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“Hedge Fund Guru” Predicts $10,000 Gold

Yesterday The Daily Reckoning provided an update from legendary James (Jim) Rickards on gold. Followers and readers of Jim’s books know he has predicted $10,000 gold is on its way. In the following excerpt Jim talks about another legend, Jim Rogers, the ‘hedge fund guru’ and ex partner of George Soros taking a similar view.

“China has a keen interest in keeping gold prices low because it is on a multi-year, multi-thousand ton buying spree. If you were buying 3,000 tons in a thin market, you’d want low prices too.

Of course, all of that will change when China reaches its gold reserve target of 10,000 tons — surpassing the United States. At that point, it will be in China’s interest to become more transparent and let the price of gold soar, which is another way of saying the value of the dollar is in free-fall.

China’s endgame may still be a few years away. Meanwhile, there are other more prosaic explanations for the long decline in gold prices from 2011 to 2015.

The best explanation I’ve heard came from legendary commodities investor Jim Rogers.

He personally believes that gold will end up in the $10,000 per ounce range, which I have also predicted. But, Rogers makes the point that no commodity ever goes from a secular bottom to top without a 50% retracement along the way.

The calculation of a retracement necessarily relies on certain assumptions about which baseline to use for the analysis. For instance, gold fell, but traded in a narrow range between $490 per ounce in November 1987, and $255 per ounce in August 1999.

From there, gold turned decisively higher and rose 650% until the peak in 2011. So, the August 1999 low of $255 seems like a reasonable baseline for a retracement calculation.

Based on that, gold rose $1,643 per ounce from August 1999 to September 2011. A 50% retracement of that rally would take $821 per ounce off the price, putting gold at $1,077 when the retracement finished. That’s almost exactly where gold ended up on November 27, 2015 ($1,058 per ounce).

This means the 50% retracement is behind us and gold is set for new all-time highs in the years ahead.

Still, investors have been disappointed so many times since 2011 that they remain sceptical. Why is this rally different? Why should investors believe gold won’t just get slammed again?

The answer is that there’s an important distinction between the 2011-2015 price action and what’s going on now. The four-year decline exhibited a pattern called ‘lower highs, and lower lows’.

While gold rallied, and fell back, each peak was lower than the one before and each valley was lower than the one before also.

The March 2014 high of $1,381 per ounce was lower than the prior October 2012 high of $1,780 per ounce. The November 2015 low of $1,058 per ounce was lower than the prior December 2013 low of $1,202 per ounce. Meanwhile, the overall trend was down.

Since December 2016, as shown in the chart below, it appears that this bear market pattern has reversed. We now see ‘higher highs, and higher lows’, as part of an overall uptrend.

The February 24, 2017 high of $1,256 per ounce was higher than the prior January 23, 2017 high of $1,217 per ounce. The May 10, 2017 low of $1,218 per ounce was higher than the prior March 14, 2017 low of $1,198 per ounce.

Of course, this new trend is only five months old and is not deterministic. Still, it is an encouraging sign when considered alongside other bullish factors for gold.

The question for investors today is:

Where does the gold market go from here?

We’re seeing a persistent excess of demand over new supply. China and Russia alone are buying more than 100% of annual output each year. That’s on top of normal demand by individuals and the jewelry industry. This means that demand has to be satisfied from existing stocks in vaults.

But western central banks have all but stopped selling in recent years. The last large sales were by Switzerland in the early 2000s and the IMF in 2010.

Private holders are keeping their gold also. On a recent visit to Switzerland, I was informed that secure logistics operators could not build new vaults fast enough and were taking over nuclear-bomb proof mountain bunkers from the Swiss Army to handle the demand for private storage.

With gold sellers disappearing and large demand continuing, the price will have to go up to clear markets — regardless of how much “paper gold” is dumped.

Geopolitics is another powerful factor. The crises in North Korea, Syria, Iran, the South China Sea, and Venezuela are not getting better; they’re getting worse. The headlines may fade in any given week, but geopolitical shocks will return when least expected and send gold soaring in a flight to safety.

Fed policy tightening is normally a headwind for gold. But, the last two times the Fed raised rates — December 14, 2016 and March 15, 2017 — gold rallied as if on cue. Gold is the most forward-looking of any major market. It may be the case that the gold market sees the Fed is tightening into weakness and will eventually over-tighten and cause a recession.

At that point, the Fed will pivot back to easing through forward guidance. That will result in more inflation and a weaker dollar, which is the perfect environment for gold. Look for another Fed rate hike on June 14, and another gold spike to go along with it.

In short, all signs point to higher gold prices in the months ahead. I look for a short-term rally to $1,300 in the next month, and then a more powerful surge toward $1,400 later this year based on Fed ease, geopolitical tensions, and a weaker dollar.

The gold rally that began on December 15, 2016 looks like one that will finally break the bear pattern of lower highs and lower lows, and turn it into the bullish pattern of higher highs and higher lows.”

The following chart, taken from Macrotrends, illustrates these moves.



Of course the above and all prices referenced in the article are in USD. If you are not familiar, our website has a charting tool (here) that allows you to produce AUD charts between dates of your choice. Below is a screen shot for the dates discussed:

 

What “Fake” NFP Means to Aussies

As we wrote last week, there was a lot riding on the US employment figures released Friday night, and it wasn’t what the Fed had hoped for… it was a shocker. But as usual it wasn’t the headline (which was bad enough) but the detail beneath it. Why does this matter to Aussies? Because the Fed know they need to normalise rates and seem hell bent on doing so. History is littered with examples of recessions being caused by central banks tightening policy (raising rates) into a fundamentally weak economy. A US recession normally sees the world follow suit. Last time, the GFC, Australia avoided a technical recession but any scan of the press over the weekend reveals growing ‘expert’ calls for us heading for one now regardless (we wrote about this last week here and here). A US recession would just seal that fate.

So what happened Friday night? The headline non farm payrolls numbers saw a big miss with only 138,000 new jobs (185K expected, 140K lowest estimate) and both March and April’s numbers quietly revised down by a collective 66,000. The continuing concerns on wage growth took another hit with a miss at just 0.2% for average hourly earnings due to a majority of the new jobs being in the ‘minimum wage’ categories. The unemployment rate dropped to 4.3% but did so on the back of the participation rate dropping again to just 62.7% on the back of 608,000 more people dropping out of the ‘labour force’. To quote a Jim Rickards tweet:

“Here's a thought experiment. 320 million are home watching TV. One person is looking for a job, finds it. "Unemployment" is now 0.0%. Good?”

In a continuation of the trend we are seeing here in Australia, full time jobs are declining in lieu of part time jobs. The accompanying household survey showed a decline of 233,000 employed workers courtesy of 367,000 full time jobs lost against 133,000 part time gained.

The aforementioned article last week questioning the validity of these numbers was further reinforced by a Morningside Hill report that looked into the influence of double or triple counting part time jobs and the business birth / death model on the figures. We’ve spoken to the latter before, it is the BLS’s way of estimating the move from people previously employed to starting their own new businesses (birth) and the ‘death’ of those that fail. The ‘science’ behind it is questionable to the extreme but its influence (of course to the positive) is enormous. How big? Have a read of the conclusion of that report….

“There has been an ongoing macroeconomic debate on the BLS’s job numbers and why they are at odds with so many economic indicators. After presenting the evidence on new business formation dynamics, we believe this table merits another look.



We won’t call the jobs added through the birth and death model fictional, but they can be described as hypothetical, unaudited data, with no support from actual business birth / death statistics.

