Ainslie Bullion - Daily news, Weekly Radio and Discussions

Discussion in 'General Precious Metals Discussion' started by AinslieBullion, Jun 12, 2014.

  1. AinslieBullion

    AinslieBullion Member

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    Hospital Pass

    Whilst a common phrase in rugby, it sums up nicely the habit of ‘smart money’ passing the financial ball to the hapless private investor before ‘that’ crashing tackle, with crash being the operative word in this financial metaphor.

    We’ve written previously of Bank of America Merrill Lynch reporting the trend of institutional investors exiting the sharemarket at a great rate and also senior execs (in the know), particularly in the financial sector, offloading shares in their own companies at alarming rates. Even the rampant share buybacks by US corporations seems to have abated (as we’ve reported the sudden reduction in corporate credit growth last week). So who is buying these shares?

    Charles Schwab Corp is one of the US’s largest brokerage firms. Last week they reported that new accounts surged by 44% in the first quarter of this year. Individual private investors opened accounts at the fasted pace in 17 years. You might recall one of the biggest bubbles in history occurred 17 years ago… the dot.com bubble. That crash saw shares lose 78% of their value after reaching ridiculously high valuations. We saw exactly this same behaviour in the lead up to it. “It’s different this time” reared its head yet again.

    In classic bubble market behaviour the little guy who feels like he’s missing out on all these amazing gains comes in at, or nearly at, the end as the smart money is getting out of the way… passing the proverbial ball into their eager open arms.

    Speaking of smart money it doesn’t get any bigger than Blackrock. Last week their CEO, Larry Fink, echoed those concerns saying “the warning signs are getting darker". He put the current hiccups in the market down to people waiting to see what corporate earnings would look like this quarter. To date this hasn’t concerned punters as it was all hope based with expectations of health care reform, infrastructure spending and tax cuts… none of which have eventuated. Trump threw out another bone to the hope crowd on Friday night saying we’ll hear all about the “massive” tax cuts this Wednesday. No mention of specifics or getting it through Congress. The smart money aint buying it, the little guy is lapping it up. The graph below is a salient reminder of reality…

    [​IMG]
     
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  2. AinslieBullion

    AinslieBullion Member

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    Silver Production Under Pressure

    Whilst calls that 2015 saw ‘peak gold’ production seem to have support, the same can’t yet be said for silver. Silver has seen massive inputs from the new Tahoe Resources high grade Escobal mine which in 2014 and 2015 produced an incredible 20m oz of silver. We then saw the ramp up of Fresnillo’s Saucito mine which, when combined with Escobal, saw production amongst the world’s top 7 producers reach a record high 158m oz in 2016. However there is an underlying trend and broader global scope which should have investors paying attention.

    Behind those increasing production numbers is a more concerning trend for miners, and that is yield. Despite Escobal’s incredible 16.3oz per ton yield in 2014 (one of the highest recorded) the overall yield amongst the top 7 has recommenced the decline we’ve seen over the last decade with 2016 seeing an all time low of just 7.4oz per ton of material mined.

    [​IMG]

    Whilst we don’t have official numbers yet for 2016 the graph below gives the most recent forecast when it comes to total global production (as opposed to simply the top 7 producers above) and raises the question again of whether indeed 2015 saw peak silver production.

    [​IMG]

    Irrespective of whether 2016 does see a drop in production, 2015 certainly saw a marked slowing of growth to just 2% and when combined with the dropping yield is something to keep a close eye on.

    It appears silver is getting harder (and hence more expensive per oz) to mine and supply is diminishing whilst demand remains strong. As an investor in silver that is potentially great news.

    For your general interest, there were two mines bigger than the aforementioned Saucito in Mexico (22.0m) and Escobal in Guatamala (20.4m), and that was Australia’s Cannington (22.2m) and Russia’s Dukat (22.3m). Australia dropped to 5th biggest producer in 2015 as Russia took 4th spot just as Russia is challenging our second place for gold right now.

    887m oz is 27,586 tonne. Total gold mine supply in 2016 was around 3,236 tonne. So we saw around 8.5 times as much silver mined as gold. A little different to a gold silver price ratio of 71 huh….
     
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  3. AinslieBullion

    AinslieBullion Member

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    Exter’s Pyramid Like You’ve Never Seen It!

    The info graphic below is a journey worth taking as it simply and enlighteningly takes you through their equivalent of the fabled Exters Inverted Pyramid. It is a journey of the world’s liquidity, organising assert classes in terms of their inherent risk and size. The sheer scale will undoubtedly blow you away. Take the time to read each explanation in the expanded version and share with your friends and family over the weekend. Everyone should see and understand this.

    The image below is an abridged version. Click on it to go to a large high res version with more information.

    [​IMG]
     
  4. AinslieBullion

    AinslieBullion Member

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    Australia’s Dollar Challenges

    Today we address two critical factors for Australia’s economic future off the back of two separate headlines late last week.

    Firstly that perplexingly strong Aussie dollar... Amid plummeting iron ore prices and a strengthening USD our little Aussie battler has ignored both and remained stuck in a 70-80c trading band and particularly around 75c.

    From the AFR: “The dollar's potential loss of its status as a high-yielding currency could cause the Aussie to plunge to US62¢, forcing the Reserve Bank to raise interest rates despite still-weak domestic growth, according to one of Asia's most prominent currency strategists.”

