Ainslie Bullion - Daily news, Weekly Radio and Discussions

Time bomb

We've all heard those cheesy radio games where the caller has to yell "Stop!" before the increasingly threatening noise of the time bomb ends in an explosion. In the context of the global economy that noise is getting louder and louder. The last 2 days have been very interesting for observers sitting back watching. Tuesday night saw big losses on Wall Street as investors got spooked on a raft of horrific economic news out of Europe and the IMF cutting (yet again) its economic outlook for the world (listen to tomorrow's radio for a full wrap). The 'noise' was increasing and a few yelled "Stop!". And last night? US Fed comments revealed they see zero interest rates for still some time yet due to the impact of this very same noise. i.e. the US will struggle to recover when Euro and Japan are in such a mess. And what did Wall Street do? It rallied up just as strongly as the previous night's losses because the free money show continues. Seriously!? For those looking beyond the headlines and reading the real play going on (i.e. hearing the building noise) gold and silver are a logical "Stop!" or at least worth buying as a safe bunker for when the explosion comes.

PS free delivery for Gold purchases during Diwali!
(1-23rd October)

 

Its Friday and a lot is happening so we are posting 2 must reads on the web for your weekend digestion and strongly suggest you listen to today's Weekly Wrap as well given what has happened this past week in the global economy. The first post is probably one of the more respected gold updates going around, John Hathaway's Tocqueville Gold Strategy Investor letter. Tocqueville largely address gold miner shares but it is the same driver for physical gold and silver owners and we just believe the latter removes all counterparty risk and remind people if you invest in mining shares you are investing in the management skills of that company so do your homework (a badly managed miner can still underperform when the metal rises). Secondly, at a time when the gold/silver ratio is above 70 (!) we post a great summary of why silver is looking like such a great buy right now. Last night's big falls on Wall Street will no doubt be a precursor to what will happen in markets around the world today. The Eurozone is a mess, as is Japan, the IMF again warns of a slowing global economy and bubble like sharemarkets (and property in Australia), the higher USD is hurting the US's already weak recovery and the Fed is again emphasising zero interest rates are here for much longer (inflating the bubble), wars rage around the world, ebola keeps threatening to spread, and the Chinese cannily keep voraciously buying up gold whilst prices are low and sentiment at rock bottom. Whilst some are still calling for gold to drop further the list of experts stating we just saw the bottom after the triple bottom this last week is most certainly growing.

Check out the articles mentioned: https://www.ainsliebullion.com.au/BullionNews.aspx

 

I missed that. Where were the one million new government jobs added?

 

One Person who knows all about US jobs and BLS is Alan Butler. He quotes the BLS report table B1 where you get the real data
He also consults the previous head of the BLS Keith Hall.

Listen to his discussion

http://host1.cyberears.com//27880.mp3

4.31 minutes in you will get the real stats including 1million government jobs

The stats are on the BLS website

Table B1
http://www.bls.gov/news.release/empsit.t17.htm

Rest of the info

http://www.bls.gov/news.release/empsit.nr0.htm

 

Running out of options

We've written many times of the things inflating the US (and other) sharemarket to record highs. The end of last week saw large losses as a few of those inflators came home to roost. Firstly Eurozone and Japan economies went from bad to worse. To date these weakening economies have only really had the effect of strengthening the US dollar as their central banks ramped up monetary stimulus (increasing their debt). That 2 of the world's biggest economies are slowing badly prompted both the IMF and US Fed to say that world growth is slowing more than expected. Also that strong US dollar has adversely affected US exporters. Secondly there was the realisation that this is the month that QE3 ends and that QE has been a huge contributor to propping up these markets. Thirdly, a little spoken of fact is that S&P 500 companies will have spent about 95% of their earnings on share buybacks and dividends to the point that they can do little more. Whilst great for boosting your share price it does little about future growth which is what share prices are actually supposed to reflect. Finally, because 'everything is fine' the volatility index (VIX) has been at historic lows for quite some time. Well it just shot from a 50 day moving average of about 15 to 22. So if the Fed engineer a reduced USD (which in itself is good for gold), and major global economies continue to falter (remember Euro is just Japan before it started its record stimulus and that didn't work either), with QE gone the only thing left is zero interest rates, companies with very high P/E ratios out of tricks, and a market suddenly very nervous - it's not a great set up and we may well see a flight to safe haven gold and silver.