Beyond the birth and death model, no one knows how many of the BLS jobs were double and triple counted part-time positions. According to some studies (Harvard-Princeton, etc.) most of the jobs added after 2005 were indeed part-time jobs. Therefore if, according to official numbers, we added a net 6.7 million jobs over the past 9 years and most were part-time jobs, while the birth and death model added 6.3 million of these jobs, this means that the actual number of full-time jobs has declined significantly. By this measure the jobs market has never recovered from the 2008 recession. In this case, US workers have every right to be discontented. This may explain why so many of them voted for Trump and his ‘bring back the jobs’ platform.

The NFP jobs and the initial jobless claims reports are flawed indicators. If tomorrow General Motors lays off 1,000 full-time workers and they end up working two part-time jobs each, the BLS will report a net gain of 1,000 jobs. If, further down the line, those same workers lose their part-time jobs, they will not be eligible for unemployment insurance and will not show up in the initial jobless claims report.

Fretting over whether the next jobs number will be 160,000 or 211,000 adds little value to any fundamental analysis.”

You will have noted both gold and silver jumped strongly on the release of the NFP Friday night our time. The question of why is interesting. On the face of it, it is because the figures add to the numerous poor economic data prints of late and are counter to the Fed’s ‘everything’s awesome’ narrative, meaning they won’t raise rates and the cheap money game continues (which is why shares also bounced). But gold and silver have actually rallied on each of the last 3 rate rises so that seems a little counterintuitive? Maybe those subsequent rallies are because the market is expecting one of these tightening moves in a fundamentally weak economy will be the straw on this heavily debt burdened camel’s back? The charts below show gold consolidating its break, and silver commencing it’s break, through their key respective moving averages. It will be interesting indeed to see what happens after the Fed meeting next Wednesday our time….

 

Gold Rallies into “Super Thursday”

It was another strong night for gold and silver last night as the market becomes increasingly concerned about global events and is piling into safety. The so called “Super Thursday” events of the UK election, former FBI Director Comey’s senate testimony regarding alleged Trump interventions on the Russia case, and the ECB meeting have since been joined by the growing tensions around Qatar. Overnight the Saudi’s issued a 24 hour ultimatum to Qatar sparking growing concerns of military action. Overnight too, South Africa became the latest country to fall into a recession.

Money piled into US Treasuries (the other ‘safe haven’) as well with 10yr yields falling to their lowest since November. Indeed it has further cemented the anomaly of share prices rising at the same time as bond yields falling (normally, like gold, bond prices which are the inverse of bond yields, are uncorrelated with shares). The big question when looking at the graph below, is which of the two will break?



And so, like the bond prices, gold is hitting 7 month highs and in doing so has broken through some key technical resistance lines. If you are into charts:

First in the daily chart:



And also the weekly chart



So we are now looking for a break through the 1304 to 1315 level to see the next leg take off.

The other key divergence we are seeing at the moment is gold versus commodities. This should be no surprise as we find gold being put in the ‘commodity’ basket complete nonsense. Very little gold is ‘used’ as a commodity nowadays. Gold is a monetary asset and would be more at home being reported with other financial indices or currencies. Unsurprisingly commodities are low because world growth is low. That world growth is low despite record stimulus and debt (per yesterday’s article) means buying into a safe haven makes extraordinary sense right now… Refer Exhibit A below….

 

Australia “Running out of Puff”

Headlines abounded yesterday of Australia’s world record streak of 25 years without a recession as we limped over the expansion line with a GDP print for the last quarter of just 0.3%. That print takes our annual rate down to 1.7%, nearly half the 3% normally associated with the strong employment market our unemployment rate implies, though few economists believe.

So whilst “ScoMo” was full of praise for this government somehow being responsible for this, the economic reality going forward is far less compelling. As Reuters lead in reporting this:

“Australia's economy may have achieved a remarkable winning streak, avoiding a recession for 25 years, but there are now clear signs that the consumers who have driven much of the growth are running out of puff.

With cash interest rates at a record low and house prices near record highs, the nation's household debt-to-income ratio has climbed to an all-time peak of 189 percent, according to the Reserve Bank of Australia (RBA).

That means there are an increasing number of people who have little cash for discretionary spending – on everything from cars to electrical appliances and new clothes - as their pay packets get consumed by large mortgages and high rental payments in the country's red-hot property market.”

They cite one analyst “estimates a record 52,000 households risk default in the next 12 months and that 23.4% of Australian families are under mortgage stress, meaning their income does not cover ongoing costs.”

This at a time when “Australians are also facing a cash crunch because price inflation in essential items such as food, electricity and insurance is accelerating at a 3.4 percent annual rate at a time when Australian wages are rising at their slowest pace on record, just 1.9 percent in the year to March.

Meanwhile, growth in retail sales, personal loans and luxury car sales are all at multi-year lows, suggesting the household sector - nearly 60 percent of Australia's A$1.7 trillion ($1.3 trillion) economy - is under severe strain.”

Citigroup joined the chorus of housing bubble concerns last week with their Chief Economist stating Australia is experiencing “a spectacular housing bubble” calling for tougher regulations, and that “"It had better be focused on immediately, to try and tether a soft housing landing,” and “Clearly if these things are not managed well they can be a trigger for a cyclical downturn.”

The upshot is Australia has for some time now been ‘buying’ GDP with more and more debt. We are on an increasing trajectory of how many dollars of debt we need for each dollar of GDP. At some stage the debt burden fundamentally weighs on growth to the point that it smothers it. Australians are feeling that at a personal level just as the government is at their level. Something eventually has to give…..

 

There have been two recent articles that caught our eye in respect of longer term trends with implications for gold. Regular readers will know our thoughts on the dangers inherent in the US sharemarket. Last week we shared the thoughts and graph of Mark Yusko calling a “massive” crash in the US. This week we saw Paul Singer (head of the $31b Elliott Management hedge fund) say:

“I am very concerned about where we are…..What we have today is a global financial system that’s just about as leveraged - and in many cases more leveraged - than before 2008, and I don’t think the financial system is more sound.....I don’t think that the fixes that have been put into place have actually created a sound financial system. I don’t believe that confidence is justified in policy makers and central bankers…..If and when confidence is lost, it could be lost in a very abrupt fashion causing conceivably a ruckus in bond markets, stock markets and in financial institutions.” Read here for his warnings last year.

However…. Yusko just came out stating whilst he thinks the US is in trouble he thinks Emerging Markets (EMs) are a buy. Yusko puts the US’s issues down to the 3 D’s:

1) too much debt, 2) bad demographics, and 3) deflation. He says:

“GDP [economic] growth is much, much better in emerging markets than developed markets.

The Killer Ds are what’s going to hurt the developed world over the next decade. That’s debt. That’s bad demographics. And that’s deflation.

You got the exact opposite in emerging markets. You have very low debt. You have very good, strong demographics. A lot of young people to buy stuff. And on top of it, you don’t have the deflation problem. You actually have inflation.”

The key EM’s are of course the BRICs - Brazil, Russia, India, and China and he also highlights Poland and Columbia as a couple of favourites along with India. He is suggesting moving your share portfolio to play in these emerging economies.

The other article that caught our attention is a release by the World Gold Council yesterday reporting on the tax overhaul in India where “On 1st July, India’s labyrinth of taxes will be replaced with a simple, nationwide Goods & Services Tax (GST). While this radical step forward could present short-term challenges, we believe it will make the gold industry more transparent and efficient, benefiting the gold industry and gold buyers.”

If Yusko (and he’s certainly not alone) is correct, this resurgence of EM’s should also be positive for gold as you will note a few of the world’s biggest gold consumers in the above list, particularly China and India, reinforced further by the WGC report yesterday. Already this year Indian gold demand is up strongly and China remains strong whilst the Russian’s keep adding large amounts to their reserves. China and India alone, the world’s 2 most populous, account for a huge proportion of global demand. More prosperity and inflation would almost certainly see more gold demand.

