Posted by AGORACOM
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)
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 ($Billions)
The illusion of earnings growth that has captivated investor
psychology was achieved through share buybacks and increased leverage.
Growth of earnings per share, not the same as profit growth, has been
juiced by financial engineering. The same can be said for returns on
financial assets. The amount and location of leverage within the economy
and financial markets is opaque but may well have reached high tide for
many years. A post-recession economic recovery will not necessarily,
and does not have to, translate into strong returns from investing in
financial assets.
Global Debt Has Increased +100% Since 2007
In popular thinking, the current U.S. administration, or the one that
follows it, will pull every trick out of the bag to stimulate the
economy. This belief will likely excite investors from time to time in
anticipation of a rebound. Unfortunately, the financial markets are
experiencing a deflationary bust that could spread to general economic
activity. Public policy has all but exhausted the potential benefits of
resorting to traditional monetary and fiscal solutions. The marginal
benefit to economic growth from heaping on new layers of debt is capped
by the law of diminishing returns, as shown by Figure 4 from Rosenberg
Economics. Since 2007, global debt increased 110% vs. 46% for global
GDP:
Figure 3. Global Debt vs. Global GDP ($ 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.
Posted by AGORACOM
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
Section
HOLE ID
From
To
Interval (m)
AuEq g/t
Au g/t
Ag g/t
Cu ppm
% increase
Horizon
107+00 NE
CB-17-29
1.20
575.00
573.80
0.321
0.278
0.9
224
15.5%
300
107+00 NE
CB-17-29
60.50
333.50
273.00
0.435
0.392
1.1
197
11.0%
300
107+00 NE
CB-17-29
60.50
176.00
115.50
0.728
0.685
1.9
142
6.3%
300
107+00 NE
CB-18-32
196.50
783.50
587.00
0.542
0.497
1.6
177
9.1%
300 + CS600
107+00 NE
CB-18-32
196.50
316.50
120.00
1.082
1.045
1.7
106
3.5%
300
107+00 NE
CB-18-34
419.00
711.50
292.50
0.499
0.461
2.4
63
8.2%
300
107+00 NE
CB-18-34
831.50
897.50
66.00
0.290
0.221
1.3
361
31.2%
CS600
108+00 NE
CB-17-09
41.00
545.00
504.00
0.549
0.488
2.3
225
12.5%
300
108+00 NE
CB-17-09
41.00
200.00
159.00
0.782
0.708
2.9
261
10.5%
300
108+00 NE
CB-17-12
3.00
243.50
240.50
0.848
0.797
2.6
139
6.4%
300
108+00 NE
CB-17-12
33.00
224.00
191.00
0.979
0.923
3.0
134
6.1%
300
108+00 NE
CB-17-24
3.50
563.00
559.50
0.618
0.576
2.0
121
7.3%
300
108+00 NE
CB-17-24
62.00
275.00
213.00
1.018
0.945
3.9
180
7.7%
300
108+00 NE
CB-17-24
3.50
686.00
682.50
0.563
0.498
1.8
288
13.1%
300
108+00 NE
CB-18-36
659.50
772.00
112.50
0.487
0.454
1.8
74
7.3%
300
108+00 NE
CB-18-36
659.50
704.50
45.00
0.733
0.688
2.7
88
6.5%
300
108+00 NE
CB-18-36
682.00
703.00
21.00
1.101
1.035
4.6
79
6.4%
300
108+00 NE
CB-18-38
20.50
638.00
617.50
0.465
0.429
1.3
137
8.4%
300
108+00 NE
CB-18-38
248.50
353.00
104.50
0.733
0.639
3.4
360
14.7%
300
108+00 NE
CB-18-38
468.50
638.00
169.50
0.683
0.659
1.1
76
3.6%
300
108+00 NE
GS-19-40
23.00
350.00
327.00
0.501
0.443
1.72
251
13.1%
300