 

QE Infinity?
We've really resisted using this term that has been used tirelessly by some commentators as a fait accompli as QE3 ends this month. Since the GFC we've had QE1, QE2, Operation Twist and now QE3 from the US Fed. As each ended the easy money addicted sharemarket corrected and they had to start the next round of money printing to revive it. Many (including us) think QE3 is a little different as there is so much 'stored up' as the velocity of money has been weak, so it may not be as quick to happen this time. You have to admit however that there appears considerable merit to the calls for an inevitable QE4 or even QE Infinity. There is little doubting this is a market built on stimulus over substance. We've written previously of the over looked reality that more debt can (and frankly did) buy you a better GDP than the underlying fundamentals. Likewise it is debt that is largely supporting the earnings that has the Shillers Price/Earnings ratio for the S&P500 at nearly (nose bleed) 25! As the easy money goes away so does the support for this bubble. And very simplistically (in this short piece) that is the essence of the calls for QE Infinity. The Fed will inevitably bail out the next crash, and the next crash will be so severe so will the response. The problem is, as we've seen since the GFC, it simply adds to the very same debt problem that brought about the crash. And that raises the other thesis that we can't have QE Infinity as this is unsustainable forever. An alternative is a failed attempt at QE4 bringing about the big 'reset' that many talk of too. Gold and silver are hard assets, with no counterparty risk, that should thrive on either scenario.

 

Silver Quote of the Week
As the Gold : Silver ratio sticks above the 70 mark legendary silver analyst Ted Butler had this to say:

"Silver's recent relative weakness compared to gold is not, to my mind, a harbinger for what will evolve over time. In fact, it seems almost impossible to me for silver not to vastly outperform gold over time (although I am solidly bullish about gold's immediate price prospects). The compelling relative factors revolve around how each metal is used (silver being consumed, gold being held for wealth and jewellery) and the resultant mismatch over how much of each exists in the world, particularly in dollar terms.

I would be overstating the case if I declared that even as many as one-tenth of one percent of the world's inhabitants actually know that there was vastly more gold in the world than silver, especially in dollar terms. Most people logically assume that an item 70 times more expensive than another similar item would be much rarer. Not only is this not the case with gold and silver in terms of physical ounces, where there is more gold than equivalent silver by a factor of two or three; when the comparison is made in terms of dollar value, the total amount of gold exceeds the amount of silver by as much as 200 times. Yes, I am saying that there is as much as 200 times more gold in the world than silver in terms of the total dollar value of each. All the world's gold is valued at more than $6.5 trillion (5.5 billion oz x $1200) compared to the value of the world's silver of $35 billion (2 billion oz, including coins, x $17.50)."

To put this into perspective we've posted an excellent article from Bill Holter today which speaks to gold mainly and so gives you his views on the base of this ratio.
https://www.ainsliebullion.com.au/g...mand-will-matter-/tabid/88/a/754/default.aspx

 

what?

 

That translates as three times as much.

 

Where silver comes from
A lot of people don't realise that, as opposed to gold, a large proportion of silver supply comes as a bi-product of base metals such as lead and zinc and indeed gold itself, rather than as primary output of silver mines. Therefore it is harder to collate the data to show where it has come from. The tables below (produced by analysts Metals Focus) show supply in the first half of this year compared to last, by company and country. A few things are worth noting:
Anecdotally the modest 4% growth has been outstripped by demand
Further growth is largely dictated by industrial demand for the base metals. Industrial output indices around the world have been softening.
Cost of production has dropped considerably to just $14.09 but this is largely off volume and currencies weakening against the USD and considered a short lived hit before future cost effects due to same.
Beyond 2014 they see production growth plateauing at about 850 million ounces annually and note the cutbacks by mining majors in both new project investment and development may result in a period of prolonged production decline.

