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Sprott Gold Report – Point of No Return SPONSOR: American Creek Resources $AMK.ca $TUD.ca $SII.ca $GTT.ca $AFF.ca $SEA.ca $SA $PVG.ca $AOT.ca

Posted by AGORACOM-Eric at 11:49 AM on Friday, March 20th, 2020

SPONSOR: American Creek owns a 20% Carried Interest to Production at the Treaty Creek Project in the Golden Triangle. 2019’s first hole averaged of 0.683 g/t Au over 780m in a vertical intercept. The Treaty Creek property is located in the same hydrothermal system as the Pretivm and Seabridge’s KSM deposits. Click Here For More Info

Credit Deflation and Gold

Gold and precious metals mining shares are casualties of panic selling across all financial markets. The scenario is similar to what happened in 2008 during the global financial crisis (GFC). When the general selling exhausted itself in late 2008, gold and mining shares delivered superior absolute and relative performance for the following three years. We believe that this pattern is likely to repeat following this sell-off.

While COVID-19 outbreak is grabbing the headlines, the far bigger story is the deflation of financial assets that it has triggered and the resulting loss of investment confidence. Markets that had been priced for perfection must now reckon with a likely recession, soaring fiscal deficits and the very real possibility of a sustained bear market.

In our opinion, even though the economy will recover from the downturn and the health scare will prove to be temporary, financial asset valuations are unlikely to return to pre-crash manic levels. In mid-February, the Wilshire 5000 Stock Index1 traded at approximately 145% to gross domestic product (GDP),2 its second highest level since 1950, and only slightly below the 2000 peak (see Figure 1). At this writing, the ratio has fallen to 114% (as of 3/17/2020), which is still very expensive by historical standards. Valuations are driven by investor psychology, leverage and the liquidity necessary to support leverage. All three may have been critically impaired for the near to intermediate term.

Figure 1. Total U.S. Corporate Equities and U.S. GDP (1950-2020)

Source: AdvisorPerspectives.com. Data as of 3/3/2020.

Gold Will Continue to Do its Job

If financial assets struggle, interest in gold is very likely to widen. Gold may have been caught up in the recent stampede for liquidity, but it has delivered good relative performance on a year-to-date basis; gold bullion is up 0.73% as of March 17, compared to -25.17% for the S&P 500 Index.3 The 12-month figures (as of 3/17/2020) are even more impressive: gold has returned 17.19% vs. -8.54% for the S&P 500.

On a peak-to-trough basis for the last few weeks, gold has declined roughly 12%. Other safe haven assets have experienced the same pressure. For example, the yield on 30-year U.S. Treasury bond rose from less than 1.0% to 1.5% in only a few days, a drawdown of more than 30%. What this shows is that quality assets will be sold by portfolio managers desperate to reduce leverage. Low-grade assets cannot be sold quickly enough to meet margin calls.

It was leverage that inflated valuations, not fundamental economic growth and strong year-over-year earnings. In fact, corporate pre-tax profits have been declining since Q3 2014. Figure 2 shows pretax profits on a quarterly basis since 2014.

Figure 2. U.S. Corporate Pre-Tax Profits Have Been Declining ($Billions)

Source: Federal Reserve Bank of St. Louis Economic Research. Data as of 3/16/2020. 

The illusion of earnings growth that has captivated investor psychology was achieved through share buybacks and increased leverage. Growth of earnings per share, not the same as profit growth, has been juiced by financial engineering. The same can be said for returns on financial assets. The amount and location of leverage within the economy and financial markets is opaque but may well have reached high tide for many years. A post-recession economic recovery will not necessarily, and does not have to, translate into strong returns from investing in financial assets.

Global Debt Has Increased +100% Since 2007

In popular thinking, the current U.S. administration, or the one that follows it, will pull every trick out of the bag to stimulate the economy. This belief will likely excite investors from time to time in anticipation of a rebound. Unfortunately, the financial markets are experiencing a deflationary bust that could spread to general economic activity. Public policy has all but exhausted the potential benefits of resorting to traditional monetary and fiscal solutions. The marginal benefit to economic growth from heaping on new layers of debt is capped by the law of diminishing returns, as shown by Figure 4 from Rosenberg Economics. Since 2007, global debt increased 110% vs. 46% for global GDP:

Figure 3. Global Debt vs. Global GDP ($ Trillions)

Source: Rosenberg Economics. Data as of 12/31/2019.

Central banks have few conventional tools remaining to combat credit deflation. An impotent response can be expected from new rounds of monetary stimulus, rate reductions or central bank balance sheet expansion. Global debt, public and private, measures 287% vs. global GDP ($244 trillion divided by $85 trillion). The debt burden will most assuredly grow, a post coronavirus rebound notwithstanding. The world’s debt structure is already incapable of withstanding even a minute rise in rates. More debt relative to GDP will only make matters worse. All that remains is currency destruction.

Gold has been rising for the past eighteen months side by side with a strong stock market and no inflation. Conventional wisdom said that wasn’t supposed to happen. As shown in Figure 4, gold has outperformed equities and bonds since 2000, the dawn of radical monetary experimentation by central bankers. We think gold has been sensing the endgame for Keynesian policy prescriptions, mainstream economic thinking and hyper-leveraged investment practices.

Figure 4. The Modern Era of Gold
Gold Bullion vs. Stocks, Bonds, Oil, USD (2000-2020)

For the period from 12/31/1999 to 3/16/2020, gold has provided posted an average annual return of 8.55%, compared to 5.44% for U.S. bonds, 4.44% for U.S. stocks, 0.57% for oil and -0.19% for the U.S. dollar. 

Source: Bloomberg. Period from 12/31/1999 –3/16/2020.4

Gold Miners are Poised to Perform

During the 1930s credit deflation, gold and gold mining stocks performed well in relative and absolute terms. When credit deflates, and counterparties cannot be trusted, gold is the ultimate safe asset. In the 1930s, the metal price rose, costs of producing gold declined and the miners generated strong earnings and paid handsome dividends. We believe that this is a sequence that will repeat.

At the moment, mining company valuations appear extraordinarily cheap. It is one of the few industries that will report solid year-over-year earnings gains for the remainder of this year and perhaps into the next. 

Buying low is never easy but now is the time to do it.

https://sprott.com/insights/sprott-gold-report-point-of-no-return/?

American Creek Resources $AMK.ca Reports Gold Equivalent Results for All Drill Holes at Treaty Creek $TUD.ca $SII.ca $GTT.ca $AFF.ca $SEA.ca $SA $PVG.ca $AOT.ca

Posted by AGORACOM-Eric at 9:38 AM on Wednesday, March 4th, 2020
  • P&E Mining Consultants Inc. Provides Drill Hole Spacing Recommendation for the 2020 Drill Plan
  • Calculations include credit for previously analyzed values for Cu and Ag
  • Newly discovered NE Extension within the 300 Horizon. The gold-only result of 1.27 gpt Au over a 252 metre (m) interval increased to 1.51 gpt AuEq, an increase of 18.9%.

Cardston, Alberta–(Newsfile Corp. – March 4, 2020) – American Creek Resources Ltd. (TSXV: AMK) (the “Company”) is pleased to announce the results of gold-equivalent (AuEq) calculations for all drilling completed at JV partner Tudor Gold’s (“Tudor”) flagship project Treaty Creek. These calculations include credit for previously analyzed values for Cu and Ag. Geological analysis and reinterpretation of all the drill holes to date exposed a new copper horizon (CS 600 horizon) as well as significant silver and copper mineralization throughout the Goldstorm system.

The strongest AuEq increase was seen in the newly discovered NE Extension within the 300 Horizon. The gold-only result of 1.27 gpt Au over a 252 metre (m) interval increased to 1.51 gpt AuEq (with 13.8 gpt Ag and 504 ppm Cu), an increase of 18.9%.

All drill holes at Goldstorm Zone had significant increases to the composite results when the AuEq values for the copper and silver mineralization were included however when the drill holes intersected the CS-600 Horizon, the copper values within this mineralized body had the greatest impact to an individual horizon with up to 79.8% increase to the AuEq value from a gold-only 0.39 gpt Au over 150m to 0.70 gpt AuEq over the same 150m interval.

P&E Mining Consultants Inc. were retained to assess all Goldstorm drill hole results and historical data in order to render an opinion as to the consistency of the gold mineralization as well to ascertain the recommended drill hole spacing that would be required to potentially derive an Indicated Mineral Resource and a Measured Mineral Resource. P&E Mining Consultants Inc. concluded the following:

Three dimensional continuity analyses of the Treaty Creek drill hole assay results were carried out for the Goldstorm Zone. The regional geological trend was used to guide the selection of horizontal, across-strike, and dip-plane directions during variogram fan analysis. Variogram fans were generated separately for Ag, Au, Cu, Pb, and Zn uncapped composite samples in each zone.

All modeled semi-variograms display a very low nugget effect, and display long range continuity down the plunge of the mineralization and along the regional strike of the deposits.

For the Goldstorm Zone, a drill spacing of 200 m is recommended for Indicated Mineral Resources, and 100 m for Measured Mineral Resources.”

Tudor’s goal is to design a diamond drill hole program that will fast-track the exploration program for 2020 with the objective to begin the Mineral Resource Estimate work as soon as possible.

Vice President of Project Development Ken Konkin P.Geo. comments: “We are very encouraged to see that the silver and copper mineralization has made an important impact to the AuEq results from our recent drilling as well as the historical drilling. The next step is to plan the drill hole program for the 2020 exploration season. We continue to work with our Mineral Resource Estimate geologists and engineers from P&E Mining Consultants to plan the drill hole program in order to optimize the drilling and to attempt to fast-track the exploration program for this coming drill season

Table l provides gold equivalent composites from the 2019 drilling and all historical drilling within the Goldstorm Zone. Table ll contains the drill data including collar location, depth of drill holes as well as the dip and azimuth for all drill hole.