    Despite our cash rate being the lowest in history (at 1.5%) that is still relatively high in this zero (and even negative) interest rate world and hence money has continued to buy the AUD. But the Fed seems set on a path of raising rates which means the spread between Aussie and US bond yields is closing, per the chart below:

    [​IMG]
    TD Securities chief Asia-Pacific strategist says:

    "We're spending a bit too much time saying inflation isn't high, therefore the RBA doesn't need to hike. We all know the RBA wants a lower currency. But you have to be careful what you wish for…. If the Fed hikes three or four times, and the RBA sits tight, we won't be high-yield. That doesn't mean the Aussie falls to US72¢. It means it collapses to US62¢. And think of the inflation shock that would cause."

    Think too what that would do to your AUD gold and silver price… <insert smiley face, insert #$2000 gold>…

    And that is before predictions iron ore has plenty of falling still to do… From BMI Research, the research arm of ratings giant Fitch “The commodity will drop to $US70 a tonne this year, $US55 in 2018, and slump to $US46 by 2021”

    We also heard from Minack Advisor’s Gerard Minack (former global strategist for Morgan Stanley and famed predictor of the GFC) that Australia is facing a one-in-three risk of a home-grown recession next year.

    He says that whilst the housing boom saved us from the mining bust, it wasn’t clear what would support growth if it stalled, let alone the bursting of the bubble everyone is talking about.

    "It is fairly clear that housing's contribution to growth will fade in 2018 - indeed, even with a soft landing it is likely to drag on growth."

    His other key concern is the energy cost debacle. Cheap energy has been one our biggest global advantages, overcoming in part our sky high labour and red tape costs. He says:

    "Uncertainty about medium-term energy pricing will presumably reduce the prospect of stronger investment spending in any industry where energy is a significant cost," Mr Minack said.

    "If non-mining investment weakens at the same time as housing, there is a material risk of recession in 2018."

    That too bodes badly for the Aussie dollar. To newcomers, as the AUD goes down the price of AUD gold and silver (against the USD spot price) go up.
     
  5. AinslieBullion

    AinslieBullion Member

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    Why Gold Fell This Morning

    You likely woke this morning to the gold and silver prices falling. Why? Last night the US Fed met and released their statement. Whilst they held rates unchanged this month at 1.0%, the minutes showed a decidedly more ‘hawkish’ (intent to tighten monetary policy / raise rates) stance and the odds of a June hike jumped to 90%. The Fed expect to hike 2 more times this year whilst the market is pricing in 1.

    As usual, on any hawkish Fed commentary, gold and silver fell (less so in AUD as the AUD fell too) which is becoming more and more counterintuitive as, on each rate hike, gold and silver have gone on to rally!? Sell the rumour, buy the fact?... Or is it simply a matter of sell on traditional fears of rising rates being bad for gold (higher real rates), BUT then realise rising rates will likely be the very thing that brings down the debt based house of cards?

    As you can see from the graph below (courtesy of Zerohedge), since the last hike gold rallied (like it did the last 3 times post GFC), shares went nowhere, and banks tumbled:

    [​IMG]

    The Fed too seem to be working on the same ‘hope’ strategy as the market, as they described the awful 0.7% GDP print for the first quarter “as likely to be transitory”. The Fed haven’t hiked rates in a quarter that weak since 1980…

    The Fed also seem to be ignoring the falls in the various hard (first) and now soft economic data prints over the last month too. Again courtesy of Zerohedge:

    [​IMG]

    They also stated that inflation over the last 12 months has been “running close to the Committee’s 2% longer-run objective” however placed the caveat that "Excluding energy and food, consumer prices declined in March and inflation continued to run somewhat below 2 percent"… Hmmm. So after more than $4 trillion of printed money since the GFC not yet achieving 2% real inflation (but financial asset bubbles everywhere), they somehow think raising rates will help????
     
  6. AinslieBullion

    AinslieBullion Member

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    Q1 2017 Gold Demand Trends

    The World Gold Council last week released their first quarter Gold Demand Trends report for 2017. Q1 saw demand of 1,035 tonne which, whilst still historically strong, was down 18% on the all time record quarter of Q1 2016. Below is a summary..

    ETF’s – when comparing to that extraordinary Q1 2016, the 109 tonne of inflows into ETF’s we saw this year was just one third that seen in the rush to safe haven investments in that period when investors were worried the sharemarket was about to collapse. The Fed had just put up rates and the wobbles were in. Maybe that will be the case in July after a June hike?

    Investment Bullion – countering that lower ‘paper gold’ ETF number we saw increased demand in bullion (290 tonne), up 9% and lead strongly by China which saw retail investment surging by 30% to over 100 tonne, the 4th biggest on record. India too was up 14% to 31.2 tonne.

    Jewellery – was up slightly to 481 tonne, supported largely by an increase in India.

    Central Banks – whilst remaining net buyers (maintaining the record streak since the GFC), central bank net purchases dropped 27% to 76 tonne but retained little appetite to sell.

    Technology – bucking the trend, technology demand actually increased 3% to 78.5 tonne, dominated by electronics and boosted by the trend to wireless mobile phone charging.

    Supply – Total supply contracted sharply, down 12% to 1,032 tonne lead by a 21% fall in recycling whilst mine supply remained essentially unchanged at 764 tonne. Recycling is very price dependent and Q1 2016’s high prices saw strong recycling sales.

    China, the world’s biggest producer (by far), saw a 9.3% drop in supply to 101 tonne whilst consumption jumped 14.7%. Interestingly their central bank stopped their reported accumulation in October 2016. Very few analysts believe their reported figures regardless, with general consensus that they have far more gold held in other agency accounts.

