Monthly Archives: February 2018
Gold and silver finished the day pretty much where they started at $1319 and $16.42 respectively. The big news of the day was the stock market’s waterfall drop in the last hour and a half of trading – an event that took many by surprise and set the stage for an interesting day tomorrow. Fed chairman Powell will return to Congress tomorrow likely with both the stock market drop and a lukewarm GDP number on his mind. A Reuters’ survey of analysts concludes that “Elevated U.S. debt levels and volatility in stocks could boost gold prices above $1,400 longer-term.” Overnight trading is quiet as we put a wrap on the day.
Quote of the Day
“To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.” – James Grant, Interest Rate Observer
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“The U.S. Commerce Department this month recommended imposing quotas on incoming shipments of the industrial metals, including a tariff of at least 24 percent on steel imports from all countries. President Trump has until April 11 to announce a decision on steel imports and until April 19 for aluminum. ‘Protectionist pressures are mounting: Americans can expect to pay more for washing machines and softwood lumber and perhaps soon anything containing steel or aluminum because of tariffs imposed by President Donald Trump,’ Ip said. ‘Productivity growth, the usual antidote to rising costs, is tepid and could stay that way.'”
MK note: As mentioned previously, we believe price inflation is going to sneak up on America and it will start with prices rising for all sorts of imported goods, not just because of the new tariffs (though that will be a factor), but because the cost of raw materials that go into finished goods is on the rise. Greg Ip is the chief economics commentator at the Wall Street Journal.
“U.S. stocks tumbled in afternoon trading, adding to the worst month for equities in two years, while Treasuries climbed with the dollar.”
MK note: It happened quickly in the space of 90 minutes into the close – the kind of sudden, waterfall drop we are used to seeing in the gold market.
“[Saxo Bank’s Ole] Hansen said the market may see the price of gold strengthen in the short to medium term based on the expectation that higher inflation will continue. He said: ‘We are also expecting gold to be boosted by elevated geopolitical risks, especially around the unpredictability of the sitting US President. Typically, investors seek tail-end protection in gold against the risk of a correction in other asset classes, such as stocks and bonds but also potentially in cryptocurrencies. If the price for gold breaks above the 2016 high at $1,375/oz we could see gold mount an extension towards $1,436/oz and ultimately $1480/oz. However, another rejection carries the risk seeing a correction to lows of $1,330/oz. . . . ‘”
MK note: Saxo Bank believes that there is a risk of a major economic slowdown within the next 12 months the result of global central banks’ determination to “normalize” rates “very late in the business cycle.”
Gold is gathering itself this morning after yesterday’s downdraft trading pretty much level on the day at $1319.00. Silver is also sideways at $16.48. Tomorrow we get day two of Fed chairman Powell’s testimony wherein he is likely to tread lightly after yesterday’s brush with market disaster. The GDP number has come in at a tepid 2.5% annualized growth rate. That’s not what the Trump administration might have hoped for and a number that might prompt a question or two of Mr. Powell during his testimony today. The dollar is coming off its highs earlier in this morning’s trading and stocks are down marginally. All in all, the markets seem quiet as we go to fetch this report over to the server.
One other item . . . We thought this assessment of the markets from Crossborder Capital’s Michael Howell worth passing along. “The price of safe assets is wrong. We think the U.S. dollar and Treasuries are overvalued. Yields have to go up. This is a good long-term environment for gold. . . We have been telling clients to buy gold on weakness because it will be higher in 18 months. On the whole, the entire financial background has to be positive for gold.” [Kitco News]
Chart of the Day
Chart notes: Though gold’s fluctuations day to day are the center of much attention, for long-term investors the chart on average annual prices tells a more placid and comforting tale – one that speaks convincingly to the twin notions of averaging your purchases over time and buying the dips.
“German Buba President Weidmann spoke about the Bundesbank’s Annual Report, in Frankfurt, with the following comments made: policy normalisation will take a long time and if the economic upswing continues and prices rise, there is no reason to not end QE this year. He said it is important to ‘gradually and dependably’ reduce ECB stimulus. Rapid Eurozone growth confirms that inflation will move towards the target. There is evidence that FX movements are having a smaller impact on inflation than in the past. Germany’s and the Eurozone’s growth was ‘very satisfactory’. He also said that bigger QE reduction or a clearer end date would be justifiable. Finally, he said that an ECB rate hike in 2019 is ‘not completely unrealistic’.”