TABLE l: Au Eq COMPOSITES GOLDSTORM ZONE

SectionHOLE IDFrom ToInterval (m) AuEq
g/t
Au
g/t
Ag
g/t
Cu
ppm
% increaseHorizon
107+00 NECB-17-291.20575.00573.800.3210.2780.922415.5%300
107+00 NECB-17-2960.50333.50273.000.4350.3921.119711.0%300
107+00 NECB-17-2960.50176.00115.500.7280.6851.91426.3%300
107+00 NECB-18-32196.50783.50587.000.5420.4971.61779.1%300 + CS600
107+00 NECB-18-32196.50316.50120.001.0821.0451.71063.5%300
107+00 NECB-18-34419.00711.50292.500.4990.4612.4638.2%300
107+00 NECB-18-34831.50897.5066.000.2900.2211.336131.2%CS600
108+00 NECB-17-0941.00545.00504.000.5490.4882.322512.5%300
108+00 NECB-17-0941.00200.00159.000.7820.7082.926110.5%300
108+00 NECB-17-123.00243.50240.500.8480.7972.61396.4%300
108+00 NECB-17-1233.00224.00191.000.9790.9233.01346.1%300
108+00 NECB-17-243.50563.00559.500.6180.5762.01217.3%300
108+00 NECB-17-2462.00275.00213.001.0180.9453.91807.7%300
108+00 NECB-17-243.50686.00682.500.5630.4981.828813.1%300
108+00 NECB-18-36659.50772.00112.500.4870.4541.8747.3%300
108+00 NECB-18-36659.50704.5045.000.7330.6882.7886.5%300
108+00 NECB-18-36682.00703.0021.001.1011.0354.6796.4%300
108+00 NECB-18-3820.50638.00617.500.4650.4291.31378.4%300
108+00 NECB-18-38248.50353.00104.500.7330.6393.436014.7%300
108+00 NECB-18-38468.50638.00169.500.6830.6591.1763.6%300
108+00 NEGS-19-4023.00350.00327.000.5010.4431.7225113.1%300
108+00 NEGS-19-4081.50127.0045.501.0600.9074.9263416.9%300
108+00 NEGS-19-4127.50353.00325.500.7240.5895.2548022.9%300
108+00 NEGS-19-4147.00146.0099.001.2521.0159.8380023.3%300
109+00 NECB-16-0388.00708.00620.000.5820.5341.52029.0%300
109+00 NECB-16-03112.00426.00314.000.7920.7332.22208.0%300
109+00 NECB-17-04152.10327.00174.900.8270.8031.0763.0%300
109+00 NECB-17-2712.50536.00523.500.6880.6401.61977.5%300
109+00 NECB-17-2712.50350.00337.500.8070.7582.01696.5%300
109+00 NECB-18-31404.00680.50276.500.5260.4941.41006.5%300
109+00 NECB-18-31481.00597.00116.000.7730.7321.81245.6%300
109+00 NECB-18-33B599.00623.0024.000.4350.3675.42218.5%300
109+00 NEGS-19-4368.00561.50493.500.6080.5661.361747.4%300 + CS600
109+00 NEGS-19-43141.50197.0055.501.0681.0052.622116.3%300
109+00 NEGS-19-43405.50561.50156.000.7850.7181.503259.3%CS600
109+00 NEGS-19-44101.00368.00267.000.8670.8073.301347.4%300
109+00 NEGS-19-44125.00275.00150.001.1431.0654.621517.3%300
109+00 NEGS-19-4544.00369.50325.500.7650.7191.911546.4%300
109+00 NEGS-19-4562.00278.00216.000.9470.9012.271225.1%300
109+00 NEGS-19-45105.00278.00173.001.0541.0002.631445.4%300
109+00 NEGS-19-4634.50628.50594.000.5500.5101.311657.8%300 + CS600
109+00 NEGS-19-46175.50337.50162.000.7780.7341.931356.0%300
109+00 NEGS-19-46564.00600.0036.001.4251.3281.125607.3%CS600
110+00 NECB-17-06182.50589.50407.000.7670.6753.136913.6%300
110+00 NECB-17-06222.00393.50171.500.9140.8143.737912.3%300
110+00 NECB-17-0799.50530.00430.500.6970.6252.429311.5%300
110+00 NECB-17-07162.50309.50147.001.1551.0284.945712.4%300
110+00 NECB-18-37B125.00819.50694.500.5020.4591.21969.4%300
110+00 NECB-18-37B300.50423.50123.001.0020.9442.02346.1%300
110+00 NECB-18-37B125.00912.00787.000.4730.4271.221210.8%300 + CS600
110+00 NEGS-19-50148.00725.50577.500.6810.6021.9937213.1%300 + CS600
110+00 NEGS-19-50160.00427.00267.000.8780.8112.673008.3%300
110+00 NEGS-19-50652.00736.0084.000.8160.5712.53144442.9%CS600
110+00 NEGS-19-51119.00365.00246.000.7770.7222.311877.6%300
110+00 NEGS-19-51578.00618.5040.501.3041.0192.94169328.0%CS600
110+00 NEGS-19-53108.00255.00147.001.0360.9843.07985.3%300
111+00 NECB-18-39141.50705.30563.801.0860.9814.435210.7%300
111+00 NECB-18-39141.50422.00280.501.2741.1415.544911.7%300
111+00 NECB-18-39539.00695.00156.001.2471.1544.62578.1%300
111+00 NEGS-19-4897.501024.50927.000.7930.6773.0054317.1%300 + CS600
111+00 NEGS-19-4897.50426.00328.501.1521.0484.303549.9%300
111+00 NEGS-19-48871.50940.5069.001.4830.9373.90336458.3%CS600
111+00 NEGS-19-4981.00907.50826.500.8000.6963.4042914.9%300 + CS600
111+00 NEGS-19-4981.00330.00249.001.0800.9985.101378.2%300
111+00 NEGS-19-49483.00606.00123.001.0420.9411.8053810.7%300
111+00 NEGS-19-49747.00832.5085.501.4941.06710.50203540.0%CS600
111+00 NEGS-19-5262.00663.50601.500.7830.6683.2551317.2%300 + CS600
111+00 NEGS-19-5262.00398.00336.001.0621.0042.651825.8%300
111+00 NEGS-19-52513.50663.50150.000.7030.3916.49158379.8%CS600
112+50 NEGS-19-4263.50843.50780.000.8490.6835.8065024.3%300 + CS600
112+50 NEGS-19-4263.50434.00370.501.2751.09710.0039316.2%300
112+50 NEGS-19-4263.50315.50252.001.5081.26813.8050418.9%300
112+50 NEGS-19-42717.70843.50125.800.9020.5223.80225372.8%CS600
114+00 NEGS-19-47117.501199.001081.500.6970.5893.4045018.3%300 + CS600 + DS
114+00 NEGS-19-47200.00501.50301.500.8670.8282.10964.7%300
114+00 NEGS-19-47665.00816.50151.501.0090.5728.90222876.4%CS600
114+00 NEGS-19-47933.501176.50243.000.9960.9084.802079.7%DS

* All assay grades are uncut and intervals reflect drilled intercept lengths. True widths have not been determined as the mineralized body remains open in all directions. Further drilling is required to determine the mineralized body orientation and true widths.

HQ and NQ2 diameter core samples were sawn in half and typically sampled at standard 1.5m intervals.

**Metal prices used to calculate the AuEq metal content are: Gold $1322/oz, Ag: $15.91/oz, Cu: $2.86/lb. All metals are reported in USD and calculations do not consider metal recoveries



TABLE ll: Goldstorm Zone Drill Hole Data

To view an enhanced version of Table II, please visit:
https://orders.newsfilecorp.com/files/682/53123_d9cc75b334875995_001full.jpg

The goal is to design a diamond drill hole program for the 2020 exploration program with the objective to begin the Mineral Resource Estimate work at the end of the 2020 field season. Tudor hopes to accomplish as much drilling needed to bring a Measured and Indicated Mineral Resource Estimate forward as quickly as possible.

Walter Storm, President and CEO, stated:These new gold equivalents are extremely encouraging as our technical team continues to take positive steps advancing Tudor Gold’s flagship Treaty Creek Au-Ag-Cu project. Furthermore we received good news from P&E Mining Consultants Inc. that the drill hole spacing required to derive a Measured Resource is 100 meters due to the homogenous nature of the AuEq composites obtained to-date. During the new few weeks, our geologist and engineers will continue to work with the geological model and begin to prepare the diamond drill hole proposal for 2020.”

The Treaty Creek Project is a Joint Venture with Tudor Gold owning 3/5th and acting as operator. American Creek and Teuton Resources each have a 1/5th interest in the project. American Creek and Teuton are both fully carried until such time as a Production Notice is issued, at which time they are required to contribute their respective 20% share of development costs. Until such time, Tudor is required to fund all exploration and development costs while both American Creek and Teuton have “free rides”.

QA/QC

Drill core samples were prepared at MSA Labs’ Preparation Laboratory in Terrace, BC and assayed at MSA Labs’ Geochemical Laboratory in Langley, BC. Analytical accuracy and precision are monitored by the submission of blanks, certified standards and duplicate samples inserted at regular intervals into the sample stream by Tudor Gold personnel. MSA Laboratories quality system complies with the requirements for the International Standards ISO 17025 and ISO 9001. MSA Labs is independent of the Company.

Qualified Person

The Qualified Person for this news release for the purposes of National Instrument 43-101 is the Company’s Vice President of Project Development, Ken Konkin, P.Geo. He has read and approved the scientific and technical information that forms the basis for the disclosure contained in this news release.

About American Creek

American Creek holds a strong portfolio of gold and silver properties in British Columbia. The portfolio includes three gold/silver properties in the heart of the Golden Triangle; the Treaty Creek and Electrum joint ventures with Walter Storm/Tudor, as well as the recently acquired 100% owned past producing Dunwell Mine. Other properties held throughout BC include the Gold Hill, Austruck-Bonanza, Ample Goldmax, Silver Side, and Glitter King.

For further information please contact Kelvin Burton at: Phone: 403 752-4040 or Email: [email protected] Information relating to the Company is available on its website at www.americancreek.com

Gold Projected to Beat the Market in 2020 SPONSOR: Labrador Gold $LAB.ca $RIO.ca $WHM.ca $SIC.ca $NXS.ca

Posted by AGORACOM-Eric at 3:47 PM on Thursday, February 13th, 2020

1.jpg (600×366)
  • Gold will outperform the S&P 500 Index in 2020. That’s one of several projections made by CLSA in its just-released “Global Surprises 2020” report.
  • The Hong Kong investment firm has an impressive track record when it comes to making market predictions—last year it had a 70 percent hit rate—so it may be prudent to take this one seriously.

CLSA’s head of research Shaun Cochran: “If investors are concerned about the role of liquidity in recent equity market strength… gold provides a hedge that could perform across multiple scenarios.”

Indeed, gold is one of the most liquid assets in the world with an average daily trading volume of more than $112 billion, according to the World Gold Council (WGC). That far exceeds the Dow Jones Industrial Average’s daily volume of approximately $23 billion.

The yellow metal, Cochran adds, can be particularly useful in an era of perpetually loose monetary policy: “[I]n the event that growth disappoints the market’s expectations, gold is positively leveraged to the inevitable policy response of lower rates and larger central bank balance sheets.”

As I’ve pointed out many times before, gold has traded inversely with government bond yields. The recent gold rally has largely been driven by the growing pool of negative-yielding government debt around the world, now standing at $13 trillion. Here in the U.S., the nominal yield on the 10-year Treasury has remained positive, but when adjusted for inflation, it’s recently turned negative, despite a strengthening economy. What’s more, the Federal Reserve’s balance sheet has begun to increase again. It now holds about 30 percent of outstanding Treasury debt, up from about 10 percent prior to the financial crisis.