    Apart from China stepping up strongly to the table again, it was a welcome return of India as well. With strong gains in both investment bullion and jewellery, India saw its strongest quarter since 2014 at 270 tonne, double that of Q1 last year. 2016 saw the worst Indian demand in 7 years amid the government’s financial system crackdown.
     
  7. AinslieBullion

    AinslieBullion Member

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    China Slows & Yuan Calm Before the Storm?

    Yesterday we reported the massive jump in Chinese investment gold consumption in the first quarter of this year. Apart from the Chinese being canny buyers of a dip they also have some domestic issues that are a likely explanation for a rush to their favourite safe haven.

    We wrote last week of some of the troubles facing China’s economy, the world’s second biggest. Subsequent to that we’ve seen hard data in the form of trade figures paint a challenging picture to the China recovery story. April imports growth nearly halved to 11.9% (and well below 18% expectations) and exports growth more than halved to 8% (and again well below expectations of 11.3%), cementing a trend of declines since the end of last year and reinforcing the signals from the soft data of various economic surveys. The chart below also reinforces this trend showing commodities at 4 month lows, shares at 7 month lows, and bonds falling with yields at 22 month highs.

    [​IMG]

    The aforementioned article last week highlighted the tightening in the Chinese credit market as a clear warning signal. We’ve since learned that the collapse in bond issuance escalated in April as the cost of debt increased amongst this tightening. April saw 154 bond issues aborted, up from 94 in March and early 30’s in February and January. As The Financial Times reported from PIMCO’s global strategist:

    “The collapse in domestic bond issuance is a clear consequence of efforts to rein in shadow banking generally and wealth management products specifically….This adds to an already sizeable credit tightening impulse baked into the cake for the second half of this year….The question now is not if China’s economy will slow, but rather how fast,”

    However in terms of the Yuan trade, things are eerily quiet against this backdrop and that of a strengthening USD. If you cast your mind back to August 2015 we had seen a similar disconnect play out and then…. THAT shock devaluation that sent shockwaves around the world and the first sizeable sell off of shares since the GFC. Now check out the graph below and ask yourself if that looks just a little similar (and some)?

    [​IMG]

    Keep in mind too that China are probably the singularly biggest factor behind our Aussie dollar. If the world sees China falling they would likely exit the Aussie dollar in droves, seeing it drop to the 60’s many are predicting and seeing Aussie gold and silver surge accordingly.
     
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  8. AinslieBullion

    AinslieBullion Member

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    Why Silver Could Go To $136

    Sovereign Man’s Simon Black reports on a keynote address the Atlas 400 and as the gold silver ratio hits 75 it is a timely reminder to us all about how that 75 sits in the fundamentals of things…

    “His remarks started off like dozens of presentations that I had heard so many times before. . .

    “Without silver,” began the speaker, “our entire society would go back to the Stone Age.”

    The speaker was the CEO of one of the largest silver mining companies in the world, and he was a special keynote at the annual closed-door meeting of the Atlas 400.

    CEOs of mining companies almost always start their presentations talking about how important their mineral is.

    “If we didn’t have cobalt we would all be cave men again. . .” or “Without molybdenum our modern technology would cease to exist.”

    It sounds impressive, but the same story applies to just about every industrial commodity in the world, from copper to lumber to recycled steel.

    It’s hardly an original argument and doesn’t impress me enough to be bullish on their mineral.

    The real investment thesis about silver is that it’s a precious metal that has industrial qualities and a long-standing tradition of value.

    Like gold, silver was an ancient form of money. And for good reason.

    Out of the 118 known elements that exist on the periodic table, gold and silver share certain chemical properties that made them ideal as a medium of exchange to our ancestors.

    Gold and silver are solid at normal temperatures (as opposed to Helium). They’re not radioactive (like Plutonium).

    They’re not explosive when they come into contact with water (like Cesium), nor do they rust when they get wet (like Iron).

    Most importantly, gold and silver are rare enough to be valuable, but not so rare that it would be almost impossible to mine more.

    Between the two, gold is obviously more rare… hence the higher price.

    There’s an old estimate from the US Geological Survey from the late 1960s suggesting that the ratio of silver to gold in the earth’s crust is about 21:1.

    (So assuming that’s true, the theoretical price ratio between the two should be around 21:1)

    And in ancient times the price ratio between the two metals was frequently in the range of about 15:1, i.e. one ounce of gold was worth 15 ounces of silver.

    Today the ratio is about 75, based on a gold price of about $1230 per ounce, and a silver price of $16.35.

    This is fairly high even by modern standards as the long-term average over the past several decades is about 50.

    This would suggest that silver should in increase in price relative to gold in order for the ratio to return to its historic average.

    (A ratio of 50:1 would imply a silver price of $24.60 based on a gold price of $1230.)

    Now, all of this is an argument that many of us have heard before.

    But I did learn something over the weekend from the mining CEO; he told us that the current mining production ratio between the two metals is about 9:1.

    This means that 9 ounces of silver are mined for every 1 ounce of gold that’s mined.

    This is very interesting from a supply/demand perspective.

    According to the Silver Institute, demand for silver hit an all-time high in 2016.

    But the price of silver, at least relative to gold, is hovering near a multi-year low at 75:1. (Again, the historic average is around 50:1).

    Moreover, even though the price is 75:1, the new supply of silver is only 9:1.

    In theory if the new metal supply is 9:1, then the price should be 9:1 (which would be a silver price of $136.67).

    Obviously that’s a purely academic postulate; reality rarely conforms to theory. And the mining CEO wasn’t projecting a $136+ silver price.

    But it seemed clear to him that there’s an unsustainably wide gulf between the gold/silver price ratio versus the gold/silver supply ratio, especially when silver demand is at an all-time high.