MK note: Jens Weidmann, current president of the Bundesbank, is seen by many as the front-runners for next president of the European Central Bank. Current president Mario Draghi’s term ends in October 2019. Weidmann is a proponent of a more conservative monetary policy than the one in place under Draghi, and a critic of both quantitative easing and bailout measures for Germany’s southern neighbors. Weidmann’s policies likely would work to strengthen the euro against the dollar and other currencies, thus there might be some anticipatory movement in the foreign exchange markets as we near the 2019 term change.
“Higher inflation expectations due to rising oil prices have been supportive for gold, according to a report in February from Goldman Sachs Group Inc., which sees prices reaching $1,450 by the end of the year. Other drivers have been strong emerging market growth and some potential hedging demand in a choppy market environment, it said. JPMorgan Chase & Co. also says rising inflation will benefit commodities, including precious metals.”
MK note: Of the five charts mentioned, four paint a medium to longer term bullish picture for gold.
“China a lot of silver in January, said Commerzbank. Analysts cited the most recent data from customs authorities showing that 493 tons were imported, 85% more than January of 2016. This was the highest monthly silver imports in 7 1/2 years, Commerzbank pointed out. The global silver market was not in tight supply in January nonetheless because ETF [exchange-traded-fund] investors sold nearly 400 tons of silver last month, the bank added.”
MK note: A reminder that China is not only a major importer of gold, it is also a strong market for silver.
“While the main goal of investing is to grow one’s wealth, cautious investors should consider how to preserve their wealth in the event of a sudden market crisis. . . One way to invest in the asset is to buy bars and coins made from a precious metal. This avoids counterparty risk: if you owned gold through a brokerage, there is a risk the broker could go insolvent.”
Gold was pummeled today closing down $15 at $1318 on what markets perceived to be a hawkish tone set by new Fed chairman Jerome Powell in testimony before Congress. Silver fared no better finishing down 25¢ at $16.40. The stock and bond markets also reacted poorly to the chairman’s remarks. The only clear winner on the day was the dollar. In the end, the markets read remarks many saw as a gaffe more as a Freudian slip that revealed the Fed chairman’s true state of mind. That said, the chairman will have another day of testimony tomorrow and the chance to mend fences.
For more on this interesting day, we direct you down the page where you will get the full flavor of today’s events.
Quote of the Day
“I think that the main element suppressing growth is the heavily leveraged U.S. economy. We have too much public and private debt, and this debt does not generate an income stream for the aggregate economy. As a result of the prolonged indebtedness, which is on the verge of going much higher because of problems in the governmental sector, the economy is now experiencing very poor demographics. We have a baby bust, a household formation bust, and the lowest birth rate since 1937. These demographics are exacerbating the problems because we have too much of the wrong type of debt and thus the velocity of money has been falling since 1997. Velocity this year is only 1.43 percent, which is the lowest since 1949. Furthermore, the debt creates a situation where monetary policy capabilities are asymmetric. In other words, a lot of action is needed to provoke even a muted impact on the economy, whereas the slightest monetary tightening goes a long way in depressing economic activity. So the root cause of this under-performance is extreme indebtedness.” – Dr. Lacy Hunt, Hoisington Investment Management Company
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“Of course, it’s not an error of catastrophic proportions. That fourth rate hike, if it comes, won’t be for several months, and the Fed has ample time to walk back those expectations. Still, Powell managed to slightly ratchet up financial conditions. And it’s proof that even someone with a resume as extensive as Powell’s can still manage to mess up when carrying the massive stick that the Federal Reserve chairman wields.”
MK note: Some details to the previous post . . .
Yields started jumping right at this moment when Powell hinted at more rate hikes than expected ahead
“Treasury yields rose after Powell’s comment just around 10:43 a.m. ET. Yields move opposite price. The 10-year jumped to 2.91 percent. The 2-year yield, the most reflective of Fed policy, briefly rose above 2.27 percent but was back to 2.26 percent. ‘The market started reacting to the suggestion that the path [of rate hikes] could be shifting higher, based on all the positives mentioned by Powell,’ said George Goncalves, head of fixed income strategy at Nomura.”
MK note: This CNBC article alludes to the point I raised earlier today. . . Scroll to “Stocks drop, Treasuries tumble. . .etc.”