2.png (600×374)

I can’t say whether gold will beat the S&P this year or next, but what I do know is that the yellow metal has been a wise long-term investment. For the 20-year period through the end of 2019, gold crushed the market two-to-one, returning 451.8 percent compared to the S&P’s 223.6 percent. That comes out to a compound annual growth rate (CAGR) of 8.78 percent for gold, 4.03 percent for the S&P.

Manufacturing Turnaround Has Begun

U.S. manufacturers started 2020 on stronger footing, a welcome turnaround after contracting for five straight months. January’s ISM manufacturing purchasing manager’s index (PMI) clocked in at 50.9, indicating slight growth. Up from 47.2 in December, this represents the biggest month-over-month jump since August 2013, when the PMI increased to 55.4 from 50.9 in July.

3.png (600×314)

This may also mark the end of the recent manufacturing bear market, prompted by the trade war between the U.S. and China. Although relations between the world’s two biggest superpowers remain strained, to say the least, we’ve seen improvements lately that hint at better days. Both sides signed a “Phase One” agreement in mid-January, and last week, China announced it would be cutting tariffs in half on as much as $75 billion of U.S.-imported products.

The coronavirus is a new development that has disrupted global trade, but there’s reason to be optimistic, as the PMI makes clear.

To read my full comments on the coronavirus, and its impact on Chinese and Hong Kong stocks, click here!

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

U.S. Global Investors, Inc. is an investment adviser registered with the Securities and Exchange Commission (“SEC”). This does not mean that we are sponsored, recommended, or approved by the SEC, or that our abilities or qualifications in any respect have been passed upon by the SEC or any officer of the SEC. This commentary should not be considered a solicitation or offering of any investment product. Certain materials in this commentary may contain dated information. The information provided was current at the time of publication.

SOURCE: By: Frank E. Holmes, Chairman/CEO/CIO of U.S. Global Investors, Inc.,

http://news.goldseek.com/USFunds/1581529365.php

CLIENT FEATURE: Sean Ryan Looking to Repeat Discovery Process with LabGold’s $LAB.ca Hopedale Project $RIO.ca $WHM.ca $SIC.ca $NXS.ca

Posted by AGORACOM-Eric at 1:16 PM on Friday, February 7th, 2020
This image has an empty alt attribute; its file name is LAB-square-logo-2.png

SPONSOR: Labrador Gold – Two successful gold explorers lead the way in the Labrador gold rush targeting the under-explored gold potential of the province. Exploration has already outlined district scale gold on two projects, including a 40km strike length of the Florence Lake greenstone belt, one of two greenstone belts covered by the Hopedale Project. Click Here for More Info

Labrador Gold: District Scale Discovery Potential

  • First stage drilling on selected targets in 2020 at Hopedale
  • Large under-explored properties, including the major portion of two greenstone belts
  • Potential for discovery of new gold district(s)
  • Experienced exploration success in finding gold deposits (>17 million oz)
  • First mover advantage
  • Results of aggressive initial exploration programs already indicate district scale gold targets

Hopedale Project Highlights:

  • Discovered a new gold showing north of the Thurber Dog gold occurrence, grab samples from which assayed between 1.67 and 8.26 g/t Au.
  • The Thurber Dog gold occurrence has assays in grab and channel samples from below detection up to 7.866 g/t Au, with 5 samples greater than 1 g/t Au and 16 samples assaying greater than 0.1 g/t Au.
  • The discovery extends the potential strike length of gold mineralization by approximately 500 metres along strike to the north.
  • The new showing occurs within a larger 3km trend of anomalous gold in rock and soil associated with the contact between mafic/ultramafic volcanic rocks and felsic volcanic rocks.

Exploration at Hopedale during 2020 will focus on determining the extent of the Thurber Dog mineralized trend. Such work would aim to fill in the gaps between showings over the three-kilometre strike length with sampling and VLF-EM surveys. LabGold also intends to carry out an initial drill program targeting prospective areas along this trend, including the new showing.

 The Hopedale property covers much of the Hunt River and Florence Lake greenstone belts that stretch over 80 km. The belts are typical of greenstone belts around the world but have been underexplored by comparison. Initial work by Labrador Gold during 2017 show gold anomalies in soils and lake sediments over a 3 kilometre section of the northern portion of the Florence Lake greenstone belt in the vicinity of the known Thurber Dog gold showing where grab samples assayed up to 7.8g/t gold. In addition, anomalous gold in soil and lake sediment samples occur over approximately 40 kilometres along the southern section of the greenstone belt (see news release dated January 25th 2018 for more details). Labrador Gold now controls approximately 57km strike length of the Florence Lake Greenstone Belt.

FULL DISCLOSURE: Labrador Gold is an advertising client of AGORA Internet Relations Corp.

No Way Out – Sprott Gold Report SPONSOR: Labrador Gold $LAB.ca $RIO.ca $WHM.ca $SIC.ca $NXS.ca

Posted by AGORACOM-Eric at 5:42 PM on Friday, January 31st, 2020
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SPONSOR: Labrador Gold – Two successful gold explorers lead the way in the Labrador gold rush targeting the under-explored gold potential of the province. Exploration has already outlined district scale gold on two projects, including a 40km strike length of the Florence Lake greenstone belt, one of two greenstone belts covered by the Hopedale Project. Click Here for More Info

  • We believe that there is a strong case to expect gold mining shares to outperform the metal in the years ahead…

On September 17, 2019, overnight repo rates spiked 121 basis points, climbing from 2.19% to 3.40%, providing yet another crucial buttress for the bullish rationale for gold. The spike signaled that the U.S. Federal Reserve (“Fed”) had lost control of the price of money. Without subsequent massive injections of liquidity by the Fed into the repo market, out of control, short-term interest rates would have undermined the leverage that underpins record financial asset valuations. Going forward, unless the Fed continues to expand its balance sheet, it risks a meltdown in equity and bond prices that could exceed the damage of the 2008 global financial crisis. Despite consensus expectations, there appears no escape from this treadmill.

The Fed must monetize deficits because non-U.S. investors are no longer absorbing the growing supply of U.S. debt. Ultra-low, short-term interest rates do not compensate foreign investors for the cost of hedging potential foreign currency (FX) losses (see Figure 1). The U.S. fiscal deficit is too high and the issuance of new U.S. treasuries is too great for the market to absorb at such low interest rates. In a free market, interest rates would rise, the economy would stall and financial asset valuations would decline sharply.

Figure 1. Treasury Issuance Goes Up, Foreign Purchases Go Down (2010-2019)

Source: Bloomberg. Data as of 12/31/2019.

The predicament facing monetary policy explains why central banks are buying gold in record quantities, as shown in Figure 2. It also explains the fourth quarter “melt-up” in the equity market, even with Q4 earnings that are likely to be flat to down versus a year ago (marking the second quarter in a row for lackluster results) and the weakest macroeconomic landscape since 2009 (as shown by Figure 3).

Figure 2. Central Banks Purchases of Gold are 12% Higher than Last Year

Source: World Gold Council; Metals Focus; Refinitiv GFMS. Data as of 9/30/2019.

Figure 3. The U.S. ISM PMI Index Indicates Economic Contraction

The U.S. ISM Manufacturing Purchasing Managers Index (PMI)1 ended the year at 47.2, indicating that the U.S. economy is in contraction territory (a reading above 50 indicates expansion, while a reading below 50 indicates contraction).

Source: Bloomberg. Data as of 12/31/2019.

Liquidity injections will result in more debt, both public and private sector, but not necessarily enhanced economic growth:

“As these forms of easing (i.e., interest rate cuts and QE [quantitative easing]) cease to work well and the problem of there being too much debt and non-debt liabilities (e.g., pension and healthcare liabilities) remains, the other forms of easing (most obviously currency depreciations and fiscal deficits that are monetized) will become increasingly likely …. [this] will reduce the value of money and real returns for creditors and will test how far creditors will let central banks go in providing negative real returns before moving into other assets [including gold].”

– Ray Dalio, Paradigm Shifts, Bridgewater Daily Observations, 7/15/2019

Gold Bullion and Miners Shine in 2019

Though overshadowed by the rip-roaring equity market, precious metals and related mining equities also had significant gains in 2019 (up 43.49%)2. Gold’s 18.31% rise last year was its strongest performance since 2016. More significantly, after two more years of range-bound trading, the metal closed out 2019 at its highest level since mid-2013, and within striking distance of $1,900/oz, the all-time high it reached in 2011.

The investment world has taken little notice. Despite gold’s strong performance, GDX3, the best ETF (exchange-traded fund) proxy for precious metals mining stocks, saw significant outflows over the year as shares outstanding declined from 502 million to 441 million (or 12%) over the twelve months, despite posting a 39.73% gain, well ahead of the 31.49% total return for the S&P 500 Total Return Index.4 We believe that there is a strong case to expect gold mining shares to outperform the metal in the years ahead…

It has been our long-held view that until mainstream investment strategies run aground, interest in precious metals will continue to simmer on low, notwithstanding the likelihood that 2020 may be another very good year for the precious metals complex. The many reasons why mainstream investment strategies could unravel are not difficult to imagine. They include the emergence of meaningful inflation, further slippage of the U.S. dollar’s nearly exclusive reserve currency status, and market-driven interest rate increases or a recession. Any or all of these could disrupt the continued expansion of the Fed’s balance sheet, triggering a rapid reversal in financial asset valuations. Each possibility deserves a more complete discussion than space here allows, but evidence strongly suggests that none can be ruled out. While timing the zenith in complacency is risky, we feel confident that a reversal of fortune for high financial asset valuations awaits unsuspecting investors sooner than they expect.

We are even more confident that a bear market will generate far broader investment interest in gold. Considering that institutional exposure to gold and related mining stocks hovers near multi-decade lows, the slightest uptick could easily drive the metal and related precious metals mining shares to historic highs. Today, the aggregate market capitalization of precious metals equity shares is $400 billion, an insignificant speck on the current market landscape.

Investors outflows from precious metals mining stocks in 2019, even as gold rose 18.31%, suggests skepticism that the current rally is sustainable — perhaps hardened by the wounds of years of middling performance. Contrarian analysis would regard such bearishness as grounds to be very bullish. In our opinion, investors have overlooked that the 2019 rise in gold prices has restored financial health to sector balance sheets, earnings and cash flow. Gold stocks offer both relative and absolute fundamental value and growth potential that compares very favorably to conventional investment strategies

We believe that there is a strong case to expect gold mining shares to outperform the metal in the years ahead by a substantially wider margin than they outperformed in 2019. With continued advances in precious metals prices, the return potential from these still unloved orphans and pariahs of the investment universe should prove to be very compelling.