    Commodity prices tend to move dramatically when the market realizes there’s a serious supply/demand mismatch.

    That seems to be the case with silver right now.

    And while it would be silly to expect $100+ silver, there are certainly credible reasons why the ratio should close the gap and move MUCH lower.”

    Per the chart below the gold silver ratio hasn’t been this high since just before Brexit…

    [​IMG]
     
  9. AinslieBullion

    AinslieBullion Member

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    UBS Warns of EU “Time Bomb”

    It’s rare you get the head of one of the world’s largest financial institutions talking so bluntly about the EU and global economy. The chairman of UBS, Axel Weber was speaking to the International Institute of Finance in Tokyo last weekend and, courtesy The Financial Times, he firstly warned that the EU was not “out of the woods” despite the Macron victory:

    “Mr Weber said that political risk in Europe remained “actually quite high” even though “we’ve seen the centre hold in France” with Macron’s victory over far-right candidate Marine Le Pen, and even though all the signs were that the centre will also hold in the upcoming German location elections. “That doesn’t mean Europe is out of the woods,” he told the International Institute of Finance’s spring meeting. “There is still Italy where it is very unclear that the centre will hold. And there is still Greece.” He continued: “Where you find some bright side….there are (also) some downside risks that are not really priced into the market but could derail (Europe).” “Brexit is a time bomb… and the countdown is on. It will be two years from now,” Mr Weber said. He added that “if the British really do leave the customs union and single market there could be a lot of volatility which could impact on the global economy”.”

    As a reminder, Weber is not a Wall Street banker, his heritage is ex ECB policy maker and president of Germany’s central bank, Bundesbank. He knows Europe intimately.

    To reinforce this view an equally blunt German Finance Minister yesterday said:

    “So far we managed to hold together the EU after the Brexit decision, but the pendulum is swinging back” and on France that Macron “faces terribly difficult decisions”.

    This comes as last night the ECB chief Mario Draghi declared the Euro area is “clearly improving” but it’s “too early to declare success on growth” reflected of course in maintaining a negative cash rate of -0.4%... clearly a sign of everything being awesome?

    Last year Weber spoke on a meeting of the IMF and World Bank where he famously had this to say about the global market more broadly:

    “"They (central banks) have taken on massive interventions in the market, you could almost say that central banks are now the central counterparties in many markets. They are the ultimate buyer,"

    "Investors have been driven into investments where they have very little capability for dealing with what is on their plate and I think that is a sure reminder of where we were in a different asset class in 2007," he said.

    "So I think the central bankers need to be very careful that they do not continue to produce disturbances in the markets, which they acknowledge - it's a known side effect - but the perception that the underlying impact of monetary policy outweighs the potential side effect in my view is starting to be wrong," he added.

    Since the global financial crash of 2008, central bank policy has focused on buying up bonds in large quantities and cutting interest rates to record lows. The Federal Reserve has since looked to unwind its own policy which focused on the Treasury market and the yield curve, but the Bank of Japan and the ECB's large-scale bond-buying programs continue.

    "I don't think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention," Weber warned, adding that it often meant investors were making bad choices with where to put their money.”
     
  10. AinslieBullion

    AinslieBullion Member

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    Epic Set Up in Silver

    Friday night’s COMEX Commitment of Traders report for silver in particular was nothing short of breathtaking and one investors simply must take note of.

    As a reminder, COMEX is where gold and silver futures are traded and at volumes far exceeding physical supply and with contractual claims many many times over the physical metal available for delivery. Like it or not this paper market has a large bearing on the spot price… for now. The main players are the Commercials, dominated by the big bullion banks, and the Non Commercials dominated by Managed Money (speculating hedge funds etc). Up to last week the Commercials had amassed an all time record short position in silver (sell contracts assuming/betting on lower prices) and Managed Money conversely on the long side (buy contracts assuming/betting on a price rise). We wrote recently that we expected a big reduction in those Managed Money longs as they capitulated on the recent drops in the silver price. Well oh boy, did they!

    The COT report published Friday takes data up to Tuesday of last week. In the week to last Tuesday we saw the Commercials reduce their short positions by a staggering 19.4% in gold and 20% in silver. Conversely the hedge funds decreased their long positions by 20.9% in gold and (wait for it) an eye watering 24.8% in silver. What does that mean? Long time COMEX analyst Ted Butler had this to say over the weekend:

    “I am convinced that silver will soon explode in price in a manner of unprecedented proportions, both in terms of previous silver rallies and relative to all other commodities. By unprecedented, I mean that the price of silver will move suddenly and shockingly higher in a manner never witnessed previously, including the great price run ups in 1980 and 2011. The highest prior price level of $50 will quickly be exceeded.

    By “soon”, I mean that the move can commence at any time, but more likely before many weeks or months have gone by. I know that the price of silver has been declining on a daily basis nonstop for three weeks now, itself an unprecedented move, but I also know the reason for the decline and how the sharply improved COMEX market structure has always guaranteed a rally in a reasonable period of time.”

    How?

    “At the heart of the unprecedented move higher in the price of silver is the manner in which it will occur. It will be a price move like no other. It will be the greatest short covering rally in history. That’s guaranteed because the COMEX silver short position is the largest and most concentrated short position in history. There is no buying force in the financial markets more powerful than panicky buying by those forced to cover short positions. The largest short position ever holds the potential for the greatest short covering rally ever.”

    Now Ted Butler is one analyst and others may put forward an alternative view but the graph’s below show very clearly what normally happens after such a move (a price rally), especially a move setting up such a ‘small’ net short position.