“Apple is looking to lock in supplies, as well as buy from suppliers that are less controversial, but as an investment professional, I have to tell you that the Apple headline also sends an amoral message to those trying to figure out what securities in this market still have room to run: global commodities.”
MK note: Nice follow-up to this morning’s Chart of the Day . . .
“U.S. home prices rose last year at the fastest 12-month pace in more than three years, as potential home buyers fought over a limited number of available properties. Standard & Poor’s said that its S&P CoreLogic Case-Shiller national home price index jumped 6.3 percent in 2017, the most since June 2014.”
“U.S. stocks retreated with Treasuries and the dollar advanced as investors weighed Federal Reserve Chairman Jerome Powell’s assessment that the central bank won’t rush to raise rates even though he expects the economy to pick up steam. . .’The markets are skittish,’ Barry James, president and portfolio manager at James Investment Research in Xenia, Ohio, said by phone. ‘People are maybe a little bit oversensitive right now.'”
MK note: People or computer algorithms? At any rate, gold and silver are plunging as well. The markets are skittish. . . .and overly skittish at that. Seems Mr. Powell uttered the wrong key words. Context, tone, intent – none of that matters – only the disembodied words themselves, like in a Google search. The fact that the Fed might push for four rate hikes this year has been baked into the cake for some time now.
Gold is restless and losing ground in early trading today as is typically the case whenever anything involving the Federal Reserve is on the day’s agenda. Silver is similarly disposed this morning. Yellow metal is priced at $1328 and down about $4 on the day. White metal is down 12¢ at $16.56
We do not expect any major surprises when newly installed Fed chairman Jerome Powell appears before Congress today. The markets, though, will be watching for any sign, however meager, of impending Fed policy maneuvers in an already unsettled and fluid inflation and interest rate environment. As mentioned in last night’s LATE REPORT, while Wall Street seems to have migrated to longer-term inflation concerns, the Fed’s focus, at least in statements over the past few days, remains on near-term disinflation and not getting too far ahead of itself on interest rates. It will be interesting to see how this analytical collision plays out in the days and weeks ahead – for bonds, stocks and gold.
Chart of the Day
Chart note: “[I]t’s worth noting that gold has been behaving more like a raw commodity lately and less like a safe-haven asset. . .[T]he correlation between gold’s progression and that of the broad commodities market price trend has been tightening of late. The implication of this increasingly positive correlation is that any additional improvement in raw commodities should bode well for gold as well.” Here is an overlay chart showing the tightening correlation between gold and commodities using the CRB Index.” – Cliff Droke, technical analyst, Seeking Alpha
“The drive for cost cuts and higher margins at U.S. trucking and railroad operators is pinching their biggest customers, forcing the likes of General Mills Inc (GIS.N) and Hormel Foods Corp (HRL.N) to spend more on deliveries and consider raising their own prices as a way to pass along the costs.”
MK note: Conjures memories of the inflation pass-through news that dominated the 1970s inflationary experience . . .
The United States will overtake Russia as the world’s biggest oil producer by 2019 at the latest, the International Energy Agency (IEA) said on Tuesday, as the country’s shale oil boom continues to upend global markets. IEA Executive Director Fatih Birol said in Tokyo the United States would overtake Russia as the biggest crude oil producer “definitely next year”, if not this year. U.S. crude oil output rose above 10 million barrels per day (bpd) late last year for the first time since the 1970s, overtaking top oil exporter Saudi Arabia.”
“Silver currently remains inside of a 7-year falling channel, which could be the handle of the long-term bullish pattern. If Silver would breakout at (1), it would send a bullish price message and should attract buyers. The top of the handle pattern comes into play as resistance right now so this is a very important test for Silver! Big test friends to see if its ‘Hi-Yo Silver’ time!”
MK note: At an 80:1 ratio to gold, silver looks to be on the bargain table.
“According to Haywood Cheung Tak-hay, president of the Chinese Gold & Silver Exchange Society, China is in talks with Singapore, Myanmar and Dubai to set up a gold commodity corridor to promote gold trading using yuan as the main currency. This is part of Beijing’s ‘One Belt, One Road Initiative’ and would use Hong Kong as a base for the exchange.”
MK note: China continues to promote policies that put a foundation under physical demand for gold – all established as a means to promoting the yuan as a competitor to the dollar, particularly in Asia.