SOURCE:https://www.sprott.com/insights/sprott-gold-report-no-way-out/ 

Gold Market Update SPONSOR: Labrador Gold $LAB.ca $RIO.ca $WHM.ca $SIC.ca $NXS.ca

Posted by AGORACOM-Eric at 11:58 AM on Wednesday, January 22nd, 2020
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SPONSOR: Labrador Gold – Two successful gold explorers lead the way in the Labrador gold rush targeting the under-explored gold potential of the province. Exploration has already outlined district scale gold on two projects, including a 40km strike length of the Florence Lake greenstone belt, one of two greenstone belts covered by the Hopedale Project. Click Here for More Info

At first glance gold looks like it may be about to advance out of a bull Flag, but there are a number of factors in play that we will examine which suggest that any near-term advance won’t get far before it turns and drops again, and that a longer period of consolidation and perhaps reaction is necessary before it makes significant further progress.

On the 6-month chart we can see how gold stabbed into a zone of strong resistance on the Iran crisis around the time Iran’s General was murdered, but after a couple of bearish looking candles with high upper shadows formed, it backed off into what many are taking to be a bull Flag.


The 10-year chart makes it plain why gold is vulnerable here to reacting back over the short to medium-term, because it has advanced deep into “enemy territory” – the broad band of heavy resistance approaching the 2011 highs, with a zone of particularly strong resistance right where it is now. It would be healthier and increase gold’s chances of breaking out to new highs if it now backed off into a trading range for a while to moderate what now looks like excessive bullishness.


Thus it remains a cause for concern (or it should be for gold bulls) to see gold’s latest COTs continuing to show high Commercial short and Large Spec long positions. Is it “going to be different this time”? – the latest Hedgers charts that we are now going to look at suggest not.

Click on chart to popup a larger, clearer version.


The COT chart only goes back a year. The Hedgers charts shown below, which are a form of COT chart, go back many years, and frankly, they look pretty scary.

We’ll start by looking at the Hedger’s chart that goes back to before the 2011 sector peak. On it we see that current Hedgers positions are at extremes that way exceed even those at the peak of the 2012 sucker rally, which was followed by the bulk of the decline in the bearmarket that followed. Does this mean that we are going to see another bearmarket like that – no it doesn’t, but it does mean that these positions will probably need to moderate before we see significant further gains.

Click on chart to popup a larger, clearer version.

Chart courtesy of sentimentrader.com


Looking at the Hedgers chart going way back to before the year 2000, we see that the current readings are record readings by a significant margin and obviously increase the risks of a sizeable reaction. We can speculate about what the reasons for a decline might be, one possibility being the sector getting dragged down by a stockmarket crash after its blowoff top, which may be imminent, as happened in 2008, since it remains to be seen whether investors will rush into the sector as a safe haven in the event of a market crash.

Click on chart to popup a larger, clearer version.

Chart courtesy of sentimentrader.com


Turning now to Precious Metals stocks, we see on its latest 10-year chart that GDX still looks like it is completing a giant Head-and-Shoulders bottom pattern. However, it is currently dithering just beneath resistance at the top of this base pattern, which means that it is vulnerable to backing off.


So, how then does gold stock sentiment look right now? As we can see on the 5-year chart for the Gold Miners’ Bullish Percent Index, bullishness towards the sector is now at a very high level, 84.6%, which makes it more likely that stocks will drop soon rather than rally, and what they could do of course is rally some to increase this level of bullishness still further, and then drop.


Does all this mean that investors in the sector should suddenly rush for the exits? No, it doesn’t, especially as the charts for many individual stocks across the sector look very bullish, and it may be that all that is needed is a cooling period of consolidation. However it does make sense to use Hedges at extremes, such as leveraged inverse ETFs and better still options as insurance, which have the advantage of providing protection for a very small capital outlay, a fine example being GLD Puts which are liquid with narrow spreads. We did this just ahead of the recent peak when Iran lobbed a volley of missiles at Iraq. We will not be selling our strongest gold and silver stocks, but instead look to buy more on dips.

SOURCE: https://www.clivemaund.com/gmu.php?art_id=68&date=2020-01-19

Gold’s Big Picture SPONSOR: Labrador Gold $LAB.ca $RIO.ca $WHM.ca $SIC.ca $NXS.ca

Posted by AGORACOM-Eric at 4:36 PM on Friday, January 17th, 2020
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SPONSOR: Labrador Gold – Two successful gold explorers lead the way in the Labrador gold rush targeting the under-explored gold potential of the province. Exploration has already outlined district scale gold on two projects, including a 40km strike length of the Florence Lake greenstone belt, one of two greenstone belts covered by the Hopedale Project. Click Here for More Info

From the HRA Journal: Issue 314

The fun doesn’t stop. Waves of liquidity continue to wash traders cares away. Even assassinations and war mongering generate little more than half day dips on Wall St. It seems nothing can get in the way of the bull rally that’s carrying all risk assets higher.

It feels like it could go on for a while, though I think the liquidity will have to keep coming to sustain it. By most readings, bullishness on Wall St is at levels that are rarely sustained for more than a few weeks. Some sort of correction on Wall St seems highly likely, and soon. Whether its substantial or just another blip on the way higher remains to be seen.

The resource sector, especially gold and silver stocks, have had their own rally. Our Santa Claus market was as good or better than Wall St’s for a change. And I don’t think its over yet. I think we’re in for the best Q1 we’ve seen for a few years. And we could be in for something better than that even. I increasingly see signs of a major rally developing in the gold space. It’s already been pretty good but I think a multi-quarter, or longer, move may be starting to take shape.

I usually spend time on all the metals in the first issue of the year. But, because the makings of this gold rally are complex and long in coming I decided to detail my reasoning. That ended up taking several pages so I’ll save talk on base metals and other markets for the next issue.

Eric Coffin
January 7, 2020

Gold’s Big Picture

“Après moi, le déluge“

No, I’m not writing about Louis IV, though there might be some appropriateness to the analogy, now that I think about it. The quote is famous, even though there’s no agreement on what it was supposed to mean. Most figure Louis was referring to the biblical flood, that all would be chaos once his reign ended.

The deluge I’m referring to isn’t water. It’s the flood of money the US Fed, and other central banks, continue to unleash to keep markets stable. Markets, especially stock markets, love liquidity. You can see the impact of the latest deluge, particularly the US Fed’s in the chart below that traces both the SPX index value and the level of a “Global Liquidity Proxy” (“GLP”) measuring fiscal/monetary tightness and weakness.

You can see the GLP moved lower in late 2018 as the Fed tightened and the impact that had on Wall St. Conversely, you can see the SPX running higher in the past couple of months as the US backed off rate increases, increased fiscal deficit expansion, and grew the Fed balance sheet through, mainly, repo market operations.

Wall St, and most other bourses, are loving these money flows. The Santa Claus rally discussed in the last issue continued to strengthen all the way to and through year end. As it turned out, the Fed either provided enough backstop in advance or the yearend repo issues were overstated. The repo market itself was calm going through year end and a lot of the short-term money offered by the Fed during that week wasn’t taken down.

Everything may have changed in the past couple of days with the dramatic increase in US-Iran tensions. I don’t know how big an issue that will be, since no one knows what form Iran’s retaliation will be or how much things will escalate. I DO think it’s potentially a big deal with very negative connotations, but it may take time to unfold. Someone at the Fed thought so too, as the past couple of days saw a return to large scale Fed lending in the repo market.

I’ve no doubt Iran will try and take revenge for the assassination of its most famous military commander by the US. But I don’t know what form it will take and if this means the US has drawn itself into the Mideast quagmire even more. I fear it has though. The US is already talking about adding 3,000 troops to its Mideast presence and they’re just warming up. Even larger scale attacks, if they happen, may not derail Wall St, but they’re certainly not a positive development at any level.

We know how stretched both market valuations and sentiment were before the Suleimani drone strike. The chart below shows a three-year trace of the “fear/greed index”. You can see that its hardly a stable reading. It flip flops often and extreme readings rarely hold for long. At last check, the reading was 94% bullish.

Sentiment almost never gets that bullish and, when it does, nothing good comes of it for bulls. A reading that close to 100% tells you we’re just about out of buyers. Whatever happens in and around Iran, I think a near term correction is inevitable. The only question is whether it’s a large one or not.

A rapid escalation in US-Iran tensions could certainly make a near term correction larger. If the flood of liquidity continues though, a correction could just be another waystation on the road to higher highs. There are a couple of other dangers Wall St still faces that I’ll touch on briefly at the end of this article. First however, lets move on to the main event for us-the gold market.

It wasn’t just the SPX enjoying a Santa rally this year. Gold experienced the rally we were hoping for that gold miner stocks seemed to be foretelling early last month. Gold’s been doing well since it bottomed at $1275 in June, but it didn’t feel that way during the long hiatus between the early September high and the current move. The gold price currently sits above September’s multi-year high, after breaching that high in the wake of the Baghdad drone strike. And the first retaliatory strike by Iran. Volatility will be very high for a while going forward.

I think we’ll see more multi-year highs going forward. I hate that the latest move higher is driven by geopolitics. Scary geopolitics and military confrontations mean people are dying. We don’t want to profit from misery. And we won’t anyway, if things get ugly enough in the Mideast to scare traders out of the market.

Geopolitical price moves almost always unwind quickly. I’d much prefer to see gold moving higher for macro reasons, not as a political safety trade. I expect more political/military inspired moves. As the Iran conflict unfolds. Make no mistake, Iran is NOT Iraq. Its army is far larger, better trained and better equipped than Iraq. This could get ugly.

The balance of this piece will deal with my macro argument for higher gold prices over an extended period. The geopolitical stuff will be layered on top of that for the next while and could strengthen both gold prices and the $US in risk-off trading. It should be viewed as a separate event from the argument laid out below.

What else is driving gold higher? In part, it was gold’s inverse relationship with the US Dollar. As you already know, I’m not a believer that “its all about the USD, all the time” when it comes to the gold market. That’s an over-simplification of a more complex relationship. It also discounts the idea of gold as its own asset class that trades for its own reasons.

If you look at the gold chart above, and the USD chart below it, its immediately apparent that there isn’t a constant negative correlation at play. Gold rallied during the summer at the same time the USD did and for the same reason; the world-wide explosion of negative real yields. Gold weakened a bit when yields reversed to the upside and the USD got a bit of traction, but things changed again at the start of December.

The USD turned lower and lost two percent during December. US bond yields were generally rising during the month and the market (right or wrong) was assuming economic growth was accelerating. So, neither of those items explains the USD weakness.

If gold was a “risk off” trade, you sure couldn’t see it in the way any other market was trading. So, is there another explanation for recent strength in the gold price, and what does it tell us about 2020 and, perhaps, beyond?

Well, I’ve got a theory. If I’m right, it could mean a bull run for gold has a long way to go.

Some of this theory will be no surprise to you because it does partially hinge on further USD weakness. There are long term structural reasons why the US currency should weaken. But there are also fluctuating sources of demand for USDs, particularly from offshore buyers and borrowers that transact in US currency. That can create enough demand to strengthen the US over long periods. We just went though one such period, but it looks like that may have come to an end, with more bearish forces to the USD reasserting themselves.