 

Central Banks v 4 Week Timeclock

Friday saw another US hard data miss with Wholesale Inventories falling the most since March 2013 and so ensued the usual GDP estimate downgrades from various economists. Yet another hit to the ‘everything’s awesome’ narrative before this week’s Fed meeting. However the markets are convinced we will see another 0.25% hike this Wednesday. Again we remind you of the history of recessions triggered by the Fed raising rates into weakness.

We also recently reported (here and here) on the recession predicting track record of declining commercial and industrial lending. This shouldn’t be a surprise to anyone, but of course it is every time for the sheeple, because if growth is based purely on more debt and that debt turns down… guess what happens?



Zooming in on the present set up and you can see the precipitous nature of the current decline:



The authors of this chart, ZeroHedge, calculate that at the current rate of decline “the US will post its first negative loan growth, or rather loan contraction since the financial crisis, in roughly 4 to 6 weeks.”

Whilst US corporates are deleveraging the increasingly desperate central banks are printing more money than ever. We mentioned last week central banks had bought $1 trillion of financial assets using freshly ‘printed’ money in just the first 4 months of this year. Bank of America Merrill Lynch just updated that to a record breaking $1.5 trillion year to date! Whilst everyone was fixated on the (at the time) incredible $4.5 trillion QE program by the US Fed, since then Japan and Europe have dwarfed it. And that, importantly, is not counting the opaque but clearly evident and massive efforts of the Chinese. When the US finished QE3 in 2014 the total stood at close to $10 trillion. It’s now at $15.1 trillion just 2.5 years later (and again we stress, excluding PBoC).



To put this into historic context for you: In the US, it took 90 years from 1918 to 2007 to reach $800b ($0.8t). The US Fed then printed about the same in each and every year after the GFC to take it to $4.5 trillion.

This is desperation of an epic scale to fight off the bursting of the very bubble they created. Refer back to the first graph above….

 

Gold & Silver Holdings Grow with Valuations

On Friday the World Gold Council published their June update of ETF holdings of gold. Yet again it showed an increase, this time up 10.5 tonne from April to a total of 2,292 tonne (73.7m oz) with a value of $93b. The big growth was in Europe with inflows (20.8t) over double the outflows from the US (-7.2t).

The charts below provide an update of the total gold and silver inventories in all published depositories, mutual funds and those ETF’s above. What is immediately apparent is that whilst the prices for gold and silver are (in the broader scheme of things) essentially bouncing along the bottom (albeit maintaining the Dec 15 low), these various holders of gold and silver are building their stash.





To any but the most ardent equities-centric investor this really shouldn’t be too much of a surprise as valuations on a range of metrics are starting to scream warnings. Courtesy of advisorperspectives.com here are 2 more charts you should be taking note of (and yes, again these are US centric but you well know the US sneeze, Aussie cold history)…

First is an all encompassing combination of 4 different methods (as explained in the table insert) showing that right now we are in the 2nd most overvalued market in history…. ever…



Below is the so called Buffet Indicator, being this legend’s favourite measure of the value of all equities divided by GDP – essentially a price-to-sales ratio for the whole economy…



Not too hard to guess why inventories of gold and silver are rising huh….

 

The Student Loan Timebomb

An often counterintuitive notion in accounting for newcomers is that debt issued is counted as an ‘asset’ on your balance sheet, your total net wealth. I lend Jack $100 and put that $100 as an asset on my balance sheet on the assumption Jack will pay me back. In most cases of course that is correct. But what if Jack is in way over his head?

Whilst you may have read endless stories of the scary scale and questionable ‘security’ of all the student debt in the US, we hadn’t seen it set out so clearly as in a recent article on advisorperspectives.com. That article asked the simple question, “what line item is the largest asset in Uncle Sam's [US Federal Government] financial accounts?

A) U.S. Official Reserve Assets

B) Total Mortgages

C) Taxes Receivable

D) Student Loans”

The answer, with the source direct from the US Federal Reserve’s Financial Accounts, is as you may have guessed from the title of today’s news…student loans. Now that might be scary enough but we’d hazard to guess you might find the scale outright terrifying



Yep, over half, and not just that, but over 9 times bigger than the next biggest asset. But I hear you say, ‘yeah but that may not matter if the liabilities are modest’? The total of the US Federal Governments Financial Assets sits at $2.1 trillion. The total liabilities totalled $15.2 trillion as at the end of March this year….(that’s not a typo).

So how did Student Loans get to this incredible figure when before the GFC is represented only around 17%, not 53%? It increased by 939%..



And by the way, that $1.1 trillion is just what is owed to the Government, total student loans are $1.34 trillion according to official data from the Fed. To add salt to the wound, a recent study showed 31% of students were using their loans to fund Spring Break trips to the likes of Cancun…

If all these uni students were getting good paying jobs afterwards to pay it all down that may not be the end of the world, but as we repeatedly report after each NFP payrolls report, many are going into part time and/or low paying jobs.

This is but one of many examples (arguably auto ‘sub prime’ loans are far worse) of the broad scale explosion of adoption of debt across society. This is robbing future generations to fund our current lifestyles, or just survive. It always, always, has a day of reckoning.

Finally, if you think this couldn’t possibly happen in Australia…. From The Australian last year:

“Australian taxpayers’ exposure to university students’ loans will explode more than fivefold to $185.2 billion in 2025-26, accounting for 46.3 per cent of the nation’s public debt, according to an independent review of the Higher Education Loans Scheme.

The Parliamentary Budget Office report on the HELP scheme, commonly known as HECS, finds about 21.8 per cent of new loans taken out in that year — is unlikely to ever be repaid because the borrower either earns below the taxable income threshold or has moved overseas.

The annual cost of the HELP loans will rise from $1.7 billion in 2015-16 to $11.1 billion in 2025-26.

The report revealed the nominal value of the HELP loan portfolio, currently $42.3bn, was projected to reach $185.2bn in 2026.”

 

When Central Banks Turn Off the Tap

It is widely acknowledged that today’s “everything bubble” is largely courtesy of the unprecedented amount of central bank stimulus deployed since the GFC. We are just 2 months away from the 10 year anniversary of the onset of the GFC. 10 years of printed money buying up financial assets around the world and near (or below) zero interest rates forcing people into yielding shares and property.

Just last week we wrote of the turn, or reduction, in corporate loans whilst central banks had printed more money than ever. That turn normally precedes a recession, but what if the central banks’ monetisation programs outweighed it? Well too bad… they (ECB and BoJ) are now announcing a reduction of their QE programs (including large amounts of shares) and the Fed last week stated it will start to reduce its holdings of bonds that it bought with its QE programs. So to be clear, we now have both corporate credit rolling over and the world’s central banks about to do the equivalent.

Citibank’s market strategist Matt King had this to say:

“As we’ve noted in the past, in recent years asset price moves have displayed a high degree of correlation with central bank liquidity additions. Central bank buying has reduced the net amount of securities (in DM) the market needs to absorb, both this year and last, to near zero; we think this has played a critical role in propping up valuations at elevated levels.

Next year looks very different. We project that the private sector will have to absorb c.$1tn of securities – the highest number since 2012. The main driver for this is our anticipated reduction in ECB purchases from €780bn this year to €150bn in 2018. The faster pace of Fed balance sheet reduction we can now expect cements our impression that next year will see a big shift away from the current status quo. Assuming that Fed balance sheet reduction begins in September, the US market will have to absorb a further $450bn of supply in addition to the gap left by the ECB.”

Citi then produces the following charts illustrating the trajectory:



We explained yield spreads on bonds last week. The above is similar in that it is the spread between government bonds and higher risk non government bonds. Just check out the correlation!