108+00 NE
GS-19-40
81.50
127.00
45.50
1.060
0.907
4.92
634
16.9%
300
108+00 NE
GS-19-41
27.50
353.00
325.50
0.724
0.589
5.25
480
22.9%
300
108+00 NE
GS-19-41
47.00
146.00
99.00
1.252
1.015
9.83
800
23.3%
300
109+00 NE
CB-16-03
88.00
708.00
620.00
0.582
0.534
1.5
202
9.0%
300
109+00 NE
CB-16-03
112.00
426.00
314.00
0.792
0.733
2.2
220
8.0%
300
109+00 NE
CB-17-04
152.10
327.00
174.90
0.827
0.803
1.0
76
3.0%
300
109+00 NE
CB-17-27
12.50
536.00
523.50
0.688
0.640
1.6
197
7.5%
300
109+00 NE
CB-17-27
12.50
350.00
337.50
0.807
0.758
2.0
169
6.5%
300
109+00 NE
CB-18-31
404.00
680.50
276.50
0.526
0.494
1.4
100
6.5%
300
109+00 NE
CB-18-31
481.00
597.00
116.00
0.773
0.732
1.8
124
5.6%
300
109+00 NE
CB-18-33B
599.00
623.00
24.00
0.435
0.367
5.4
22
18.5%
300
109+00 NE
GS-19-43
68.00
561.50
493.50
0.608
0.566
1.36
174
7.4%
300 + CS600
109+00 NE
GS-19-43
141.50
197.00
55.50
1.068
1.005
2.62
211
6.3%
300
109+00 NE
GS-19-43
405.50
561.50
156.00
0.785
0.718
1.50
325
9.3%
CS600
109+00 NE
GS-19-44
101.00
368.00
267.00
0.867
0.807
3.30
134
7.4%
300
109+00 NE
GS-19-44
125.00
275.00
150.00
1.143
1.065
4.62
151
7.3%
300
109+00 NE
GS-19-45
44.00
369.50
325.50
0.765
0.719
1.91
154
6.4%
300
109+00 NE
GS-19-45
62.00
278.00
216.00
0.947
0.901
2.27
122
5.1%
300
109+00 NE
GS-19-45
105.00
278.00
173.00
1.054
1.000
2.63
144
5.4%
300
109+00 NE
GS-19-46
34.50
628.50
594.00
0.550
0.510
1.31
165
7.8%
300 + CS600
109+00 NE
GS-19-46
175.50
337.50
162.00
0.778
0.734
1.93
135
6.0%
300
109+00 NE
GS-19-46
564.00
600.00
36.00
1.425
1.328
1.12
560
7.3%
CS600
110+00 NE
CB-17-06
182.50
589.50
407.00
0.767
0.675
3.1
369
13.6%
300
110+00 NE
CB-17-06
222.00
393.50
171.50
0.914
0.814
3.7
379
12.3%
300
110+00 NE
CB-17-07
99.50
530.00
430.50
0.697
0.625
2.4
293
11.5%
300
110+00 NE
CB-17-07
162.50
309.50
147.00
1.155
1.028
4.9
457
12.4%
300
110+00 NE
CB-18-37B
125.00
819.50
694.50
0.502
0.459
1.2
196
9.4%
300
110+00 NE
CB-18-37B
300.50
423.50
123.00
1.002
0.944
2.0
234
6.1%
300
110+00 NE
CB-18-37B
125.00
912.00
787.00
0.473
0.427
1.2
212
10.8%
300 + CS600
110+00 NE
GS-19-50
148.00
725.50
577.50
0.681
0.602
1.99
372
13.1%
300 + CS600
110+00 NE
GS-19-50
160.00
427.00
267.00
0.878
0.811
2.67
300
8.3%
300
110+00 NE
GS-19-50
652.00
736.00
84.00
0.816
0.571
2.53
1444
42.9%
CS600
110+00 NE
GS-19-51
119.00
365.00
246.00
0.777
0.722
2.31
187
7.6%
300
110+00 NE
GS-19-51
578.00
618.50
40.50
1.304
1.019
2.94
1693
28.0%
CS600
110+00 NE
GS-19-53
108.00
255.00
147.00
1.036
0.984
3.07
98
5.3%
300
111+00 NE
CB-18-39
141.50
705.30
563.80
1.086
0.981
4.4
352
10.7%
300
111+00 NE
CB-18-39
141.50
422.00
280.50
1.274
1.141
5.5
449
11.7%
300
111+00 NE
CB-18-39
539.00
695.00
156.00
1.247
1.154
4.6
257
8.1%
300
111+00 NE
GS-19-48
97.50
1024.50
927.00
0.793
0.677
3.00
543
17.1%
300 + CS600
111+00 NE
GS-19-48
97.50
426.00
328.50
1.152
1.048
4.30
354
9.9%
300
111+00 NE
GS-19-48
871.50
940.50
69.00
1.483
0.937
3.90
3364
58.3%
CS600
111+00 NE
GS-19-49
81.00
907.50
826.50
0.800
0.696
3.40
429
14.9%
300 + CS600
111+00 NE
GS-19-49
81.00
330.00
249.00
1.080
0.998
5.10
137
8.2%
300
111+00 NE
GS-19-49
483.00
606.00
123.00
1.042
0.941
1.80
538
10.7%
300
111+00 NE
GS-19-49
747.00
832.50
85.50
1.494