Click here to see the top 10 silver miners and producers data for 2013-2014 - https://www.ainsliebullion.com.au/g...ilver-comes-from-/tabid/88/a/756/default.aspx

 

Gold price outperforms YTD 2014

What a week! Listening to today's Weekly Wrap radio (on the AB website) will give you a full account of the economic turmoil unfolding around the world. Overnight Euro shares plummeted as were US shares before one of the Fed presidents suggested they might just continue with QE afterall (QE Infinity?). $5.5 trillion has been wiped from global stockmarkets in this rout. For perspective, that's about the size of the entire gold and silver markets! We talk about the "cyclone in a shoe box" where the gold and silver markets are relatively tiny in the scheme of global investments, accounting for only about 1% at the moment (an historically low amount). So just imagine what happens to the price when there is a rush of the 99% looking to get into that 1% safe haven as they realise bonds are reaching danger territory too. So lets look at how things have performed YTD:

Australian All Ords: -2.3%
US Dow Jones: -2.0%
US S&P500: +1.6% (note it is these companies favoured by the QE money)
Silver (AUD) -8.9%
Gold (AUD) +4.7%

So whilst we talk of this current bearish market in gold it is still outperforming shares. Silver is the one to watch as it shares the same economic drivers as gold but also has its industrial uses and yet has way underperformed gold this year (hence the now 71.2 gold:silver ratio!).

 

Chinese gold double whammy
Many don't realise that as well as taking the title of the world's biggest consumer last year, that China also became the world's largest producer in 2007. Barely an ounce of what they produce leaves its borders. The problem is that growth in gold production is about to end with projections of just 0.9% by 2018, down from the current 6%. The thing is there is nothing to suggest a reduction in consumption so that just means more imports which of course mean more strain on global supply.
And how is that demand going? Well in the last week reported (ending 10 October) they consumed an incredible 68.4 tonne. As you can see in the graph below there have only been a two weeks higher, even in the record breaking 2013. So whilst 'western forces' are keeping the price in check, eastern demand amongst declining global production must inevitably win the price determination.


Source:

 

An epic gold and silver set up
A sad reality for owners of physical gold and silver is the price is driven more by 'paper' speculators as they sell and buy unreal amounts, rarely exchanging an ounce of physical metal. But right now these speculators may just have set up and extraordinary situation within the context of a world dealing with the end of QE, Euro recession, wars, ebola, etc
The 2 graphs below show quite clearly the repeated actions of both markets after heavy short selling. You can see the incredible levels of shorting in both gold and silver and how strong covering rallies have followed each of the shorting peaks of the past. (multiply ETF share price by about 10 to get equivalent real price)





In this regard analyst Adam Hamilton had this to say:
"The bottom line is the recent extreme gold and silver futures shorting looks to have peaked. And extreme shorting is always followed by frantic short covering of these highly-leveraged bets. Speculators who bet wrong by selling low in extreme bearishness rush to buy to close those losing positions. This process feeds on itself and attracts in new long-side buyers, always resulting in large and impressive gold uplegs.
And this time around with the Fed-spawned stock market levitation finally rolling over, the precious metals' upside potential is extraordinary. Gold and silver are on the verge of regaining favor, as investors once again remember prudent portfolio diversification is not only wise but essential. As capital floods back into this left-for-dead dirt-cheap asset class, led by stock investors, the sky is the limit for precious metals."

 

Strong Eastern Gold Demand
Data coming out of the 'East' over the last week is nothing short of amazing. In India the 450% increase in gold imports has blown their national trade deficit out to an 18 month high of $14b despite the 10% import duty still being in place. Encouragingly too, talk of them 'un relaxing' the recent exempting of 7 trading houses on the 80/20 import/export rule have been dismissed by their central bank. In China the last reported week saw over 68t of gold consumed, the 3rd highest on record and over 3500t annualised (against global production of only 2700t and their record consumption of over 2000t last year). Year to date they have already imported 957t. Silver on the Shanghai Futures Exchange remains in backwardation driven by scarcity on the back of an inventory of only 94t. Russia too continues to build its reserves in gold with September seeing them add their biggest amount in any month with 1.2m ounces or over 37t, taking their total holdings to 37m oz or 1150t.