How did we get here? Let’s start with the big picture, displayed on the top chart on the next page. It gives a long-term view of US Federal deficits and the unemployment rate. Normally, these travel in tandem. Higher unemployment means more social spending and higher deficits. Government spending expands during recessions and contracts-or should- (as a percentage of GDP) during expansions. Classic Keynesian stuff.

You rarely see these two measures diverge. The two times they did significantly before, on the left side of the chart, was due to “wartime deficits” which acted (along with conscription) to stimulate the economy and drive down unemployment.

You can see the Korean and Vietnam war periods pointed out on the chart.

The current period stands out for the extreme size of the divergence. US unemployment rates are at multi decade lows and yet the fiscal deficit as a percentage of GDP keeps rising. There has never been a divergence this large and its due to get larger.

We know why this is. Big tax cuts combined with a budget that is mostly non-discretionary. And the US is 10 years into an economic expansion, however weak. Just think what this graph will look like the next time the US goes into recession.

We can assume US government deficits aren’t going to shrink any time soon (and I think we can, pun intended, take that to the bank). That leaves trade in goods to act as a counterbalance to the funding demand created by fiscal deficits.

The chart above makes it clear the US won’t get much help from international trade. The US trade balance has been getting increasingly negative for decades. It’s better recently, but unlikely to turn positive soon, and maybe not ever.

To be clear, this is not a bad thing in itself, notwithstanding the view from the White House. The relative strength of the US economy and the US Dollar and cheaper offshore production costs have driven the trade balance. It’s grown because Americans found they got more value buying abroad and the world was happy to help finance it. It’s not a bad thing, but not a US Dollar support either.

The more complete picture of currency/investment flows is given by changes in the Current Account. In simplified terms, the Current Account measures the difference between what a country produces and what it consumes. For example, if a country’s trade deficit increases, so does its current account deficit. If there are funds flowing in from overseas investments on the other hand, this decrease the Current Account deficit or increase the surplus.

The graph below summarizes quarterly changes in the US current account. You can see how the balance got increasingly negative in the mid 2000’s as both imports and foreign investment by US companies increased.

Not coincidentally, this same period leading up to the Financial Crisis included a sustained downtrend in the US Dollar Index. The USD index chart on the bottom of the next page shows the scale of that decline, from an index value of 120 at the start of 2002 all the way down to 73 in early 2008.

The current account deficit (and value of the USD) improved markedly up to the end of the Financial Crisis as money poured into the US as a safe haven and consumers cut back on imports. The current account deficit bas been relatively stable since then, running at about $100bn/quarter until it dipped a bit again last year.

Trade, funds flows and changes in money supply have the largest long-term impacts on currency values. When the US Fed ended QE and started tightening monetary conditions in 2014, the USD enjoyed a strong rally. The USD Index was back to 100 by early 2015 and stayed there until loosening monetary conditions-and lots of jawboning from Washington-led to pullback. Things reversed again and the USD maintained a mild uptrend from early 2018 until now.

There are still plenty of US Dollar bulls around, and their arguments have short-term merit. Yes, the US has higher real interest rates and somewhat higher growth. Both are important to relative currency valuations as I’ve said in the past. Longer term however, the “twin deficits” -fiscal and current account-should underpin the fundamental value of the currency.

Movements don’t happen overnight, especially when you’re talking about the worlds reserve currency that has the deepest and largest market supporting it. Changing the overall trend for the USD is like turning a supertanker. I think it’s happening though, and it has big potential implications for commodities, especially gold.

Dollar bulls will tell you the USD is the “cleanest shirt in the laundry hamper”, referring to the relative strength of the growth rate and interest rates compared to other major currencies. That’s true if we just look at those measures but definitely not true when we look at the longer term-fiscal and current account deficits.

In fact, the US has about the worst combined fiscal/current account deficit in the G7. The chart at the bottom of this page, from lynalden.com shows the 2018 values for Current Account and Trade balances for a number of major economies, as a percentage of their GDP. It’s not a handsome group.

Both the trade and current account deficits are negative for most of them. In terms of G7 economies, the US has the worst combined Current/Trade deficit at 6% of GDP annually. You may be surprised to note that the Current/Trade balance for the Euro zone is much better than the US, thanks to a large Trade surplus. Much of that is generated by Germany. Indeed, this chart explains Germanys defense of the Euro. It’s combined Trade/Current Account surplus is so large it’s currency would be skyrocketing if it still used the Deutschmark.

Because the current account deficit is cumulative, the overall international investment position of the US has continued to worsen. The US has gone from being an international creditor to an international debtor, and the scale if its debt keeps increasing. That means it’s getting harder every year to reverse the current account position as the US borrows ever more abroad to cover its trade and fiscal deficits. Interest outflows keep growing and investment inflows shrinking. Something has to give.

The US has to borrow overseas, as private domestic demand for Treasury bonds isn’t high enough to fund the twin deficits. In the past, whenever the US Dollar got too high, offshore demand for US government debt diminished. It’s not clear why. Maybe the higher dollar made raising enough foreign funds difficult, or perhaps buyers started worrying about the USD dropping after they bought when it got too expensive. Whatever the reason, foreign holdings of US Treasuries have been declining, forcing the US to find new, domestic, buyers.

Last year, the US Fed stopped its quantitative tightening program, due to concerns about Dollar liquidity. Then came the repo market. Since September, the Fed’s balance sheet has expanded by over $400 billion, mainly due to repo market transactions.

The Fed maintains this “isn’t QE” because these are very short duration transactions but, cumulatively, the total Fed balance sheet keeps expanding. The “QE/no QE” debate is just semantics.

What do these transactions look like? Mostly, its Primary Dealers, banks that also take part in Treasury auctions, in the repo market. The Fed buys bonds, usually Treasuries, from these banks and pays for them in newly printed Dollars. That injects money into the system, helps hold down interest rates in the repo market and, not coincidentally, effectively helps fund the US fiscal deficit. To put the series of transactions in their simplest form, the US is effectively monetizing its deficit with a lot of these transactions.

The chart below illustrates the problem for the Primary Dealer US banks. They’ve got to buy Treasuries when they’re auctioned-that is their commitment as Primary Dealers. They also need to hold minimum cash balances as a percentage of assets under Basel II bank regulations. Cash balances fell to the minimum mandated level by late 2019- the horizontal black line on the chart. That’s when the trouble started.

These banks are so stuffed with Treasuries that they didn’t have excess cash reserves to lend into the repo market. Hence the blow up back in September and the need for the Fed to inject cash by buying Treasuries. The point, however, is that this isn’t really a “repo market issue”, that’s just where it reared its head. It’s a “too many Treasuries and not enough buyers” problem.

It will be tough for the Treasury to attract more offshore buyers unless the USD weakens, or interest rates rise enough to make them irresistible. Or a big drop in the federal deficit reduces the supply of Treasuries itself.

I doubt we’ll see interest rates move up significantly. I don’t think the economy could handle it and it would be self-defeating anyway, as the government deficit would explode because of interest expenses. And that’s not even taking into account the fact that President Trump would be freaking out daily.

Based on recent history and political expediency, I’d say the odds of significant budget deficit reductions are slim and none. That’s especially true going into an election year. There’s just no way we’re going to see spending restraint or tax increases in the next couple of years. Indeed, the supply of Treasuries will keep growing even if the US economy grows too. If there is any sort of significant slowdown or recession the Federal deficit will explode and so will the new supply of Treasures. Not an easy fix.

Barring new haven demand for US Treasuries, odds are the Fed will have to keep sopping up excess supply. That means expanding its balance sheet and, in so doing, effectively increasing the US money supply.

That brings us (finally!) to the “money shot” chart that appears above. It compares changes in the size of the Fed balance sheet and the US Dollar Index. To make it readable and allow me to match the scales, I generated a chart that tracks annual percentage changes.

The chart shows a strong inverse correlation between changes in the size of the Fed balance sheet and the value of the USD. This is unsurprising as most transactions that expand the Fed balance sheet also expand the money supply.

It’s impossible to tell how long the repo market transactions will continue but, after three months, they aren’t feeling very “temporary”. To me, it increasingly looks like these market operations are “debt monetization in drag”.

I don’t know if that’s the Fed’s real intent or just a side effect. It doesn’t really matter if the funding and money printing continues at scale. Even if the repo market calms completely, the odds are good we see some sort of “new QE” start up. Whatever official reason is given for it; I think it will happen mainly to soak up the excess supply of Treasuries fiscal deficits are creating.

I don’t blame the FOMC if they’re being disingenuous about it. That’s their job after all. If you’re a central banker, the LAST thing you’re going to say is “our government is having trouble finding buyers for its debt”, especially if its true.

With no prospect of lower deficits and apparent continued reduction in offshore Treasury holdings, this could develop into long-term sustained trend. I don’t expect it to move in a straight line, markets never do. A severe escalation in Mideast tensions or the start of a serious recession could both generate safe-haven Treasury buying. Money flows from that would take the pressure off the Fed and would be US Dollar supportive too.

That said, it seems the US has reached the point where a substantial increase in its central bank’s balance sheet is inevitable. Both Japan and the Eurozone have gotten there before the Fed, but it looks like it won’t be immune.

The Eurozone at least has a “Twin surplus” to help cushion things. And Japan, considered a basket case economically, had an extremely deep pool of domestic savings (far deeper than the US) to draw on. Until very recently, Japan also ran massive Current Account surpluses thanks to decades of heavy investments overseas by Japanese entities. Those advantages allowed the ECB and especially the BoJ to massively expand their balance sheets without generating a huge run up in interest rates or currency collapse.

I don’t know how far the US Fed can expand its balance sheet before bond yields start getting away from it. I think pretty far though. Having the world’s reserve currency is a massive advantage. There is huge built in demand for US Dollars and US denominated debt. That gives the Fed some runway if it must keep buying US Treasuries.

Assuming a run on yields doesn’t spoil the party, continued balance sheet and money supply expansion should put increasing downward pressure on the US Dollar. I don’t know if we’ll see a move as large as the mid-2000s but a move down to the low 80s for the USD Index over the course of two or three years wouldn’t be surprising.

It won’t be a straight-line move. A recession could derail things, though the bear market on Wall St that would generate would support bullion. Currency markets tend to be self-correcting over extended periods. If the USD Index falls enough and there is a bump in US real interest rates offshore demand for Treasuries should increase again.

The bottom line is that this is, and will continue to be, a very dynamic system. Even so, I think we’ve reached a major inflection point for the US currency. The 2000s were pretty good for the gold market and gold stocks. We started from a much lower base of $300/oz on the gold price. Starting at a $1200-1300 base this time, I think a price above $2000/oz is a real possibility over the next year or two.

It’s not hard to extrapolate prices higher than that, but I’m not looking or hoping for those. I prefer to see a longer, steadier move that brings traders along rather than freaking them out.

