it's changing. It has been changing. Most people are too distracted to see it.
He can't see it, because his world is better.
And the fact that it came from a person like him, at a time like now - with such confidence and conviction.
I remember thinking, "Wow. That's sobering."
One wonders: Could really be it?
By Dr. Jeff Lewis
Sentiment: Strong Buy