 

Weak to Strong Hands #2
It was the stand out dynamic of the 2013 'market crash' where gold from divestments of speculative paper trades in ETFs and COMEX futures left the London vaults for Swiss refineries, turned into 1kg bars and shipped to China by the hundreds of tonnes. The flighty, speculative, short term trend following paper traders of the West are commonly termed the "weak hands". Those who deal in the physical metal understand its long term intrinsic value and role in personal and sovereign economic stability are the predominantly Eastern "strong hands". 900 tonne left the London vaults of ETF's in that rout last year and predominantly the Chinese quietly went about hoovering it up at "on sale" prices to the tune of an all-time record 2000t. Well its happening again but with India now stepping up to the plate more strongly too Official data from Switzerland shows September hit a 7 month high for gold exports with a lot of that coming from London (up 636% on August). Consistent with yesterday's article the data confirms most of it is going to China and India. So as the gold price fell in September (ending in just USD1191 in early October), that divested metal (to the extent that Futures trading uses real metal so lets assume it was mainly ETF's) found 'strong hand' buyers again waiting to fill their tanks on the dip. The thing is, those strong hands tend not to sell so this just keeps on taking more and more gold out of the 'system' at a time that the system is already showing signs of potential shortages. Additionally this is another demonstration of the disconnect of the 'paper' set spot price amid strong physical demand, one that may change soon as the Shanghai Gold and Futures Exchanges move quickly toward a market making position. Do you have your physical bullion yet?

 

Swiss Gold Referendum
It's now just over one month until the Swiss vote in an historic referendum. After garnering 100,000 signatures in support, the country will go to a national vote on 30 November on 3 questions: whether or not the Swiss National Bank (SNB) should increase its gold reserves to 20%, whether the central bank should stop selling its precious metals and whether all its gold should be held within the country. The Government and its central bank (SNB) are staunchly against it but the citizens are becomingly increasingly disgruntled at the debasement of their currency (now linked to the Euro) and the debt producing stimulus the SNB has engaged in (as with central banks of US, China, Japan, Euro, UK etc etc). Whilst this is not new news, many gave it little chance of getting up and hence it wasn't getting much attention. However the first real poll has found the opposite (see graph below). The Swiss, of anyone in the western would, are known to love their gold having had the highest gold reserves per capita up to about 10 years ago and an ingrained belief in it as a backing to sound currency maybe this result shouldn't have surprised. It's also a potential protest vote against a world undergoing unprecedented unconventional economic stimulus racking up unsustainable debt with little benefit to the people. With only 7.8% of its reserves currently accounted for in the 1040 t of gold it holds, taking that to 20% would see them have to buy 1,627 tonne or about $75b worth of gold, or nearly 75% of global production. We also saw last year what happened when Germany asked for its gold backum, no. This will be a very very interesting month ahead




Also listen to today's Ainslie Radio - https://www.ainsliebullion.com.au/g...24th-october-2014/tabid/88/a/764/default.aspx

 

Buying Growth in Shares

US shares rallied again last week (buoying the Aussie shares along the way) on the back of firstly comments from various central bankers that maybe they should continue QE and keep interest rates near zero for longer, and then later on the back of some 'good' earnings out of majors on the Dow Jones. What many don't get is the 2 are still ultimately related. We've mentioned before the alarming trend of share repurchasing going on in the US. This is when companies buy back their own shares with either earnings or often loans at record low interest rates.

Buying back shares reduces the pool of shares. Reducing the pool means your Earnings Per Share (EPS) increases without actually increasing the Earnings. A great example (among many) is Caterpillar who are often considered a 'bellwether' for the industrial economy and whose sales have rather infamously tanked over the last few years. Yet Caterpillar just announced an EPS well above market expectations, and being such a big player on the DJIA, boosted the market, such is the market's desire to jump on any piece of good news. But scratching the surface you see that this was achieved through share buy backs and alarmingly at the expense of future capacity producing capex.

This is just indicative of companies that have falling earnings in what is still a struggling economy making everything look awesome through borrowing at central bank engineered low interest rates and reduced investment for the future so all the cheap money has a reason to keep buying, further driving up the sharemarket. This world continues to use debt as a tool to overcome the GFC crash borne of.. debt. Got your golden insurance yet?