This is a GLOBAL market built on credit, either corporate or central bank. That it looks now like this may be coming to an end is the ultimate test for the financial market bulls. After the Fed’s rate hike and announcement of starting to unwind its QE purchases last week Citi’s Mr King had this to say:

“…the Fed’s hawkishness this week to our minds adds to the likelihood that in markets a significant un-balancing (or perhaps that should be re-balancing?) is coming.”

The first half of this year saw the greatest amount of money injected into the global system by central banks ever. The second half is to see this reversed.

Mr King talks of balance above. Is your portfolio sufficiently balanced to weather the storm?

 

Incrementum’s Annual “In Gold We Trust” Report

Gold was under strong pressure overnight with selling taking advantage of the thin 4th of July holiday period. A strong rebound in the USD exacerbated the situation with the Commex August gold contract down $21.60 and the September silver contract down $0.497 according to Kitco.

This can be frustrating on the surface with Gregory Mannarino early this morning saying “nobody would be selling huge orders like this onto the market and be willing to take anything for it” and reminding us that when it comes to gold, “longer term I can’t imagine a better place to be”.

The price action overnight is an illustration of the points made yesterday when we discussed the importance of education and context in determining prudent investment moves. It is timely then that the 2017 version of Incrementum’s “In Gold We Trust” report has been released as it’s an excellent source of information on the monetary system, inflation, bitcoin, populism, US recession odds, portfolio characteristics of gold and mining shares.

Published for free in both a 169 page extended version and a 29 page compact version, the report is opened articulately and as such is quoted here:

“We live in an age of advanced monetary surrealism. In Q1 2017 alone, the largest central banks created the equivalent of almost USD 1,000 bn. worth of central bank money ex nihilo. Naturally the fresh currency was not used to fund philanthropic projects but to purchase financial securities. Although this ongoing liquidity supernova has temporarily created an uneasy calm in financial markets, we are strongly convinced that the real costs of this monetary madness will reveal themselves down the line.”

We cover the poignant points below but for those time challenged readers; the report articulates that we are approaching a period of wealth transfer where value is shifted from one class of asset into another. There are strong indications that gold and silver are set up to be the recipients of this wealth transfer with the value being extracted from “everything else”.

Head of research and investment funds at Incrementum Ronni Stoeferle in an interview with Kenneth Ameduri released over the weekend supported the conclusion made in Incrementum’s 2016 report; namely that we are in the early stages of a new bull market in gold. Stating that the next US recession is already on our doorstep, the report notes that the de-dollarisation already occurring supports gold technically and fundamentally at the moment.

Staggeringly, the 1T USD mentioned in the introduction is sufficient to buy every human being on this planet 1/10 of an ounce of gold and the ultimate result of its creation according to the report is asset price inflation. Real estate, bonds, share prices are at or near all-time highs where commodities and gold are very cheap both in absolute and relative terms.

A graph on page 6 of the compact report shows that financial assets of households in relation to disposable income has now exceeded the peaks of both previous bubbles (displayed below for convenience). Importantly, the last bubbles were limited to certain sectors where as now the contamination is everywhere. Ronni concludes that “the next bust will be significantly bigger than 2008. You should have insurance and this insurance should be gold”.



At gold’s peak of around $1900 in 2011, inflation rates were 4.4% YOY. Since then we’ve seen falling inflation rates. Disinflation is by far the most negative environment for gold based on the report’s analysis. This also leads to the conclusion that a strong dollar environment which we see in disinflationary scenarios is a negative environment for gold. Note that the USD index was trading at a 14 year high at the end of last year. There are quite a lot of signs that inflation numbers have bottomed last year and we are heading into an inflationary environment.

On politics, the report indicates that Donald Trump wants a weak dollar and the likelihood is that the next couple of years will see just that; an excellent environment for gold and commodities.

The whole world believes that the US economy is doing so well and that the US is firmly on the rate hike path with a hawkish fed yet from Ronni’s point of view, “that’s nonsense”. The fed will have to change course sooner or later because there’s a large gap between the soft and hard data. “Economic confidence may be high but the hard data doesn’t confirm strength. A recession going forward is one of the biggest catalysts for gold”.

There are a lot of positive signs confirming gold’s new bull market. Gold has clocked up positive gains in 2016 and 2017 in every currency which indicates good market breadth and is something we covered yesterday. The relative weakness vs the stock market is receding with gold relative to the S&P bottoming.

Incrementum is bullish on mining stocks with Ronni stating that “we’ve seen a lot of creative destruction. Free cash flow in the gold bug index last year was higher than in 2011when gold was trading at $1900 so the companies did their homework, reduced debt, restructured balance sheets, all positive signs”. Given that the last bear market in mining stocks was the longest in history it’s clear that the next bull market will be “quite interesting”.

Lastly, Ronni poses an interesting thought experiment for those not bullish on gold; that is to ask “when would I not need any gold in my portfolio?” The answer would probably be “when the debt levels can be sustained or reduced, when the threat of inflation is low, when real interest rates are high, when confidence in the monetary authority is strong, when the geopolitical environment is steady and predictable and when governments deregulate markets, simplify tax regulations and respect civil liberties.

It’s reasonably safe to say that we are currently seeing exactly the opposite.

Both the full length and condensed versions of the report are free and available at https://www.incrementum.li/

 

Gold and The June FOMC Minutes

Overnight the minutes from the Fed’s June meeting were released. They were a disappointment for those including Patti Domm at CNBC who only hours prior to the release wrote of expecting insight into the Fed’s plan to unwind its extraordinary $4.5 trillion post-GFC balance sheet.

Reactions are still emerging online but for now, one of the more notable characteristics of the report as exhibited by the various responses available at the moment was the distinct lack of consensus within the FOMC on when exactly the Federal Reserve will taper its balance sheet.

There is a consensus in the market and the “Fed watching” community more broadly that September will mark the commencement of balance sheet reductions with CIBC World Markets senior economist Avery Shenfeld going as far as saying that the uncertainty inherent in the minutes actually supported his call for a September taper and that “the Fed will be able to use progress in labour markets to justify another hike this year, but all the detail on the balance sheet issue suggests that the next move will be the run-off initiation rather than a hike”

According to the minutes, “several preferred to announce a start to the process within a couple of months, however, some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.”

In fact there was no obvious agreement on expectations for inflation in the FOMC’s discussions with some members continuing to disregard weak price pressures as “transitory” while “several participants expressed concern that progress toward the Committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist”.

To the casual observer, all of this may seem appropriately described as directionless, ambiguous, confusing or even contradictory and the use of such terms is completely understandable. “Fed watching” has become a notable characteristic of our time with tips and odds released by analysts akin to what one would expect from discussions of a sporting event. In fact it was only Monday that we discussed the difficulty that “average investors” face when trying to discern complex financial information.

Only two hours ago for example, Jim McDonald of Northern Trust Asset Management appeared on CNBC and said of the Fed “I think the market is ready for them to start to reduce the balance sheet”. Jim Caron of MSIM Global Fixed Income is already talking about his expectations for tapering guidance by saying “I think in September they’ll probably announce something, perhaps balance sheet reduction” and goes on to claim a 50% chance of a further rate hike this year. Notably he remarked that the Fed “is running into some problems here which is correlation risk”; a concept beyond the scope of this article but nicely summarised as by Jim as being “risks of excesses”.

Perhaps this lack of certainty within the financial community is why gold was relatively unchanged following the release of the minutes; with prices trading at a mid $1,220 handle at the time of writing and hovering at an attractive four-month low. Confusion is where mistakes can be made and gold is a good hedge against that situation.