This prediction isn’t a sure thing. Predictions never are. But I think the probabilities now favor an extended bull run in the gold price. Assuming stock markets don’t blow up (though I still expect that correction), gold stocks should put in a leveraged performance much more impressive than the bullion price itself.

There will be consolidations and corrections along the way, but I think there will be many gold explorers and developers that rack up share price gains in the hundreds of percent. That doesn’t mean buying blindly and never trading. We still need to adjust when a stock gets overweight and manage risk around major exploration campaigns. The last few weeks has been a lot more fun in the resource space. I don’t think the fun’s over yet. Enjoy the ride.

Like any good contrarian, a 10-year bull market makes me alert of signs of potential trouble. As noted at the start of this editorial, I’m expecting continues floods of liquidity. That may simply overwhelm everything else for a while and allow Wall St to keep rallying, come what may.

That said, a couple of data points recently got my attention. One is more of a sentiment indicator, seen in the chart below. More than one wag has joked that the Fed need only worry about Wall St, since the stock market is the economy now. Turns out there is more than a bit of truth to that.

The chart shows the US Leading Indicator reading with the level of the stock market (which is a component of the official Leading Indicator) removed. As you can see, without Wall St, the indicator implies zero growth going forward. I’m mainly showing it as evidence of just how surreal things have become.

The chart above is something to keep an eye on going forward. It shows weekly State unemployment claims for several major sectors of the economy. What’s interesting about this chart is that claims have been climbing rapidly over the past few weeks. Doubly interesting is that the increase in claims is broad, both within and across several sectors of the economy.

I take the monthly Non-Farm Payroll number less seriously than most, because it’s a backward-looking indicator. This move in unemployment claims looks increasingly like a trend though. It’s now at its highest level since the Financial Crisis.

It’s not in the danger zone-yet. But its climbing fast. We may need to start paying more attention to those payroll numbers. If the chart below isn’t a statistical fluke, we may start seeing negative surprises in the NFP soon. That won’t hurt the gold price either.

Source and Thanks: https://www.hraadvisory.com/golds-big-picture

Labrador Gold $LAB.ca Gold Market Update $RIO.ca $WHM.ca $SIC.ca $NXS.ca

Posted by AGORACOM-Eric at 4:33 PM on Monday, January 13th, 2020
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It has been a week of surprises since the last updates were posted. First, I had not expected Iran to retaliate following the murder of its top General by a US drone, but it did, despite the risks, as it was politically necessary to assuage the extreme anger of its population who demanded revenge. The next surprise was that Israel and the US did not use this retaliation as an excuse to bomb Iran back to the Stone Age, which is what they really want to do. As we know, the long-term goal of Israel and the US is to subjugate Iran, and they will not stop until they attain this goal, and so it goes on. It appears that there was a bit of theater involved in Iran’s retaliation, as it clandestinely signaled its intentions which allowed US forces to get out of harm’s way. Perhaps US forces did not then launch a blitzkrieg out of consideration for this courtesy.

Regardless of the muddled and unpredictable fundamental situation, which included the accidental downing of a passenger plane by Iranian defensive missile batteries, the charts allowed us to make a reasonably accurate prediction regarding what was likely to happen to the gold price. The call for a near-term top in the PM sector made on the site on Monday looked incorrect the following evening when gold suddenly surged about $35 on news of the retaliatory Iranian missile strike, but when it later became apparent that there were, strangely, no US troop casualties and no further action against Iran, gold and silver reversed dramatically and dropped quite hard as the tension then looked set to ease, at least over the short-term. Technically what happened is that gold pushed quite deep into heavy overhead resistance, becoming very overbought at a time when COTs were showing extreme readings, and was thus vulnerable to a sudden reversal. The action around this time illustrates an important point, which is that when gold rises due to sudden geopolitical developments, the gains tend not to stick – what really matters and is the big driver for gold at this time is the insane monetary expansion that is going on, which is being undertaken in a desperate attempt to postpone the systemic implosion that is baked in for as long as possible. As we have already observed in these updates in recent weeks, gold is already in a raging bullmarket against a wide variety of currencies, and it won’t be all that long before it’s in a raging bullmarket against the dollar too, as the Fed sets the stage for hyperinflation.

There are two big and compelling reasons for the US government to tank the dollar. One is that it makes US exporters more competitive, and the other is that it can use the mechanism of inflation to wipe clean its colossal debts, by paying them off in devalued coin, printing vast amounts of money to pay them off, in the process legally swindling the foolish creditors out of their dues. This is precisely what the Weimar Republic in Germany did in 1923 to eliminate the unfair reparations imposed by the Treaty of Versailles, which were unfair also because Germany didn’t start the 1st World War – it was tricked into it by the allies, because the British Empire was scared of Germany’s rising industrial and military might and wanted to destroy it, 100 plus years of propaganda lies about Germany being responsible for the 1st World War notwithstanding.

We’ll look at the dollar a little later. First we will review gold’s charts, starting with the 10-year chart.

On the 10-year chart we see that gold is now a bullmarket, even against the dollar, and is currently challenging the heavy resistance arising from the 2011 – 2013 top area. The second attack on this resistance in the space of few months got further because of the Iran crisis, and if this cools any more short-term, it will probably lead to gold settling into a trading range before it mounts a more successful attack on this resistance. A point to note here is that while the resistance up to the 2011 highs in the $1800 area looks like a major obstacle, it’s not such a big deal as many think, given the rate at which the dollar is now being debased.


This week it’s worth also taking a quick look at a 3-year chart for added perspective. This chart shows us that since the bullmarket started in mid-Summer, we have seen 3 sharp runups punctuated by 2 bull Flags. While the 2nd of these Flags targets the $1800 area, we have to factor in that gold now has much more overhanging supply to contend with than on the 1st runup, and this, coupled with quite extreme COT readings, inclines to the view that this will need to be worked off. Hence the interpretation that it will probably need to consolidate for a while before it makes significant further progress, although it obviously won’t if the US starts a serious bombing campaign against Iran. The Fed’s increasingly manic money printing will eventually drive it higher, of course


On the 6-month chart we can see the interesting price action around the Iran crisis over the past week or so. A bearish “shooting star” appeared on the chart last Monday, which we took as a sign that gold was forming a short-term top, but then overnight on the 7th to the 8th it surged briefly above $1610 when Iran lobbed missiles at US bases in Iraq, which had many concluding, not unnaturally that this would trigger a major Israel – US bombing campaign. When it became apparent that there were no casualties from the Iranian attack and no US counter strike, tensions quickly cooled and gold lost ground fast the next day, putting in a big high-volume reversal candle, approximating to another “shooting star”. Normally such action is followed by a retreat at least for a while, and some stocks, like silver stock Coeur Mining (CDE), that we ditched a while ago, got clobbered. This is why gold is expected to settle down into a trading range for a while before mounting another attack on the resistance.


Another factor suggesting that gold will consolidate / react back for a while is the latest COT, which shows still very high Commercial short and Large Spec long positions…

Click on chart to popup a larger, clearer version.


What about Precious Metals stocks? The latest 10-year chart for GDX shows that we still have most everything to look forward to, for despite the rally from the middle of last year, it still hasn’t broken out of the giant complex Head-and-Shoulders bottom that has been formed since way back early in 2013. A breakout above the nearby resistance should lead to a rapid ascent to the next resistance level at the underside of a large top pattern, and thereafter it will have to work its way through continuing resistance up to its highs. The strength of the volume indicators in the recent past are a sign that it “means business”.


Now we turn our attention to the dollar, which is looking increasingly frail as we can see on the latest 6-year chart for the dollar index. It is rolling over beneath resistance and appears to be breaking down from the 16-month gentle uptrend shown. This is of course the main reason that gold, shown at the top of this chart, has been breaking higher again. If it fails to hold up here it could be targeting the lower boundary of the bullhorn pattern, which would involve a heavy drop from the current level that would “light a fire” under the Precious Metals, and many other commodities, notably copper.


A chart that really gives the game away and calls time on the dollar is the 6-year chart for dollar proxy UUP. As we can see, unlike the dollar index itself, this has risen up to the upper boundary of its giant bullhorn pattern and appears to be on the point of breaking down. Its Accumulation line has been very weak. This chart suggests that the dollar could be in for a very rough ride before long, which is hardly surprising considering the lengths to which the Federal Reserve is going to destroy it. While other countries and trading blocs, most notably the EU, are making a valiant attempt to destroy their own currencies, they will be hard put to keep up with the Fed.


And now, for the benefit of anyone who still doubts that gold is in a bullmarket, I have pleasure in presenting the following 6-year chart for gold against the Japanese Yen…


Still think gold might be in bearmarket? – no – didn’t think you would.

It’s always good to end on a positive note, and we’ll do so by looking at a stock with a supremely bullish setup, which we happened to buy right before it broke out about a week ago, and it may well have been our buying that triggered the breakout…


Although you can never be 100% sure of anything with these smaller issues, I am sure that you will agree with me that this chart is not suggestive of a sector that is going anywhere but up.

Conclusion: although last week’s reversal candle and the current rather extreme COT structure mean that gold may react back more near-term, the overall picture is strongly bullish, which is hardly surprising as the fiat money system is fast approaching its nemesis, with the line of least resistance leading to hyperinflation. Our general approach therefore is not to sell PM sector investments, except on a case by case basis where they become critically overbought, but instead buy or add to positions on dips.

https://www.clivemaund.com/gmu.php?art_id=68&date=2020-01-12

12-Year Breakout in Mining Stocks Relative to Gold – SPONSOR: Labrador Gold $LAB.ca – $RIO.ca $WHM.ca $SIC.ca $NXS.ca

Posted by AGORACOM-Eric at 3:34 PM on Friday, January 10th, 2020
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Excerpts from Crescat Capitals November Newsletter:

Precious Metals

Precious metals are poised to benefit from what we consider to be the best macro set up we’ve seen in our careers. The stars are all aligning. We believe strongly that this time monetary policy will come at a cost. Look in the chart below at how the new wave of global money printing just initiated by the Fed in response to the Treasury market funding crisis is highly likely to pull depressed gold prices up with it.

The imbalance between historically depressed commodity prices relative to record overvalued US stocks remains at the core of our macro views. On the long side, we believe strongly commodities offer tremendous upside potential on many fronts. Precious metals remain our favorite. We view gold as the ultimate haven asset to likely outperform in an environment of either a downturn in the business cycle, rising global currency wars, implosion of fiat currencies backed by record indebted government, or even a full-blown inflationary set up. These scenarios are all possible. Our base case is that governments and central banks will keep their pedals to the metal to attempt to fend off credit implosion or to mop up after one has already occurred until inflation becomes a persistent problem.