 

Euro banks fail
The European Central Bank (ECB) just released the findings of their AQR stress test on Euro banks. Of the 150 banks tested 25 failed the test and failed to the tune of $36b. The tests' purpose and hence the alarming nature of the number of failures is to avoid major bank collapses amid a sudden economic downturn topical given the fragile nature of the Eurozone right now. Why should this worry us Antipodeans you ask? Well Australian banks now hold over $800b of foreign debt, making the most of the near zero interest rates overseas to lend to you and I at enticingly low rates largely deployed into an over inflated property market. Keep in mind too that a lot of Australia's $856b in foreign debt is held on the balance sheets of our major banks. The interlinked nature of the global financial system means that should a major overseas bank fail there is likely to be a domino effect that this time (we just missed in the GFC) would likely hit Australia as well. There are 2 takeaways here 1. Gold and Silver are wise 'insurance' in your portfolio and 2. That insurance should be stored out of the same system, independently at somewhere like Reserve Vault.

 

Eurozone Teeters
One of Australia's most respected economic minds and former Treasurer, Ken Henry, stated last week that he sees a Eurozone collapse as Australia's single biggest risk. Further to yesterday's article on the implications of 25 Euro banks failing the ECB's AQR stress test, an analyst since has uncovered, buried deep in the ECB report, that there is $1.1 trillion of 'bad debts' held by these banks. This gives another clear insight into Draghi's desperation to avoid outright deflation in Europe as inflation is the only way to keep these banks solvent amidst a very sick economy. In the first half week of ECB's new CBAPP (covered bond buying program) he bought (with printed money) EUR1.7b of bonds and continues to push Germany to allow him to buy Euro sovereign bonds as well (ala QE with US treasuries and mortgage backed securities). As listeners to the Weekly Wrap will know, it was only the new inclusion of prostitution, drugs and smuggled cigarettes in the last GDP figures that stopped the Eurozone falling into its 3rd recession since the GFC, and nearly all economic indicators have deteriorated since. Throw in Catalonia's secession referendum on 9 November and the Swiss gold referendum on 30 November and there are a number of Euro 'black swans' threatening exactly what Henry fears. Any such event inevitably sees a run to gold and silver.

 

QE3 post-mortem
After months of tapering the patient off printed money, QE3 finally ended in the early hours of this morning. You will note we say QE3 not QE per se. Many still expect, as with QE1 and QE2 that we will see QE4 shortly as the patient is hooked on the drug and still not well enough to survive without it (and the hospital needs the income). Time will tell but as gold dropped over 1% on the news because everything is awesome now, let's just briefly reflect on the QE program to date:
Since the GFC the US Fed balance sheet has gone from a little over $800b to over $4.5trillion. i.e. they have bought over $3.5 trillion of debt paid for with printed money. For perspective, it took almost a century to get to that $800b, and then they've printed almost that each year since the GFC!




As the US was buying its own Treasuries with printed money it was devaluing its dollar against it's creditor countries. The biggest buyer and owner of US treasuries, China, started to see this was not good for them and has actually reduced its holdings. So it begs the question, if the US stops buying its own debt (debt which is necessary to fund its continual deficits), who will? This graph tells it all (see someone missing? Someone who's been buying mountains of gold instead of UST's since 2011??):



Whilst everyone talks about the $trillions printed, fewer talk of the Velocity of that money. Since the GFC the velocity of money has been in sharp decline. i.e. apart from shares (enriching the 1%), the money has not been 'used'.



This is part of the reason why some think the sharemarket corrections that happened after QE1 and QE2 will not be as quick after QE3 due to the sheer amount of that printed money sitting 'unused'. Per below, others don't.




The only weapon left in the Fed's arsenal now is its ZIRP zero interest rate policy to try and stimulate what is still an anaemic economy. Again this morning they continued their 'considerable time' rhetoric on how long before they start raising them. Given the poor state of their housing market, low reported inflation and underutilised job market it is hard to see this happening any time soon.

Finally it is worth remembering the time between QE1 ending and QE2 starting was 17 months and QE2 to QE3 15 months. Time will tell on QE4. And let's not forget that the European Central Bank have just stepped up to the QE plate just as this is ending. At some stage the world must realise that addressing a debt fuelled financial crisis with more debt must end in tears. You'd also have to think that the complacency triggered anomaly (that started in April last year) captured in the graph below must end too. No common sense look at the above can say all is well and there is not still enormous risk in the market. Maybe it just presents a great opportunity to buy gold and silver at disconnected low prices