We’ve been covering gold’s price declines of late and can only continue to affirm the tangible fundamental characteristics of the metal in the face of an unbalance and uncertain future. In fact in lieu of any pressing news release in the coming day, tomorrow we will elaborate on the different psychological approaches to investing in a depressed asset.

 

Asymmetric Opportunities Require Discipline

It may not be a surprise to learn that the US is currently in a gold trade deficit. Gold exports from the US for the first four months of the year totalled 174mt where imports tallied 88mt with a 77mt import figure totalling 165mt. In fact, the quantity of gold leaving the US surged by 45% during the first four months of 2017 when compared with the same period in 2016 as pictured below.



According to Steve St. Angelo, “Hong Kong and India received 51%, while Switzerland and the U.K. received 43% of the total. However much of the gold that is exported to Switzerland and the U.K makes its way to China, India or other Asian countries”.

This is an important dynamic as it illustrates the psychological differences applied to investing in the East. The West is typically frustrated by low gold prices due to a tendency to focus on shorter term gains whereas the East relishes them, opting to view gold purchasing as a long term prospect and buying on price dips.

How could the Eastern approach be of benefit? Well the short answer is dip-buying and long term holding allows for the best exploitation of asymmetric trades. What are asymmetric trades? David Smith of Money Metals News Service defines them as “a situation where investing a relatively small amount of money holds the potential of yielding a profit many times the amount of the original sum at risk. In other words, where the risk to reward is skewed massively in the direction of reward”.

On Wednesday we looked at the concept of wealth transfers and explored with the help of Incrementum’s research how gold is poised to benefit from such conditions as a highly undervalued asset. It is a good example then of an asymmetric trade.

We’ve seen asymmetric trades pay off recently with the explosion in the Bitcoin price (see the one year plot below in AUD), hotly followed by Ethereum and some of the alternative (so called “alt”) coins. Similar prior examples can be seen in the equity space with insightful allocations of funds made years ago into the FANG or FAMGA stocks (Facebook, Amazon, Netflix, Google or Facebook, Apple, Microsoft, Google, Amazon respectively) returning hundreds of percent.



David Smith discusses two important factors to consider regarding asymmetric trades. Firstly, there has never been a time when the world has been so awash with funds looking for a place to go. From the personal investor, through the array of professional investment entities, banks and up to the scale of countries, the investment dollar now truly has a global audience. As such, there is a lot of potential energy just waiting to be released. This coupled with the speed at which information and money now travel means that breakouts can occur much more quickly. To exemplify, David states that “It took over two decades for Microsoft to "do its thing." Amazon? Arguably about 15 years.”

Secondly David discusses the tendency to sell early into an asymmetric price breakout. The following quote illustrates this for the USD price action in Ethereum.

“In January, 2017, ETH could be had for $10 each. By $50, the charts and many soothsayers said that it was ‘grossly overbought.’ Time to cash out? Today ETC sells for $328 each.”

Selling early is a psychological factor that takes experience and discipline to navigate. David’s suggestion is to prepare by establishing first what an investor considers their “core component holdings” (longer term holdings for the purpose of hedging, inflation mitigation or insurance) versus the “speculative component holdings” (something to liquidate at strong price points). This preparation will provide an investor with the best chance to ride asymmetric breakouts for as long as possible.

Seeing buying opportunities in depressed assets and holding them for potential future breakouts is not something the Western investor is typically geared towards and the ongoing migration of gold out of the West is a great example of the opposite mindset typically held in the East. Regardless of the approach, a balanced diversification into metals is a prudent thing to do.

 

Silver’s Flash Crash & The Real World Problems Low Prices Create

It is difficult to write on any other topic this morning than the “mysterious” silver flash crash that we saw just after 9am AET on Saturday. This saw the September silver contract on the Nymex exchange fall by 11% in minutes only to quickly recover the bulk of that decline as shown in the red plot below.



In response, even main-stream CNBC author Evelyn Cheng wrote that “computer-driven trading has gone too far”, noting that “like most other recent flash crashes, the drop in silver occurred outside of New York business hours and in the early hours of Asian market operations”.

Chris Grams, senior director of corporate communications at CME stated that “our markets worked as designed, with velocity logic pausing the market for 10 seconds at 18:06, allowing liquidity to come back into the market”. But why should such “logic” be required and why is this now considered to be normal or “as designed”?

Labelled by the Chicago Mercantile Exchange (CME) as a nondescript “glitch”, we look at the situation a little more deeply. We’re not so accepting of “glitches” when it comes to aircraft or the safety harness on a roller coaster so why then should the fundamental stability of markets or the industries supplying them with commodities be viewed any differently? As we’ll see, there are real world consequences for the price of Silver being so low.

With the help of Vince Lanci, senior partner at Echobay Partners, let’s have a look at what likely happened over the weekend. Vince suggests that trading algorithms operating on thinly traded markets where on-book stops rest and where there’s less continuous order flow will start “fishing”. To paraphrase, he goes on to explain

“When you have three or four big algorithms that find a stop they start competing with each other and they [prices] start to snowball lower; selling in front of each other, buying from each other so that you get this negative snowball effect lower. What ends up happening is (and this is where the glitch comes in) when you have a HFT [high frequency trading] algorithm selling so fast that the order book of the exchange can’t keep refreshing its buy orders, you get markets that are trading at 14.34 when the exchange hasn’t had a chance to put in its 14.62 bid by Joe Smith. The result is what you call a glitch”.

Vince concludes that these trading algorithms, now such an inherent component of markets, have become “predatory in an exchange sense” in that the HFT computers are faster than the actual exchange. To be clear, when asked directly whether silver is a buy to invest in, Vince simply replies “absolutely”.

The relationship between algorithms and “glitches” as an idea supported by Kitco senior analyst Jim Wyckoff who said that this type of thing will “probably continue to happen on a sporadic basis, especially now with the speed of electronic trading”.

Trading algorithms aside however, these low prices have palpable effects in the real world as beautifully articulated by Jason Burack over the weekend.

Jason describes how many miners have cut costs to the bone and by doing so, are potentially ruining the mines long term. “Mines can run at a loss for a little while but if they have a bad balance sheet and a lot of debt due and they don’t have a lot of cash on the balance sheet, there could be huge problems for the miner”.

Currently there is some capital available through debt or equity but it’s a punitive penalty rate. Jason uses Coeur D’alene mining is an example of a major minor in trouble at current silver prices.

Coeur produces 16 million ounces a year of silver. As a senior silver producer they’ve also been adding a lot of gold production because “once you get up to that level of annual silver production it’s really hard to routinely keep all of your revenues in silver”.

Coeur D’alene’s investor presentation to Goldman Sachs dated June 20th demonstrates how aggressive cost cutting has become. Slide 5 (displayed below for convenience) indicates that from 2014 to the first quarter of 2017 costs were reduced by 26%. That is an impressive amount but notable is how long it took them to do that especially when considering the silver bear market started in 2011. Jason states that “mines are complicated and capital intensive. You can’t cut 26% costs in a mine overnight. There are a lot of moving parts and there are dozens of things that can go wrong”.



Currently, Coeur D’alene isn’t managing $1 an ounce margin and that puts their balance sheet in peril.

Jason continues by saying that “we’re at a silver price now below $16 and that has a lot of dangerous real world consequences. Hccla and Coeur D’alene have cleaned up their balance sheets but they’re by no means in great financial shape”.

In fact between Coeur and Hccla, at current silver prices there could be a lot more than 30 million ounces of silver production a year in major trouble and this puts the supply side at further risk in an already high physical demand environment. As they say, the solution to low prices is low prices.

Jason suggests that even viewed as a speculation, buying 10 or 100 ounce silver bars and holding them for 2 or 3 years as a trade alone could see a 30 to 50% appreciation. This supports our recent discussion of the difference between core holdings and speculative allocations and at these sale prices, the asymmetric opportunities are hard to ignore.