“Global equities markets demonstrated notably strong correlations during the recent selloff. Few markets, however, tracked U.S. trading closer than Chinese shares. From the Bubble analysis perspective, tight market correlations provide confirmation of the global Bubble thesis. It’s also not surprising that Chinese markets were keenly sensitive to the abrupt drop in U.S. stocks. The U.S. and China are dual linchpins to increasingly vulnerable global Bubble Dynamics. Moreover, intensifying fragilities in Chinese Credit – and finance more generally – ensure China is keenly sensitive to any indication of a faltering U.S. Bubble.”
MK note: This is the rest of Noland’s piece referenced in yesterday morning’s EARLY REPORT. As you no doubt gathered from the snippet above, he is concerned about the overlapping risks common to the Chinese and U.S. economies.
“Sources with knowledge of the discussions tell me James Mattis, Gary Cohn, Rex Tillerson, and Kevin Hassett all think Wilbur Ross did a terrible job on Commerce’s 232 investigation and strongly disagree with his recommendations. (This is the continuation of an ideological battle that’s played out throughout the Trump administration between the free-traders and the protectionists.)”
MK note: An interesting peak behind the curtain. . . .Hard to know where this all ends.
Gold finished up $4.50 on the day at $1333.00 after bumping along irresolutely on either side of that number most of the session. Silver followed a similar route closing at $16.68 and up 12¢ on the day. Most of the upside today came during Asian trading hours the result of Shanghai traders returning as buyers from the week-long Chinese new year celebration. The dollar and bonds also seemed to be in a wait and see frame of mind.
Stocks bolted higher for reasons still to be determined, though representatives of the Fed went out of their way over the weekend and today to put a dovish spin on the central bank’s intentions. As reported this morning in the EARLY REPORT, there seems to be lingering concern about the stubborn disinflationary bias in the economy, not just in the United States but globally. Thus, the markets are anticipating inflation, but the Fed is anticipating more disinflation. . . .or so it seems.
For details, we invite you to scroll below where you will find a wealth of information on today’s steady stream of events.
Quote of the Day
“I also found myself thinking: the English may finally have decided they have had enough of their experiment with the American financial way of life. If what happened in the Western world financial system had happened at another time in history, there would have been an obvious political response: a revolt against the Roger Younts of the world and, more generally, the grotesque inequities spawned by the putatively free financial marketplace. If the memory of British socialism wasn’t so fresh—if people didn’t still recall just how dreary London felt in 1980—they’d be pulling down the big banks, and redistributing the wealth of the bankers, and it would be hard to find a good argument to stop them from doing it. The absence of the satisfying political response to the financial crisis is due, at least in part, to the absence of an ideological vessel to put it in. No one wants to go forward in the same direction we’ve been heading, but no one wants to turn back either. We’re all trapped, left with, at best, the hope that our elites might experience some kind of moral transformation.” – Michael Lewis, author, The Big Short and Moneyball
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“RealForecasts.com expects that the growth of TMS will continue its downward trend in the months ahead, as the Federal Open Market Committee continues to raise the Fed Funds Target Rate and reduce its balance sheet. Based upon the current trajectory of this trend, and the Fed’s current policy stance, it looks like the next credit and liquidity crisis could occur during the second half of 2018, with an economic recession and real estate market downturn to follow. Of course, this forecast could change if the Fed changes its policy stance or if the commercial banks change their pace of lending activity.”
MK note: We were referred to this excellent report through the Mises Insititute site, an article by Joseph T. Salerno. Though directed to real estate investors, Peshut’s findings apply across the boards to all markets and the economy in general. As Salerno states, “[T]he qualitative relationship between TMS* growth, credit crisis, and recession has been remarkably clear since 1978.” TMS is based on the Austrian School of Economics theory of the business cycle. This presentation is in keeping with our reminder in this morning’s EARLY REPORT that we have not as yet fully escaped the disinflationary forces still gripping the global economy.
*The Rothbard/Salerno True Money Supply
“An era of low productivity growth and high world demand for safe assets may be anchoring central bank policy rates at a low level, St. Louis Federal Reserve President James Bullard said on Monday. If the Fed continues to hike short-term rates, he said, the result could be policy that is too tight for the current economy. . . “If the Committee raises the policy rate substantially from here without other changes in the data, the policy setting could become restrictive,” Bullard said in prepared remarks to the National Association of Business Economists.
MK note: Is a theme beginning to emerge here?