    [​IMG]

    [​IMG]

    When looking at these too, keep in mind the incredible concentration of these short in silver between just 2 banks, Canada’s Scotiabank and J P Morgan, the latter of which Butler reports has in excess of 500m oz of physical silver on the other side of its paper short position. Between the 2 of them they are short the equivalent of 86 days of silver production, or about 2/3 of the red bar in the graph below. This is not a ‘market wide’ position, this is a concentrated short like no other, in the most shorted commodity on earth. Just think about what that means….(Hunt Bros?)

    [​IMG]
     
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  11. AinslieBullion

    AinslieBullion Member

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    China Sends Another Clear Buy Signal

    The economic wobbles in the Chinese economy are gaining more and more attention and the implications for the Aussie dollar also. We’ve recently reported on the economic warning signs from China (here and here) and yet the S&P500 and NASDAQ both hit new highs last night and the VIX extended its all time record streak of closing below 11 to 15 straight days, 50% more than the next longest. Everything is absolutely awesome. HOWEVER… Bloomberg have just reported that VXX trades, long futures trades (calls) betting on a jump in the VIX, have shot to a record high relative to puts.

    [​IMG]

    Apart from the disconnect on share price fundamentals, geo political uncertainty, and bubbles everywhere, there is another clear warning sign in the historic lagged correlation between the China Credit Impulse (as we discussed last week) and VIX. That drop (graph is inverted) in Chinese Credit Impulse has already happened… a VIX spike seems baked in and maybe the smart money sees this and is buying up VXX?

    [​IMG]

    We’ve written before of the direct historic correlation between the gold price and VIX. However given this is China there is a double benefit for Aussie gold and silver holders and that is the AUD. We finished our article on this last week talking about money leaving the AUD ‘in droves’ and according to a recent Bloomberg article that is exactly what is happening.

    “Hedge funds are giving up on the Australian dollar.

    Leveraged funds cut net long positions to 12,879 contracts in the week through May 9, the sixth straight reduction and down from as high as 53,601 at the start of March, according to data from the Commodity Futures Trading Commission. Optimism has evaporated as the prices for iron ore, Australia’s biggest export earner, plunged.”

    [​IMG]

    A softening Chinese economy sees a softening in ore demand:

    [​IMG]

    And reinforcing our article last week, so too is the attractiveness of our yield over US treasuries

    [​IMG]
     
  12. AinslieBullion

    AinslieBullion Member

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    Tech Tock Tech Tock…

    Remember the dot-com crash? The NASDAQ dropped nearly 80% very very quickly.

    Right now we have the NASDAQ hitting new all time highs, and don’t think it is just a contained ‘tech thing’ either. The S&P500 (the world’s biggest index) has relied on just 10 companies for nearly half of all gains year to date (and that is scary enough). The first 5 are all tech: Apple, Google, Facebook, Amazon and Microsoft. The table below shows the performance, and more amazing still the relative size (far right column)…

    [​IMG]

    Now let’s look at the NASDAQ now compared to the dot-com bubble:

    [​IMG]

    But the dot-com bubble was because the market got carried away with the concept rather than the reality (Snapchat anyone?). It ‘was different this time’. No it wasn’t. What about this time?

    [​IMG]

    No surprises then that Bank of America Merrill Lynch’s latest Fund Manager Survey found it was the most crowded trade:

    [​IMG]

    Because like last time confidence was soaring, everything was awesome, fundamentals didn’t matter:

    [​IMG]

    As a reminder, if your shares drop 80%, you need to make 500% on what’s left to just get back to square… But it’s probably nothing….
     
  13. AinslieBullion

    AinslieBullion Member

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    Loosey Goose Trump Lays Golden Eggs

    Love him or loath him, you have to admit Trump is a ‘loose goose’ or, maybe more aptly, a ‘loose cannon’. Either way, uncertainty and unease follow wherever he goes and whenever he speaks.

    Last night US shares had their biggest fall since his election, the Dow down 373 points and the S&P500 down 44 points, the USD fell, bonds surged and so did gold (up the same 1.8% that shares fell). The falls were reflected all around the world and Australia will surely follow today. Why? Because the Democrats are calling for Trump’s impeachment after the (sacked) Comey memo alleging Trump was forcing him to drop the Russian investigation regarding the also sacked national security advisor Flynn.

    Simplistically this just creates uncertainty, but more fundamentally it casts very serious doubt about Trump’s ability to get the key reforms of health care, tax cuts, infrastructure spend, etc etc through congress as even his own Republicans are starting to distance themselves. There is no shortage of irony in last night being the biggest fall since the election. What happened straight after the election of course was a massive hope fuelled rally, all based on his promises of stimulatory reform. We’ve written ad nauseum about this and you know NONE of it has happened.

    Context is everything and the context of this uncertainty is that we have financial and property markets at crazy bubble-like highs all around the world. Bubbles, if you will, looking for a prick. Many Trump haters might take that as a pun….

    [​IMG]

    The reality is Comey is due to testify this time next week and we will possibly learn the truth. Now the truth may not be as juicy as some would like, and we could see a reversal of last night. If he confirms worst expectations however, hold onto your hats.