If you are interested in learning more, Ainslie Bullion will be presenting at the NUU Understanding Money Conference on Saturday 26th August 2017. Suitable for all, this conference will exhibit a range of presenters on a number of topics from the definition of money, its past and future, cryptocurrencies and of course gold as the oldest form of money. We look forward to seeing you there.

 

India’s H1 2017 Gold Imports & The Psychology Of “Buying The Dips”

Last month we referenced a World Gold Council article that discussed the implications of India’s tax overhaul on gold. For those who missed it, this snippet summarises:

“On 1st July, India’s labyrinth of taxes will be replaced with a simple, nationwide Goods & Services Tax (GST). While this radical step forward could present short-term challenges, we believe it will make the gold industry more transparent and efficient, benefiting the gold industry and gold buyers.”

At the time, we commented that “Already this year Indian gold demand is up strongly and China remains strong whilst the Russians keep adding large amounts to their reserves. China and India alone, the world’s 2 most populous, account for a huge proportion of global demand. More prosperity and inflation would almost certainly see more gold demand.”

In support of our comments then comes a timely article penned by Anna Golubova yesterday who points out that India’s H1 2017 gold import figure of 521 tonnes has already surpassed that of 2016 at 510 tonnes according to data from GFMS (Gold Fields Mineral Services) Thomson Reuters.

To explain this, senior GFMS analyst Sudheesh Nambiath was quoted as saying “large jewellery manufacturers have seen volumes higher than the monthly average through April to June. Investment-led demand has also turned stronger as there has been an increased interest to stash away cash in gold which many believe may be difficult post-GST. Our estimate is that at least one-third of the wedding related demand that comes up in the fourth quarter has been advanced”

The two important takeaways from this analysis are firstly that Indians view gold as a viable alternative to cash when it comes to storage of wealth and secondly that gold provides a hedge against political disruptions or legislative changes.

Importantly, the pulling forward of demand from a future high tax environment to a current low tax environment is a good example of “buying the dip”. This concept is well established in the East and we’ve recently covered the advantages of this psychology in relation to investment success.

The upswing in gold demand was also observed by the Times Of India on June 29th when they reported on gold premiums jumping significantly ahead of the GST rollout. At the time, the TOI noted that gold premiums were sitting at near eight month highs “as consumers advanced purchases to avoid paying higher tax when a new nationwide sales tax takes effect from July 1”.

The new 3% tax is up from 1.2% previously.

According to Smaulgld “May Indian gold imports were 220 tons up 132% from April imports of 95 tons, and up 511% from 36 tons imported in May 2016” as pictured below.





According to the Times Of India, “jewellery showrooms in key Indian cities like Mumbai and Kolkata were crowded” in June, a typically weak month for demand and despite dealers charging “a premium of up to $10 an ounce over official domestic prices, the highest since mid-November” and up from a $1 premium the week prior.

Kumar Jain, VP at Mumbai Jewellers Association attributes the surge to the fact that "people are advancing buying to avoid paying additional tax"

It remains to be seen whether the surge in Indian gold consumption currently is a replacement for the demand typically seen in Q4 or whether that cyclical demand will still be observable this year.

Rajendra Jadhav at CNBC is predicating the former but in the latter scenario, 2017 annual figures could surpass 900 tonnes which would mark the highest import figure since 2012. If Sudheesh Nambiath is correct in estimating that only one third of peak H2 demand has been brought forward then we should reasonably expect to still see higher figures this year as the peak season comes to pass.

Regardless, the observable human investment behaviour in the face of legislative change in India right now is strong evidence of the widely held confidence placed in gold as a long established instrument of sound money.

 

FRED Deflationary Warnings, Gold’s Role & A Lesson From Irving Fisher

Despite all the fundamental considerations, the now five week old technical down-trend in the daily gold chart and the near four-month price low reached earlier this week will have some investors asking questions.

Although seeing some price “stabilisation” (in the words of Kitco’s Jim Wyckoff) and a slight bounce overnight, the word deflation seems to be currently trending and perhaps not without cause. In fact just last night Jeff Clark, chief investment strategist and senior precious metals analyst for goldsilver.com tackled this very issue.

Along with Mike Maloney, the gentlemen provided broad examples of contraction in growth observable in the US right now and we’ve generated the following charts on the Federal Reserve Bank of St. Louis website earlier this morning to illustrate some of their examples. For reference, the following plots use seasonally adjusted weekly data sets in units of “percent change from a year ago” plotted from June 29th 2016 to June 28th 2017, a mere two weeks ago.

Starting with bank credit for all commercial banks we see a distinct slowing of the expansion of credit with the following plot dropping to 3.5% (highlighted) from 7.4% on June 29th 2016. Note that this does not represent a credit contraction but rather a cratering in the rate of credit growth, an ominous warning sign.





Moving on to the plot of commercial and industrial loans for all commercial banks we again see a significant growth contraction from 9.28% on June 29th 2016 down to 1.87% two weeks ago (highlighted).



This metric is a bellwether for the economy as it broadly represents the use of credit for manufacturing, warehousing and retrial to name a few. Mike Maloney labels this as “an enormous slowing” and “typical of the peak and popping of bubble”.

Moving on to real estate loans for all commercial banks and we again observe a remarkable slowing in growth, in this case from 7.0% to 4.5%



Taking a break from the charts but continuing with the examples over the same time period we can observe consumer loan growth fall from 8.5% to 4% (a near halving), consumer loans for credit cards and other revolving plans fall from 9% to just over 4% and other consumer loans (automobile loans) falling from almost 9% to 3%.

Lastly (and importantly given Australia’s cultural bias towards property) we can look at growth in residential real estate loans which have fallen from approximately 4% to 1.3%. A sub 1.5% growth rate can be classified as anaemic and Mike Maloney suggests that “pretty soon these charts will probably turn negative”. This is significant with Mike concluding that “if residential real estate loan growth YOY has slowed to less than 1.5% then that means that the real estate bubbles are coming to an end”.

In fact the last real estate peak occurred in the 2006/2007 time frame when growth began to slow, stop and then reverse but it wasn’t until 2008/2009 that the impacts were widely felt. This suggests that disruption may not be around the corner, but it may be just up the road.

Just from this small set of examples, it becomes clear that there are now huge contractions across the board in terms of credit growth and this is one leading indicator of the onset of a recession.

Jeff remarks that “it’s not just one chart showing this trend but multiple and one must hence consider the cumulative effect of all of these things coming to a head all at the same time” and to paraphrase he concludes that this is “clearly pointing to a deflationary outcome which corresponds well to the slowing velocity of money and why we haven’t seen inflation yet”.

To one of the main points of this article, Jeff talks about how he receives a lot of emails asking why it is important to buy precious metals now if a deflation is coming that could see them able to “buy silver when it’s down in single digits” or “buy gold if it drops below $1000”.

There are two strong rebuttals to this line of thinking. Firstly, there’s no guarantee that we will see a deflationary event and secondly, in any deflationary event there’s no guarantee that gold and silver prices will be driven lower.

In fact Jeff explains that the last great deflation pushed gold & silver prices up. “During the great depression, yes gold prices were fixed but the only gold that citizens could buy as private investors was gold stocks and those soared by 400 or 500 percent and that’s just producers only so there’s no guarantee that it’s [the gold price] going to fall”.

Dispelling the idea further is the reality that paper prices tend to diverge from physical prices in these circumstances. “It’s the paper price that goes deflationary, not the physical. During the last financial crisis in 2008, the people who wanted to buy it when it was supposedly cheap ended up paying a whole lot more for it because of the large divergence in the paper price and the physical price”.