The gold and silver mining industry is precisely where we see one of the greatest ways to express this investment thesis. These stocks have been in a severe bear market from 2011 to 2015 and have been formed a strong base over the last four years. They are offer and incredibly attractive deep-value opportunity and appear to be just starting to break out this year. We have done a deep dive in this sector and met with over 40 different management teams this year. Combining that work with our proprietary equity models, we are finding some of the greatest free-cash-flow growth and value opportunities in the market today unrivaled by any other industry. We have also found undervalued high-quality exploration assets that will make excellent buyout candidates.

We recently point out this 12-year breakout in mining stocks relative to gold now looks as solid as a rock. In our view, this is just the beginning of a major bull market for this entire industry. We encourage investors to consider our new Crescat Precious Metals SMA strategy which is performing extremely well this year.

Zero Discounting for Inflation Risk Today

With historic Federal debt relative to GDP and large deficits into the future as far as the eye can see, if the global financial markets cannot absorb the increase in Treasury debt, the Fed will be forced to monetize it even more. The problem is that the Fed’s panic money printing at this point in the economic cycle may hasten the unwinding of the imbalances it is so desperate to maintain because it has perversely fed the last-gasp melt up of speculation in already record over-valued and extended equity and corporate credit markets. It is reminiscent of when the Fed injected emergency cash into the repo market at the peak of the tech bubble at the end of 1999 to fend off a potential Y2K computer glitch that led to that market and business cycle top.
After 40 years of declining inflation expectations in the US, there is a major disconnect today between portfolio positioning, valuation, and economic reality. Too much of the investment world is long the “risk parity” trade to one degree or another, long stocks paired with leveraged long bonds, a strategy that has back-tested great over the last 40 years, but one that would be a disaster in a secular rising inflation environment.

With historic Federal debt relative to GDP and large deficits into the future as far as the eye can see, rising long-term inflation, and the hidden tax thereon, is the default, bi-partisan plan for the US government’s future funding regardless of who is in the White House and Congress after the 2020 elections. The market could start discounting this sooner rather than later.
The Fed’s excessive money printing may only reinforce the unraveling of financial asset imbalances today as it leads to rising inflation expectations and thereby a sell-off in today’s highly over-valued long duration assets including Treasury bonds and US equities, particularly insanely overvalued growth stocks. We believe we are in the vicinity of a major US stock market and business cycle peak.

Source:”Running Hot”

Courtesy of Crescat Capital: https://www.crescat.net/running-hot/

Thanks to

Kevin C. Smith, CFA
Chief Investment Officer

Tavi Costa
Portfolio Manager

Gold’s Outlook for 2020 – SPONSOR: American Creek Resources $AMK.ca $TUD.ca $SII.ca $GTT.ca $AFF.ca $SEA.ca $SA $PVG.ca $AOT.ca

Posted by AGORACOM-Eric at 2:20 PM on Friday, January 10th, 2020

This article is an overview of the economic conditions that will drive the gold price in 2020 and beyond. The turn of the credit cycle, the effect on government deficits and how they are to be financed are addressed.

In the absence of foreign demand for new US Treasuries and of a rise in the savings rate the US budget deficit can only be financed by monetary inflation. This is bound to lead to higher bond yields as the dollar’s falling purchasing power accelerates due to the sheer quantity of new dollars entering circulation. The relationship between rising bond yields and the gold price is also discussed.

It may turn out that the recent extraordinary events on Comex, with the expansion of open interest failing to suppress the gold price, are an early recognition in some quarters of the US Government’s debt trap.

The strains leading to a crisis for fiat currencies are emerging into plain sight.

Introduction

In 2019, priced in dollars gold rose 18.3% and silver by 15.1%. Or rather, and this is the more relevant way of putting it, priced in gold the dollar fell 15.5% and in silver 13%. This is because the story of 2019, as it will be in 2020, was of the re-emergence of fiat currency debasement. Particularly in the last quarter, the Fed began aggressively injecting new money into a surprisingly illiquid banking system through repurchase agreements, whereby banks’ reserves at the Fed are credited with cash loaned in return for T-bills and coupon-bearing Treasuries as collateral. Furthermore, the ECB restarted quantitative easing in November, and the Bank of Japan stands ready to ease policy further “if the momentum towards its 2% inflation target comes under threat” (Kuroda – 26 December).

The Bank of Japan is still buying bonds, but at a pace which is expected to fall beneath redemptions of its existing holdings. Therefore, we enter 2020 with money supply being expanded by two, possibly all three of the major western central banks. Besides liquidity problems, the central bankers’ nightmare is the threat that the global economy will slide into recession, though no one will confess it openly because it would be an admission of policy failure. And policy makers are also terrified that if bankers get wind of a declining economy, they will withdraw loan facilities from businesses and make things much worse.

Of the latter concern central banks have good cause. A combination of the turn of the credit cycle towards its regular crisis phase and Trump’s tariff war has already hit international trade badly, with exporting economies such as Germany already in recession and important trade indicators, such as the Baltic dry index collapsing. No doubt, President Trump’s most recent announcement that a trade deal with China is ready for signing is driven by an understanding in some quarters of the White House that over trade policy, Trump is turning out to be the turkey who voted for Christmas. But we have heard this story several times before: a forthcoming agreement announced only to be scrapped or suspended at the last moment.

The subject which will begin to dominate monetary policy in 2020 is who will fund escalating government deficits. At the moment it is on few investors’ radar, but it is bound to dawn on markets that a growing budget deficit in America will be financed almost entirely by monetary inflation, a funding policy equally adopted in other jurisdictions. Furthermore, Christine Lagarde, the new ECB president, has stated her desire for the ECB’s quantitative easing to be extended from government financing to financing environmental projects as well.

2020 is shaping up to be the year that all pretence of respect for money’s role as a store of value is abandoned in favour of using it as a means of government funding without raising taxes. 2020 will then be the year when currencies begin to be visibly trashed in the hands of their long-suffering users.

Gold in the context of distorted markets

At the core of current market distortions is a combination of interest rate suppression and banking regulation. It is unnecessary to belabour the point about interest rates, because minimal and even negative rates have demonstrably failed to stimulate anything other than asset prices into bubble territory. But there is a woeful lack of appreciation about the general direction of monetary policy and where it is headed.

The stated intention is the opposite of reality, which is not to rescue the economy: while important, from a bureaucrat’s point of view that is not the greatest priority. It is to ensure that governments are never short of funds. Inflationary financing guarantees the government will always be able to spend, and government-licenced banks exist to ensure the government always has access to credit.

Unbeknown to the public, the government licences the banks to conduct their business in a way which for an unlicensed organisation is legally fraudulent. The banks create credit or through their participation in QE they facilitate the creation of base money out of thin air which is added to their reserves. It transfers wealth from unsuspecting members of the public to the government, crony capitalists, financial speculators and consumers living beyond their means. The government conspires with its macroeconomists to supress the evidence of rising prices by manipulating the inflation statistics. So successful has this scheme of deception been, that by fuelling GDP, monetary debasement is presented as economic growth, with very few in financial mainstream understanding the deceit.

The government monopoly of issuing money, and through their regulators controlling the expansion of credit, was bound to lead to progressively greater abuse of monetary trust. And now, in this last credit cycle, the consumer who is also the producer has had his income and savings so depleted by continuing monetary debasement that he can no longer generate the taxes to balance his government’s books later in the credit cycle.

The problem is not new. America has not had a budget surplus since 2001. The last credit cycle in the run up to the Lehman crisis did not deliver a budget surplus, nor has the current cycle. Instead, following the Lehman crisis we saw a marked acceleration of monetary inflation, and Figure 2 shows how dollar fiat money has expanded above its long-term trend since then.

In recent years, the Fed’s attempt to return to monetary normality by reducing its balance sheet has failed miserably. After a brief pause, the fiat money quantity has begun to grow at a pace not seen since the immediate aftermath of the Lehman crisis itself and is back in record territory. Figure 1 is updated to 1 November, since when FMQ will have increased even more.

In order to communicate effectively the background for the relationship between gold and fiat currencies in 2020 it is necessary to put the situation as plainly as possible. We enter the new decade with the highest levels of monetary ignorance imaginable. It is a systemic issue of not realising the emperor has no clothes. Consequently, markets have probably become more distorted than we have ever seen in the recorded history of money and credit, as widespread negative interest rates and negative-yielding bonds attest. In our attempt to divine the future, it leaves us with two problems: assessing when the tension between wishful thinking in financial markets and market reality will crash the system, and the degree of chaos that will ensue.

The timing is impossible to predict with certainty because we cannot know the future. But, if the characteristics of past credit cycles are a guide, it will be marked with a financial and systemic crisis in one or more large banks. Liquidity strains suggest that event is close, even within months and possibly weeks. If so, banks will be bailed, of that we can be certain. It will require central banks to create yet more money, additional to that required to finance escalating government budget deficits. Monetary chaos promises to be greater than anything seen heretofore, and it will engulf all western welfare-dependent economies and those that trade with them.

We have established that between keeping governments financed, bailing out banks and perhaps investing in renewable green energy, the issuance of new money in 2020 will in all probability be unprecedented, greater than anything seen so far. It will lead to a feature of the crisis, which may have already started, and that is an increase in borrowing costs forced by markets onto central banks and their governments. The yield on 10-year US Treasuries is already on the rise, as shown in Figure 3.


Assuming no significant increase in the rate of savings and despite all attempts to suppress the evidence, the acceleration in the rate of monetary inflation will eventually lead to runaway increases in the general level of prices measured in dollars. As Milton Friedman put it, inflation [of prices] is always and everywhere a monetary phenomenon.

Through QE, central banks believe they can contain the cost of government funding by setting rates. What they do not seem to realise is that while to a borrower interest is a cost to set against income, to a lender it reflects time-preference, which is the difference between current possession, in this case of cash dollars, and possession at a future date. Unless and until the Fed realises and addresses the time preference problem, the dollar will lose purchasing power. Not only will it be sold in the foreign exchanges, but depositors will move to minimise their balances and creditors their ownership of debt.

If, as it appears in Figure 3, dollar bond yields are beginning a rising trend, the inexorable pull of time preference is already beginning to apply and further rises in bond yields will imperil government financing. The Congressional Budget Office assumes the average interest rate on debt held by the public will be 2.5% for the next three years, and that net interest in fiscal 2020 will be $390bn, being about 38% of the projected deficit of $1,008bn. Combining the additional consequences for government finances of a recession with higher bond yields than the CBO expects will be disastrous.

Clearly, in these circumstances the Fed will do everything in its power to stop markets setting the cost of government borrowing. But we have been here before. The similarities between the situation for the dollar today and the deterioration of British government finances in the early to mid-1970s are remarkable. They resulted in multiple funding crises and an eventual bail-out from the IMF. Except today there can be no IMF bail-out for the US and the dollar, because the bailor gets its currency from the bailee.

Nearly fifty years ago, in the UK gold rose from under £15 per ounce in 1970 to £80 in December 1974. The peak of the credit cycle was at the end of 1971, when the 10-year gilt yield to maturity was 7%. By December 1974, the stock market had crashed, a banking crisis had followed, price inflation was well into double figures and the 10-year gilt yield to maturity had risen to over 16%.