    But, and this is a big but, this goes way beyond the Russiagate issue. President Loose Goose/Cannon is yet to deal with a hostile congress on his key promises, North Korea, the looming Debt Limit and a possible government shutdown, the implications of his trade restrictions on global markets (3rd ranking below), and of course the unknown unknowns…

    How a few days makes a difference too... Last week BofAML reported their Global Fund Managers worst fears (you will recall yesterday we shared their most overcrowded trades):

    [​IMG]

    We’d like to see that survey done again now…. And that is the key point here. There are a host of uncertainties around now. Headlines change week to week but as we said, context is everything. Uncertainty in a stable environment is usually containable. Uncertainty (a myriad of ‘pricks’) flying around amongst so many over-inflated asset bubbles can only end one way. Bubbles go pop, you only know afterwards when that happens.

    Check out Mike Maloney’s latest video “The Everything Bubble: CODE RED” that walks you through the abundantly clear warnings that this is close. Watch on our home page.
     
  14. AinslieBullion

    AinslieBullion Member

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    Australia – Multiples Economic Warnings

    The warnings about the Australian economy came thick and fast last week and the front page of today’s AFR continues with the headline “Interest-only loans could be 'Australia's sub-prime'”

    “High-risk mortgage loans to young families, professionals and other over-extended borrowers amounting to more than six times household incomes could wipe out 20 per cent of the major banks' equity base, institutional investment fund JCP Investment Partners has warned.”

    That’s a pretty scary prospect whether you are a home owner or not as you are probably invested in banks through super etc. It’s yet another argument for getting your own Self Managed Super Fund and taking control.

    Last week Credit Suisse warned the RBA will need to cut rates multiple times this year due to slack in the economy. Last week we saw the unemployment headline figures show a larger than expected increase in employment and the unemployment rate drop to 5.7%. However that 37,400 jump was solely due to part time jobs, up 49,000 against a fall of 11,600 full time jobs and seeing a further decline in hours worked and stagnant wage growth. Credit Suisse go on to say:

    "Employment quality was even more questionable considering statistical distortion. If we were to remove upward statistical biases, the decline in full-time employment in April would have been even greater than officially reported."

    These two factors – rampant household debt in a bubble like property market and weak earnings fundamentals – are a concerning mix. Professor Steven Keen of Kingston University last week warned that “Australia has simply delayed its day of reckoning,” as we escaped the GFC relatively unscathed on the back government interventions including the first home buyer grant that inflated property prices and which the government is now afraid to stop. As he puts it:

    “The housing bubble makes the politicians look good because A, people are feeling wealthier, and B … people are borrowing money to spend,” he said.

    “Then the government runs a balanced budget and looks like it really knows what it’s doing”

    From news.com.au:

    “His latest book, ‘Can We Avoid Another Financial Crisis?’ argues Australia, along with Belgium, China, Canada and South Korea, is a “zombie” economy sleepwalking into a crunch that could come between 2017 and 2020.

    “Both [Australia and Canada] will suffer a serious economic slowdown in the next few years since the only way they can sustain their current growth rates is for debt to continue growing faster than GDP,” he writes.”

    We often remind you that per GDP Australia has the highest personal debt in the world. The OECD published a comparison against net disposable income showing Australia as 4th worst in the world (behind Denmark, Netherlands and Norway). Of note however, its data from 2015 and we have since seen more debt but stagnant income growth so it’s probably worse again now.

    It also casts serious doubt over the latest budget whose forecast of future surpluses heavily relies on a miraculous and robust return to wage growth based only on the science of hope. That didn’t escape Standard & Poors who, whilst maintaining our AAA rating this time, confirmed their outlook “remains negative”. From the AFR:

    “The body [S&P] says the government's projected return to a balanced budget in 2020-21 is eight years later than the previous government's 2010 forecast for a return by 2013.

    "If achieved, it would come more than 10 years after the global recession pushed the central government budget into deficit," the agency said in a statement on Wednesday.

    "This substantial delay in fiscal repair, and the risk of further delay, raises our doubt over the ability of the Australian government to meet its fiscal objectives."”

    Wage growth is one thing, GDP growth another. But even there on Friday we had J P Morgan substantially downgrade its forecast for Australian GDP for 2017 to 2.1% from 2.8%. That is well short of the budget’s assumptions of course, but budget’s these days are less budget, more political propaganda. An investment portfolio banking on the ‘lucky country’ cruising through another crisis is a dangerous one indeed.
     
  15. AinslieBullion

    AinslieBullion Member

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    COMEX Signals Get Even More Bullish

    It was remiss of us yesterday not to update you on the COMEX positioning for both silver and gold (via Saturday’s Commitment of Traders Report) – because it appears very bullish for both. If you haven’t read last week’s report on these developments you should before reading on…. (click here)

    As of the report on Saturday, the net short position in silver from the Commercials dropped another whopping 17% whilst the speculative hedge fund Managed Money increased their shorts and ended up reducing their net long position by 19.9%, a huge move on any measure. Like last week, the chart below tells the story and you can see the correlation with such moves in the past being bullish for price gains:

    [​IMG]

    In gold the story was similar with the net short position from the Commercials dropping another, big, 13% whilst the speculative hedge fund Managed Money increased their shorts and ended up reducing their net long position by 15.5%.

    [​IMG]

    Analyst Ted Butler certainly isn’t retracting from his predictions last week of ‘this could be it’, and had this to say earlier in the week:

    “As an analyst observing the repetitive cycle of COMEX positioning for more than three decades, it is fitting that I would become more cautious on price as the technical funds [Managed Money] load up on the long side and more bullish when they abandon the long side and load up on the short side. I know many have expressed surprise that I have recently come out with the opinion that the big move in silver is close at hand, but my basic analysis demands it. If one is to be bullish after the technical funds have sold, should not he or she be most bullish after the technical funds have sold the most in history?”
     