Demand for physical bullion increases as people get worried and rush to safe haven assets and that tends to cause shortages irrespective of what the derivative contract price may be. In fact if the deflation is crisis driven then the resulting fear among the investment community could see the paper price just as easily soar.

With the US now in its 3rd longest economic expansion in history we see unjustified levels of confidence or even hubris. A lesson from history comes from famed Yale economist Irving Fisher who famously said “Stock prices have reached what looks like a permanently high plateau” approximately one month prior to the commencement of the great depression.



With Janet Yellen recently voicing her view that we won’t see another financial crisis in our lifetimes, no better argument for an allocation into gold and silver then can be made.

 

Fed Watchers Left Guessing After Yellen House of Reps Testimony

Guessing, it would seem, is not an inappropriate term to describe a situation where both gold and stocks rally simultaneously. That is precisely what we saw overnight after Federal Reserve chair Janet Yellen presented her now dovish remarks in prepared testimony to the US House of Representatives.



The gold price bounce was modest and possibly partly attributable to bargain-hunters and short-covering, but it was noticeable nonetheless. The reaction in equities however was much more conclusive.

About 5 hours ago, Gregory Mannarino of traderschoice.net remarked that “the markets are in full-blown rally mode”. With the DJIA up in the vicinity of 130 points at the time, Gregory stated that US equities will probably see “new records in the next several days”.

So what’s driving this and what can we learn from it? Two important takeaway points from Yellen’s comments were as follows. Firstly, Yellen said that interest rates do not need to move much higher and secondly, the Fed is almost at a neutral point.

Equities loved this new story of course as it means the Federal Reserve (at least until the next “180”) is going to keep doing what they’ve been doing; suppressing interest rates and punishing savers.

In the last weeks and months, Yellen had been sounding Hawkish, speaking of raising rates and shrinking their balance sheet; something we wrote about exactly one week ago today when discussing the release of the June FOMC minutes. With this most recent release, any shrinking of the balance sheet will likely be so gradual that it will probably be inconsequential.

In a concerted guidance effort, Lael Brainard also came out yesterday sounding somewhat dovish and some are suggesting that the Fed may be reacting to concern about action in the bond market; namely how bonds were selling off and interest rates were consequently rising.

Again we circle back to what the prudent investor can learn from this latest Federal Reserve sparked rally. Almost unarguable is the conclusion that these price actions are the result of the comments of a single individual and not the result of fundamental free-market operation. As such, they are without fundamental foundation and are hence firmly in the speculative rather than fundamental basket. Chasing gains here should be done with the knowledge that the profits can disappear as quickly as they appeared.

Almost unarguable too is the fact that the difficulties faced by savers in this new normal of suppressed returns is likely to remain. Given that cash allocations are typically the defence against deflationary warning signs such as those we discussed yesterday, this puts individuals in a catch-22.

By storing cash savings in real money and denominating these in ounces rather than dollars, a prudent investor stands a chance of balancing the conflicting need to be invested (so as to avoid the war on savings and currency risk) and to be cash rich (to mitigate deflation risks).

 

A Flattening Yield Curve & The Curious Case Of The Yen/Gold Pair

In an overnight interview, TF Metals Report owner and 27 year veteran of the securities space Craig Hemke has contributed some interesting observations to the economic narrative.

There are two particular takeaways of interest in Craig’s material. The first is the observed relationship between the COMEX gold price and the Dollar / Yen pair and his hypothesis that this may be the result of algorithmic linking of the metal market to the much larger foreign exchange market for the purpose of hedging.

By plotting the inverse of the currency pair (the Yen / Dollar) and overlaying that with gold, a clear correlation which started to form in 2012 becomes evident as we’ll show below.

One of the suggestions behind this correlation is to allow the bullion banks, those that manage the physical metal supply at the wholesale level around the world and issue the derivatives contracts, to offload risk into the FOREX market. Craig explains that these derivative instruments which are tied to a physical commodity are inherently tremendously risky and indeed JP Morgan nearly had an extension event in 2011 (particularly during the last $10 short squeeze from $38 to $48 in the month of April) when they held a large short position and little physical silver behind it.

Because the banks recognise this risk they want to eliminate it. With such large positions however, it can be difficult to mitigate or hedge that risk by using only the gold market itself and it seems possible that the bullion banks have utilised computing algorithms to link gold prices with the USD/JPY pair.

The motivation to link by computer a currency pair to the gold contract price is to facilitate hedging of short gold exposure through the Yen and in utilising the near $6 Trillion a day FOREX market to do so there is “a near infinite pool where you can cover and hide your tracks on your hedges”.

We stress that this is a hypothesis (albeit an interesting one) yet the means and motive would appear to hold water. To explore this idea, we generated the following three plots this morning for comparison. They show one year historical data for the inverted USD / Yen pair and the gold price over the same period.





For further perspective, overlaying the two plots and expanding the time out to two years, an astounding correlation can be observed below. One can only speculate as to why this currency pair may have been selected if this hypothesis has merit but liquidity must be one of the considerations in this case. If nothing else, this concept adds weight to the importance of understanding risks in and limiting the amount of funds allocated to any speculative financial vehicle.



The second interesting takeaway point that we will cover from Craig’s interview is on the topic of recession indicators. The last three Federal Reserve rate increases in December, March & June have produced a 75 basis point increase in the shortest rate available, the Federal Funds rate or the so called “overnight rate”. This is the only rate that the FOMC has direct control over and during this time the long rates have actually gone down.

“The 30 year long bond double topped at 3.21% and now today it’s at approximately 2.9%”. These rate increases have hence had the effect of flattening the yield curve; a phenomenon well established as an accurate precursor to recession.

Craig explains that “the global central banks have printed so much cash and given all of it to the banks that the cash is now looking for a place to go. So it creates a put under the bond market, like a constant bid for bonds, at least on the long end, because everyone is desperately searching for yield”. He says the jawboning of threatening to unwind the balance sheet (which we discussed last week) is intended to frighten that bid and achieve a positively sloping yield curve in order to avoid this classic recession signal.

In closing, we’ll leave you with a tweet from Jim Rickards which would seem to put discussion of algorithmic trading and rate manipulation into stark perspective.

 

June Advance Monthly Sales Census Boosts Gold Price

On Friday, the US Census Bureau issued release number CB17-112 entitled “ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES, JUNE 2017”.

This release is intended to provide an early estimate of monthly sales by business type for retail and food service companies located in the US and is compiled from answers to a questionnaire mailed to employer firms selected from the larger Monthly Retail Trade Survey.

As illustrated below from page 1 of the report, retail sales were down -0.2% (following an expected +0.2%) after falling by a revised -0.1% in May.





Interestingly, ZeroHedge notes that “core retail sales ex auto/gas posted the lowest annual increase going back to February 2014”.

Analysis suggests that the depressed level of spending in the US makes it difficult to envision official inflation reaching the Federal Reserve’s 2% target and the consequential impact of this release on the gold price was notable.

Myra Saefong, markets & commodities reporter at MarketWatch.com, noted that “gold prices on Friday marked the highest finish of the month and their first weekly rise since early June, as data on retail sales and inflation stoked concerns that the pace of economic growth may not merit lifting US interest rates again in 2017”.

In fact, August contract gold rose over US$10 to rest at just under US$1,230 signifying the best “single-session climb” since the first week of June and at +1.5%, the first weekly rise in 5 weeks. Interestingly, the breakout in gold was accompanied by a similar breakout in the JPY/USD pair.



Fawad Razaqzada at Forex.com remarked that “the disappointing US retail sales and inflation data has seen the odds of another rate hike fall below 50% this year”, adding further weight to our established observations.