1.067
10.50
2035
40.0%
CS600
111+00 NE
GS-19-52
62.00
663.50
601.50
0.783
0.668
3.25
513
17.2%
300 + CS600
111+00 NE
GS-19-52
62.00
398.00
336.00
1.062
1.004
2.65
182
5.8%
300
111+00 NE
GS-19-52
513.50
663.50
150.00
0.703
0.391
6.49
1583
79.8%
CS600
112+50 NE
GS-19-42
63.50
843.50
780.00
0.849
0.683
5.80
650
24.3%
300 + CS600
112+50 NE
GS-19-42
63.50
434.00
370.50
1.275
1.097
10.00
393
16.2%
300
112+50 NE
GS-19-42
63.50
315.50
252.00
1.508
1.268
13.80
504
18.9%
300
112+50 NE
GS-19-42
717.70
843.50
125.80
0.902
0.522
3.80
2253
72.8%
CS600
114+00 NE
GS-19-47
117.50
1199.00
1081.50
0.697
0.589
3.40
450
18.3%
300 + CS600 + DS
114+00 NE
GS-19-47
200.00
501.50
301.50
0.867
0.828
2.10
96
4.7%
300
114+00 NE
GS-19-47
665.00
816.50
151.50
1.009
0.572
8.90
2228
76.4%
CS600
114+00 NE
GS-19-47
933.50
1176.50
243.00
0.996
0.908
4.80
207
9.7%
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
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
Posted by AGORACOM
at 3:47 PM on Thursday, February 13th, 2020
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.â€
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.â€
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.
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.
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.
Posted by AGORACOM
at 1:16 PM on Friday, February 7th, 2020
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The discovery extends the potential strike length of gold mineralization by approximately 500 metres along strike to the north.
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Posted by AGORACOM
at 5:42 PM on Friday, January 31st, 2020
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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 (“Fedâ€) 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].â€
– 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.
Posted by AGORACOM
at 11:58 AM on Wednesday, January 22nd, 2020
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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.
Posted by AGORACOM
at 4:36 PM on Friday, January 17th, 2020
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.
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†(“GLPâ€) 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 indexâ€. 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 hamperâ€, 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
issueâ€, 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 “temporaryâ€.
To me, it increasingly looks like these market operations are “debt
monetization in dragâ€.
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
debtâ€, 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
Posted by AGORACOM
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 starâ€.
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
businessâ€.
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.
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.
Posted by AGORACOM
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 parityâ€
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.
Posted by AGORACOM
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.