History rhymes, as they say. But for historians the parallels between the outlook for the dollar and US Treasury funding costs at the beginning of 2020, and what transpired for the British economy following the Barbour boom of 1970-71 are too close to ignore. It is the same background for the relationship between gold and fiat currencies for 2020 and the few years that follow.

Gold and rising interest rates

Received investment wisdom is that rising interest rates are bad for the gold price, because gold has no yield. Yet experience repeatedly contradicts it. Anyone who remembers investing in UK gilts at a 7% yield in December 1971 only to see prices collapse to a yield of over 16%, while gold rose from under £15 to £80 to the ounce over the three years following should attest otherwise.

Part of the error is to believe that gold has no yield. This is only true of gold held as cash and for non-monetary usage. As money, it is loaned and borrowed, just like any other form of money. Monetary gold has its own time preference, as do government currencies. In the absence of state intervention, time preferences for gold and government currencies are set by their respective users, bearing in mind the characteristics special to each. It is not a subject for simple arbitrage, selling gold and buying government money to gain the interest differential, because the spread reflects important differences which cannot be ignored. It is like shorting Swiss francs and buying dollars in the belief there is no currency risk.

The principal variable between the time preferences of gold and a government currency is the difference between an established form of money derived from the collective preferences of its users, for which there is no issuer risk, and state-issued currency which becomes an instrument of funding by means of its debasement.

The time preference of gold will obviously vary depending on lending risk, which is in addition to an originary rate, but it is considerably more stable than the time preference of a fiat currency. Gold’s interest rate stability is illustrated in Figure 4, which covers the period of the gold standard from the Bank Charter Act of 1844 to before the First World War, during which time the gold standard was properly implemented. With the exception of uncontrolled bank credit, sterling operated as a gold substitute.


Admittedly, due to problems created by the cycle of bank credit, these year-end values conceal some significant fluctuations, such as at the time of the Overend Gurney collapse in 1866 when borrowing rates spiked to 10%. The depression following the Barings crisis of 1890 stalled credit demand which is evident from the chart. However, wholesale borrowing rates, which were effectively the cost of borrowing in gold, were otherwise remarkably stable, varying between 2-3½%. Some of this variation can be ascribed to changing perceptions of general borrower risk and some to changes in industrial investment demand, related to the cycle of bank credit.

Compare this with dollar interest rates since 1971, when the dollar had suspended the remaining fig-leaf of gold backing, which is shown in Figure 5 for the decade following.


In February 1972 the Fed Funds rate was 3.29%, rising eventually to over 19% in January 1981. At the same time gold rose from $46 to a high of $843 at the morning fix on 21 January 1980. Taking gold’s originary interest rate as approximately 2% it required a 17% interest rate penalty to dissuade people from hoarding gold and to hold onto dollars instead.

In 1971, US Government debt stood at 35% of GDP and in 1981 it stood at 31%. The US Government ran a budget surplus over the decade sufficient to absorb the rising interest cost on its T-bill obligations and any new Treasury funding. America enters 2020 with a debt to GDP ratio of over 100%. Higher interest rates are therefore not a policy option and the US Government, and the dollar, are ensnared in a debt trap from which the dollar is unlikely to recover.

The seeds of the dollar’s destruction were sown over fifty years ago, when the London gold pool was formed, whereby central banks committed to help the US maintain the price at $35, being forced to do so because the US could no longer supress the gold price on its own. And with good reason: Figure 6 shows how the last fifty years have eroded the purchasing power of the four major currencies since the gold pool failed.

 

Over the last fifty years, the yen has lost over 92%, the dollar 97.6%, the euro (and its earlier components 98.2% and sterling the most at 98.7%. And now we are about to embark on the greatest increase of global monetary inflation ever seen.

The market for physical gold

In recent years, demand for physical gold has been strong. Chinese and Indian private sector buyers have to date respectively accumulated an estimated 17,000 tonnes (based on deliveries from Shanghai Gold Exchange vaults) and about 24,000 tonnes (according to WGC Director Somasundaram PR quoted in India’s Financial Express last May).

It is generally thought that higher prices for gold will deter future demand from these sources, with the vast bulk of it being categorised as simply jewellery. But this is a western view based on a belief in objective values for government currencies and subjective prices for gold. It ignores the fact that for Asians, it is gold that has the objective value. In Asia gold jewellery is acquired as a store of value to avoid the depreciation of government currency, hoarded as a central component of a family’s long-term wealth accumulation.

Therefore, there is no certainty higher prices will compromise Asian demand. Indeed, demand has not been undermined in India with the price rising from R300 to the ounce to over R100,000 today since the London gold pool failed, and that’s despite all the government disincentives and even bans from buying gold.

Additionally, since 2008 central banks have accumulated over 4,400 tonnes to increase their official reserves to 34,500 tonnes. The central banks most active in the gold market are Asian, and increasingly the East and Central Europeans.

There are two threads to this development. First there is a geopolitical element, with Russia replacing reserve dollars for gold, and China having deliberately moved to control global physical delivery markets. And second, there is evidence of concern amongst the Europeans that the dollar’s role as the reserve currency is either being compromised or no longer fit for a changed world. Furthermore, the rising power of Asia’s two hegemons continues to drive over two-thirds of the world’s population away from the dollar towards gold.

Goldmoney estimates there are roughly 180,000 tonnes of gold above ground, much of which cannot be categorised as monetary: monetary not as defined for the purposes of customs reporting, but in the wider sense to include all bars, coins and pure gold jewellery accumulated for its long-term wealth benefits through good and bad times. Annual mine production adds 3,000-3,500 tonnes, giving a stock to flow ratio of over 50 times. Put another way, the annual increase in the gold quantity is similar to the growth in the world’s population, imparting great stability as a medium of exchange.

These qualities stand in contrast to the increasingly certain acceleration of fiat currency debasement over the next few years. Anyone prepared to stand back from the financial coalface can easily see where the relationship between gold and fiat currencies is going. Most of the world’s population is moving away from the established fiat regime towards gold as a store of value, their own fiat currencies lacking sufficient credibility to act as a dollar alternative. And financial markets immersed in the fiat regime have very little physical gold in possession. Instead, where it is now perceived that there is a risk of missing out on a rise in the gold price, investors have begun accumulating in greater quantities the paper alternatives to physical gold: ETFs, futures, options, forward contracts and mining shares.

Paper markets

From the US Government’s point of view, gold as a rival to the dollar must be quashed, and the primary purpose of futures options and forwards is to expand artificial supply to keep the price from rising. In a wider context, the ability to print synthetic commodities out of thin air is a means of suppressing prices generally and we must not be distracted by claims that derivatives improve liquidity: they only improve liquidity at lower prices.

When the dollar price of gold found a major turning point on 17 December 2015, open interest on Comex stood at 393,000 contacts. The year-end figure today is nearly double that at 786,422 contracts, representing an increase of paper supply equivalent to 1,224 tonnes. But that is not all. Not only are there other regulated derivative exchanges with gold contracts, but also there are unregulated over the counter markets. According to the Bank for International Settlements from end-2015 unregulated OTC contracts (principally London forward contracts) expanded by the equivalent of 2,450 tonnes by last June, taken at contemporary prices. And we must not forget the unknown quantity of bank liabilities to customers’ unallocated accounts which probably involve an additional few thousand tonnes.

In recent months, the paper suppression regime has stepped up a gear, evidenced by Comex’s open interest rising. This is illustrated in Figure 7.


There are two notable features in the chart. First, the rising gold price has seen increasing paper supply, which we would expect from a market designed to keep a lid on prices. Secondly instead of declining with the gold price, open interest continued to rise following the price peak in early September while the gold price declined by about $100. This tells us that the price suppression scheme has run into trouble, with large buyers taking the opportunity to increase their positions at lower prices.

In the past, bullion banks have been able to put a lid on prices by creating Comex contracts out of thin air. The recent expansion of open interest has failed to achieve this objective, and it is worth noting that the quantity of gold in Comex vaults eligible for delivery and pledged is only 2% of the 2,446-tonne short position. In London, there are only 3,052 tonnes in LBMA vaults (excluding the Bank of England), which includes an unknown quantity of ETF and custodial gold. Physical liquidity for the forward market in London is therefore likely to be very small relative to forward deliveries. And of course, the bullion banks in London and elsewhare do not have the metal to cover their obligations to unallocated account holders, which is an additional consideration.

Clearly, there is not the gold available in the system to legitimise derivative paper. It now appears that paper gold markets could be drifting into systemic difficulties with bullion banks squeezed by a rising gold price, short positions and unallocated accounts.

There are mechanisms to counter these systemic risks, such as the ability to declare force majeure on Comex, and standard unallocated account contracts which permit a bullion bank to deliver cash equivalents to bullion obligations. But the triggering of any such escape from physical gold obligations could exacerbate a buying panic, driving prices even higher. It leads to the conclusion that any rescue of the bullion market system is destined to fail.

A two-step future for the gold price

It has been evident for some time that the world of fiat currencies has been drifting into ever greater difficulties of far greater magnitude than can be contained by spinning a few thousand tonnes of gold back and forth on Comex and in London. That appears to be the lesson to be drawn from the inability of a massive increase in open interest on Comex to contain a rising gold price.

It will take a substantial upward shift in the gold price to appraise western financial markets of this reality. In combination with systemic strains increasing, a gold price of over $2,000 may do the trick. Professional investors will have found themselves wrongfooted; underinvested in ETFs, gold mines and regulated derivatives, in which case their gold demand is likely to drive one or more bullion houses into considerable difficulties. We might call this the first step in a two-step monetary future.

The extent to which gold prices rise could be substantial, but assuming the immediate crisis itself passes, banks having been bailed in or out, and QE accelerated in an attempt to put a lid on government bond yields, then the gold price might be deemed to have risen too far, and due for a correction. But then there will be the prospect of an accelerating loss of purchasing power for fiat currencies as a result of the monetary inflation, and that will drive the second step as investors realise that what they are seeing is not a rising gold price but a fiat currency collapse.

The high levels of government debt today in the three major jurisdictions appear to almost guarantee this outcome. The amounts involved are so large that today’s paper gold suppression scheme is likely to be too small in comparison and cannot stop it happening. The effect on currency purchasing powers will then be beyond question. Monetary authorities will be clueless in their response, because they have all bought into a form of economics that puts what will happen beyond their understanding.

As noted above, the path to a final crisis for fiat currencies might have already started, with the failure by the establishment to suppress the gold price through the creation of an extra 100,000 Comex contracts. If not, then any success by the monetary authorities to reassert control is likely to be temporary.

Perhaps we are already beginning to see the fiat currency system beginning to unravel, in which case those that insist gold is not money will find themselves impoverished.

Source: Goldmoney Insights

https://www.goldmoney.com/research/goldmoney-insights/gold-s-outlook-for-2020