The July 2017 Advance Monthly Retail report is scheduled for release on August 15, 2017. More interesting however and also coming in August is the NUU Understanding Money Conference. Scheduled for Saturday 26th August and suitable for all, this conference will exhibit a range of presenters on a number of topics from the definition of money, its past and future, cryptocurrencies and of course gold as the oldest form of money. Ainslie Bullion will be presenting at the event and we look forward to seeing you there.

 

What an 1895 Military Medallion & London’s Hatton Garden Teach Us About Real Gold Demand

Picture yourself owning a golden military medallion dated 1895. It’s likely that you’d treasure it for its historical value or perhaps store it for price appreciation over time. With the demand for gold what it is today however, just such a medallion has recently found its fate in the “boiling pot” at the hands of Nick Hammond from London’s Baird & Co. gold refinery.



So called “scrap” gold is too valuable to be retained in trinket or medallion form and is hence melted down and re-cast at Baird’s East London refinery, the only one of its type in the United Kingdom.

The firm marks its 50th anniversary this year and supplies gold bars to the Royal Mint as well as jewellery to suppliers and the growing consumer market. In fact, as reported yesterday by the UK Telegraph’s Jon Yeomans, Baird & Co. has just opened the doors to a new retail store and vault facility in London’s gold and diamond district of Hatton Garden in order to service demand for the metal.

Often lost in the numbers is the reality of gold’s tangibility and what’s required to service the physical demand for gold right now. A perfect example comes from Mr. Hammond’s quote “The last time we changed the doormat, we recovered £6,000-worth of gold”. Indeed, those who have been on the Perth Mint’s tour will recall hearing something similar about residual gold embedded in the vicinity of the furnace.

Such recovery efforts are justified when considering that a staggering 20.8 million ounces of gold transactions cleared in London during the month of May alone.

The opening of Baird’s new retail outlet is only part of the story however. It has also been announced that the firm is looking to expand its network of gold suppliers by exploring primary mining sources in Africa. This is an endeavour that would not be undertaken in a low demand environment.

According to the WGC (World Gold Council), global Q1 gold bar and coin demand increased by 9% and despite the recent price declines that we’ve been covering, gold investments are still almost 7% higher year to date.

Sharps Pixley Chief Executive Ross Norman suggests that “where gold really performs is in the long term - it maintains its purchasing power over time. You could use it to buy a suit of armour 500 years ago. You could use the same amount to buy one today. Try doing that with cash.”

In support of this, we couldn’t finish today’s article without a chart. Again from the UK Telegraph, the following plot illustrates the performance of various share to gold portfolio allocation ratios over the last 18 years.

It can be seen that over this time period, the higher the gold allocation the more pronounced the peaks and troughs in the plot are and, ultimately, the higher the ultimate ROI (Return On Investment). In this particular example the 5% gold allocation returned 228% where the 50% allocation returned 321%.

James Connington of the Telegraph summarises as follows. “Gold maintained its price during the technology-fuelled stock market collapse of 2000-2003, and then gained further during the Iraq war and in response to corporate scandals such as energy giant Enron's collapse. It soared ahead of the FTSE World Index when the global financial crisis hit, and posted its biggest gains in the nervy years that followed”.



We’ll wrap up with another quote from Sharps Pixley CEO Ross Norman who succinctly said that “once people get gold in their hands, they understand it, the tangibility of it”. Is it time to hold some in your hand?

 

Activity In AUD & Gold Over The Last 24 Hours

It’s been an interesting and volatile 24 hours, most notably for the tremendous surge in the Australian dollar yesterday following the release of the July RBA minutes.

Our local currency jumped one cent to hit a two year high yesterday following a 3% rally last week. Tuesday’s move follows the RBA’s suggestion that official rates are currently a remarkable 200 basis points below what’s now being considered neutral (the balancing point between stable inflation and economic expansion) at 3.5% nominal, down from 5% previously.

The chart below from the Sydney Morning Herald shows the magnitude of the spike yesterday. Put simply, this means that holders of Australian dollars can, at least temporarily, purchase more.



This move according to a wide variety of analysis yesterday and overnight looks tenuous however. Let’s start with remarks from Westpac’s Bill Evans:

“If the mortgage rate increased by a further 200bps, the evidence of 2011 suggests that house prices would likely fall – hardly what one might assess as a neutral policy stance. Overall, in the current circumstances, this neutral rate looks too high. Arguably, the discussion around the neutral rate can be interpreted as laying the foundation for a tightening cycle. However with uncertainty around wages and inflation; the consumer; and, of course, the labour market and housing it would be inappropriate to over interpret this signal.”

A short translation could be to suggest that the one cent jump in the local currency is based on expectations of rate hikes that haven’t priced in peripheral considerations and hence the sustainability of the jump should be questioned.

Indeed concerns regarding the consumers’ battle with rising electricity prices, underemployment and anaemic wage growth were identified by the RBA and given the high levels of loans issued at the now record low rate; a higher cash rate will exacerbate these stresses for investor and residential borrowers.

ABC’s senior business correspondent Peter Ryan added that “despite the RBA's efforts to manage expectations, concerns remain that anything but a gradual increase would leave indebted borrowers in Sydney, Melbourne and Brisbane struggling to meet higher mortgage repayments.”

In its release, the RBA noted softening in housing recently with Brisbane apartment prices and the Perth market more broadly having fallen further at a time when the impacts of APRA’s recent lending crackdown aren’t yet fully understood.

Notably, local shares fell by over 1.2% yesterday marking the biggest one day fall in 2 weeks and again highlighting yesterday’s comments relating to diversity in equity portfolio allocations.

These looming downward pressures on house and equity prices support our recent peak wealth cycle comments and arguably do not support the rate hike timeframe suggested by the following Overnight Index Swaps (OIS) plot which, according to ANZ senior rates strategist Martin Whetton, is now close to fully pricing in a 25 basis point hike by July next year. Martin notes that this is “in stark contrast to that seen only a few weeks ago when a rate hike next year was seen as a marginal possibility at best”.



The question then becomes whether the bigger picture in Australia is supportive of sustaining the Australian Dollar at its current elevated level. If not, we could certainly be looking at a retracement in the currency and a consequential drop in relative purchasing power for its holders.

How then can holders of Australian Dollars benefit from the possibly transient high in the currency now? To answer this, let’s look at gold’s recent action.

Yesterday saw the third consecutive session gain for gold assisted in part by a weakening USD and political issues surrounding President Trump's health care reforms. Gold is now at its highest level for the month and, importantly, looking to have an upward bias given that it is sitting much closer to its next near-term technical resistance level breakout at $1,250 than it is to its next near-term technical support level of $1,200 according to Kitco’s Jim Wyckoff.

One could make the case that now is a good opportunity to utilise the currently more valuable AUD to obtain appreciating assets. Illustrating this, the combined impact of the rising Australian Dollar along with a falling USD on gold and silver prices can be observed using our charting tool. The first plot below shows the increases in the Australian Dollar over the past week while the subsequent two plots show the dampened impact on AUD priced gold and silver respectively. These dynamics position Australians very well to shift some holdings out of Australian Dollars and into metals given that the former appears to be overvalued while the latter appears to have bottomed.

In effect, the release of the RBA minutes yesterday have placed the three day long gold price increase on hold for Australian Dollar owners allowing for a buy-in at still depressed levels. The same logic applies to silver although its performance has been even more astounding given that it has been appreciating in Australian Dollar terms since the 14th of this month, despite the increases in the local currency.







As we’ve previously discussed, the wealth cycle theory is predicated upon exiting inflated assets in order to enter deflated ones and yesterday’s AUD spike coupled with what appears to be a coincidentally timed bottoming in gold and silver prices may arguably be just one of those opportunities.