  16. AinslieBullion

    AinslieBullion Member

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    World’s Worst Debt Pile Just Got Downgraded

    The front page of today’s AFR says “China angry at Moody’s Downgrade” and well they might as the world’s worst debt pile just got more expensive to service.

    Forecasting the 2016 year end Debt:GDP ratio of 256% to worsen, Moody’s, one of the world’s pre-eminent ratings agencies, “delivered a scathing assessment of Beijing's economic policy making and downgraded the country's debt for the first time in 26 years.”

    The IIF recently established that Debt:GDP is now 300% per the following:

    [​IMG]

    China’s challenges were succinctly summarised by one analyst in the AFR article - "The downgrade is yet another sign of the challenges faced by China, which is juggling rising leverage issues, declining economic growth rates and ongoing structural reforms,"

    Regular readers won’t be too surprised as over the last month we have reported on the warning signals 4 times (here, here, here and here).

    However if you cast your mind way back to September last year we published the article “China Banking Crisis Near” which talked to the historically critical ‘credit to GDP gap’ being at record highs. That article talked of a study by Hyman Minsky from whom the famous “Minsky Moment” phrase was based. A Minsky Moment is defined by Investopedia as “When a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. A Minsky moment is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises; the longer speculation occurs the worse the crisis will be. This crisis is named after Hyman Minsky, an economist and professor famous for arguing the inherent instability of markets, especially bull markets. He felt that long bull markets only ended in large collapses.”

    The graph below illustrates the usual lead up to such a ‘moment’ and to which UBS recently said China’s rate of credit growth compared to GDP growth (hence that increasing ratio) puts it in the Ponzi phase of the cycle and fast approaching it’s Minsky Moment. A credit downgrade makes all that debt even more expensive to service and accelerates the process. Arguably too, the credit contraction outlined in some of our articles linked above show we could well be in the early phase of the Minsky Moment right now…

    [​IMG]
    As a contextual reminder, we are talking about the world’s second biggest economy here…
     
  17. AinslieBullion

    AinslieBullion Member

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    Another Bullish Signal for Silver

    On Tuesday we updated last week’s report on the ‘epic’ set up in futures contracts for gold and silver on COMEX. To say it was bullish is an understatement. But of course paper is only part of the story, there is physical demand as well, and that has been very interesting over the last couple of months too. Two of the biggest players, J P Morgan and the ETF Silver Trust (SLV) have been exceptionally heavy buyers of late. The chart below shows JPMorgan bought no less than 14.9m oz in the month of April alone and SLV 13.5m oz in May.

    [​IMG]

    That these purchases happened after silver’s sizeable correction in April, make it all the more remarkable. They were mopping up when everyone was selling.

    We’ve written before of Ted Butler’s (and others) thesis of JP Morgan shorting the market with paper silver (forcing the price down) whilst simultaneously buying up subsequently cheap physical silver. The actions of April’s purchases above and the massive reversal in short reductions on COMEX over the last couple of weeks certainly appears to gel with that thesis. It begs the question, are they about to ‘let her go’?
     
  18. AinslieBullion

    AinslieBullion Member

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    Chasing That Final 10-20%

    Yet another bank joined the chorus of warning clients of the market looking set for a crash on Friday. We’ve written of BofA (in particular), JP Morgan and Goldman Sachs’ recent warnings and now Citi issued a report including the admission “eight years into the cycle - and one where QE has been the asset market driver – virtually every market appears rich”. Beyond the usual warnings on equities valuations they point out the lack of value across the board, including bonds and credit. “Rich” avoids any outright ‘alarm’ in their note and they do point out they have a divergence of opinion within their asset class ranks. The credit guys are seeing things coming off while the equities guys still see more in the market. The graphs below show US (lhs) and Eurozone (rhs) equites (blue lines) and corporate debt (green lines). You will note the divergence predicted and this is not new to regular readers (last discussed here), the credit tightening over recent weeks is grabbing the attention of some analysts. So whilst the red lines indicate more gains to be made in shares even Citi notes “such a divergence may well happen, but historically is somewhat of an anomaly”. So… its different this time….

    [​IMG]

    The chart below maps this out a little clearer from an historic perspective (and adding bank loans to the above corporate bonds) courtesy of Mark Yusko of Morgan Creek Capital Management.

    [​IMG]

    Yusko, when presenting this chart at a conference last week, said:

    “I’m telling you right now, the US is going to have a crash and it will be massive”

    However, going back to Chart 4 from Citi above, we remind you that we are not professing sell everything and put it all into gold and silver. What we are reminding you is that, yes you may well see some more gains (particularly in Euro shares is Citi’s advice) but such ‘anomalies’ as Citi themselves warn, can precede a crash. Be aware and have your uncorrelated assets in place whilst you flirt with danger.

    Remember too that chasing the final 10 or 20 percent in a sharemarket needs to be done in the context of a market that could drop (say) 50-80% without warning. A 50% loss means you have to make 100% on what’s left to get back to even. A balanced portfolio means something else in your portfolio may have done a lot of that heavy lifting simultaneously….
     
  19. AinslieBullion

    AinslieBullion Member

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    You probably saw the news yesterday of the Australian asset manager Altair Asset Management headed by Aussie investment stalwart Philip Parker liquidating all its Aussie equities. He made the bold decision to return “hundreds of millions” of dollars to their clients on his firm belief there is an imminent property market “calamity” and that we are in an “overvalued and dangerous time in this cycle” in shares, forgoing of course his fees on those hundreds of millions.