“Federal Reserve Chairman Jerome Powell and his colleagues may be willing to accept inflation rising as high as 2.5 percent as they seek to extend the almost nine-year economic expansion. . . . ‘I’ve had some hawks on the committee surprise me and say they wouldn’t be worried about a modest overshoot” as long as it’s below 2.5 percent, former Fed governor Laurence Meyer said, without identifying who those anti-inflation stalwarts were. Inflation currently is 1.7 percent.'”
MK note: If what this Bloomberg article suggests turns out to be true, it is an extremely important long-term positive for gold. It implies a prediposition in the Powell Fed to keep the inflation rate ahead of the interest rate, thus insuring a negative real rate of return – a linkage that has been beneficial to precious metals in the past. As such, this Bloomberg report is vastly more important than it appears at first glance.
Gold is up almost $5 today at $1333.00 in moderately active trading, stable currencies and a level yield on the 10-year Treasury. It was up as much as $13 in overnight trading in Asia as Shanghai traders returned from China’s New Year celebration. Silver is also up a tad, +8¢ at $16.62. All eyes in the financial world will be on Fed chairman Jerome Powell when he testifies before Congress on Tuesday and Wednesday. There might be a certain amount of wariness to take positions ahead of that testimony in all the markets.
Speaking of China, a New York Times article yesterday on China’s seizure of high-flying Anbang Insurance focused attention on the country’s more generalized debt problems. “For years, Beijing encouraged big Chinese companies to invest overseas,” says NYT, “spreading the country’s wealth and influence beyond its borders. The money transformed global markets and industries. Now, the government wants to rein them in, worried that the debt-fueled spending spree could curtail the country’s growth. A concern is that the companies’ big borrowing binge could weigh on the country’s financial system.”
Doug Noland, editor of the Credit Bubble Bulletin, adds this: “[I]n terms of an effect on overall systemic risk, this move [China’s seizure of Anbang] barely registers on the risk-o-meter. . . With unrelenting rapid growth in credit of deteriorating quality, systemic risk [in China] continues its parabolic ascent.”
Perhaps we should concern ourselves with black swans gliding onto the U.S. financial pond from China. With all the discussion about inflation and inflation expectations, we forget that the predominant trend in global economies remains disinflation. With it comes the specter of cross-border, rolling debt defaults, real estate and financial market breakdowns and currency market disruptions – in other words, 2008 all over again. . . . . (For more, please see today’s ChartNotes below.)
Chart of the Day
Chart notes: Often forgotten, or in some quarters deliberately ignored, gold performed extraordinarily well in the disinflationary aftermath of the 2007-2008 financial crisis appreciating from $650 per ounce in January, 2007 to over $1800 in August, 2011. The consumer price index, on the other hand, was bumping along either side of zero and had the potential to evolve to a full deflationary spiral. Inflation, in short, was not an issue. Though gold is generally considered an historically-proven inflation hedge, it is also an historically-proven disinflation hedge as the post 2007-2008 example demonstrates. Investors from 2007 on were interested in gold for its safe-haven characteristics and as a refuge from a potential full-out financial system breakdown. One of the great advantages of being a gold owner is that it is an investment for all seasons protecting its owners against inflation, disinflation, deflation or hyperinflation.
“Large precious metals speculators raised their bullish net positions in the Gold futures markets this week, according to the latest Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) on Friday.” (Complete review at link)
“Dollar trends will likely dominate in the gold markets again during the coming week, with data releases and Fed rhetoric in focus. Fed Chair Jerome Powell is likely to take a slightly more hawkish stance regarding expectations of further gradual rate increases, although a measured tone and the promise of continuity is likely to limit gold losses. . . The impact of U.S. inflation and monetary policy expectations will continue to ripple across all asset classes and will inevitably be a key driver of gold prices during the week ahead.”
MK note: All eyes will be on Congress Tuesday and Wednesday when chairman Powell delivers his first Humphrey-Hawkins testimony.
Interview of BlackRock’s Tushar Yadava, investment strategist
“Gold as a portfolio hedge and as hedge in terms of signs of stress is doing exactly as advertised. It’s delivering that diversification benefit, and it has done that, especially through the volatility over the last couple of weeks.”
MK note: Hedge funds like BlackRock, though their commitments can be in the hundreds of millions or even billions, invest in gold for the same reasons as most private individuals – as a hedge and safe haven.