    This story is extraordinary for a couple of reasons. First it is rare we get such a forthright assessment of a market from such a respected, 30 year veteran of financial markets, and secondly that we see a genuine care for investors by not just sounding that warning but by taking the selfless decision to return funds to investors and forego both management and performance fees to protect their interests. That, dear reader, is exceptionally rare and why we saw such carnage in the likes of the GFC when fund managers kept share portfolios full despite the obvious warnings. But not all agree, and it drew this question and analogy from the AFR yesterday:

    “Still, isn't that Parker's job? To make money for his clients, particularly during difficult periods? One trader on Twitter likened it to a cricketer who, when things get tough, just takes his bat and ball and heads home. A quitter, in other words - no ticker.”

    Ummm… your hard earned wealth is not a cricket game and his (and all other fund managers) “job” is to make or at least protect your wealth. They are not magicians that can make you money when a market crashes 50-80%. What Altair has done is consistently outperformed the market and seen double digit gains since inception. Sometimes you need to take your profit and walk.

    Again from the AFR:

    “Mr Parker outlined a roll call of "the more obvious reasons to exit the riskier asset markets of shares and property".

    They included: the Australian east-coast property market "bubble" and its "impending correction"; worries that issues around China's hot property sector and escalating debt levels will blow up "later this year"; "oversized" geopolitical risks and an "unpredictable" US political environment; and the "overvalued" Aussie equity market.”

    So what exactly did he have to say about this market? Here are a few more excerpts:

    "We think that there is too much risk in this market at the moment, we think it's crazy….Valuations are stretched, property is massively overstretched and most of the companies that we follow are at our one-year rolling returns targets – and that's after we've ticked them up over the past year….Now we are asking 'is there any more juice in these companies valuations?' and the answer is stridently, and with very few exceptions, 'no there isn't'."

    "Let me tell you I've never been more certain of anything in my life….I am absolutely certain we are in a bubble in this property market."

    "Mortgage fraud is endemic, it's systemic, it's just terrible what's going on. When you've got 30-year-olds, who have never seen a property downturn before, borrowing up to 80 per cent to buy three and four apartments, it's a bubble."

    [in reference to our major banks] "If they get a property downturn anything similar to 1989 to 1991 then they are going to have all sorts of issues,"

    "Australia hasn't had its GFC event, we've been living in this fool's paradise. But if China slows down the way the guys think it will towards the end of this year, then that's 70 per cent of our exports [affected]. You can see already that the commodity market is turning down."

    Maybe an apt continuation of the previous cricket analogy is that when there are a multitude of lightening strikes approaching the cricket ground, taking your bat and ball and heading for a safe haven may be the best decision for your wellbeing; it’s not quitting, it’s survival. At the very least don a golden lightening rod to protect you if you want to face a few more balls…
     
  20. AinslieBullion

    AinslieBullion Member

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    The “Full Employment” Fallacy

    It’s that time of the month where we are just one day from the US’s official employment figures via the non farm payrolls (NFP) print due Friday night our time. The setting is a US Fed keen to not lose face and follow through with a rate hike at their 13-14 June meeting. However there have been a number of quite ordinary economic data prints of late and analysts yet again revising down GDP estimates after the very ordinary 0.7% print last quarter. A lot is riding on a good NFP print to justify taking more ‘tightening’ medicine.

    The last print in April was a solid 211,000 new jobs and saw the unemployment rate drop to just 4.4%, its lowest since May 2007 and considered by most as “full employment”. Sounds awesome yeah? Well for a start the unemployment rate was helped by another drop in participation with the number of Americans simply not in the workforce rising to 94.375m. Apparently you don’t count if you give up... The other red flag was yet another drop in the average hourly earnings – wage growth continues to stall. On this point we came across a very insightful article titled “Simple (economic) Math” by Jeffrey Snider of Alhambra Investments.

    Snider argues that talk of the US having ‘full employment’ because of a 4.4% official rate is nonsense, evidenced by the simple fact that wages growth is so low, the real economy is fundamentally weak, and corporate cash flow (basic earnings) is seeing little to no growth. Let’s look at a couple of charts from the article. The first shows what would normally happen to wage growth in a ‘full employment’ environment and what is happening now.

    [​IMG]

    Snider summarises nicely the simple math that businesses are no longer willing to afford labour – “Anyone will take all the cheapest possible labour they can get, but it takes an actually growing economy with widespread, plausibly sustainable gains to give employers an impetus to actually pay market-clearing rates. That is the simple, small “e” economics left off the pageviews. “We could produce more product” has never in the past stopped businesses from paying up for labor, but it does now because there is no actual economic growth.”

    For over half a century, in our post world war era, the US enjoyed, on average, a steady 2% growth rate measured against corporate cashflow below:

    [​IMG]

    Since the GFC that trend has been broken despite the efforts of Quantitative Easing (QE - money printing) and ARRA (American Recovery and Reinvestment Act 2009 – another debt funded government spending stimulus plan post GFC).

    [​IMG]

    We are seeing a confluence of businesses not hiring so people can buy more things, and people not buying more things allowing businesses to hire more people.

    [​IMG]

    The note in the chart above addresses our earlier point about non participation. Dissecting that 94m we mentioned earlier, Snider breaks down those who can’t and those who can work but aren’t and arrives at 15.3m people simply missing from the labour force. One quickly understands the Trump (and the like) phenomenon of disenchanted voters.

    The other takeaway from the last chart is the nexus with share valuations. Clearly in this ‘recovery’ earnings are going sideways, personal wealth for the 99% is going sideways, and yet shares have soared – all on price multiples – not on fundamentals.

    It’s just math.
     

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