Monthly Archives: April 2019
The inverted yield curve as a harbinger
of higher gold prices
(Grey vertical bars indicate recessions.)
During the course of the past several weeks, we have heard much about the inverted yield curve in three-month and ten-year Treasuries as a harbinger of recessions. Missed in the press reports is the fact that it has also been a harbinger of higher gold prices. In the chart above, please note the upward surges in the price of gold in the five-year periods following the two most recent yield inversions in 2000 and 2006. The first occurred with gold trading in the $300 range. It subsequently rose to the $600-650 level in 2006. The second occurred with gold priced in the $600-650 range. It subsequently rose to over $1900 per ounce in 2011 – its all-time high.
“Ominously,” writes Robin Wigglesworth and Joe Rennison in a recent Financial Times editorial, “the US yield curve has now inverted once again, with the 10-year Treasury yield on March 22 dipping below the three-month T-bill yield for the first time since 2007. Combined with the length of the post-crisis expansion — this summer it will become the longest growth spurt in US history — and deteriorating economic data, the inverted yield curve has stirred fears that the countdown to the next downturn has already begun.”
Peter Fisher, formerly head of fixed income at BlackRock and currently a professor at Tuck School of Business at Dartmouth, puts it succinctly in that same Financial Times editorial. “The mistake,” he says, “is to think it [an inverted yield curve] is a predictor of recessions. I think it causes recessions.” The rise in the price of gold following the two prior instances of yield inversion, it is now well understood, came in response to aggressive central bank monetary easing and the sudden emergence of credit-related systemic risks.
Note: Commitment of Traders reports are published Friday with data from the previous Tuesday.
Gold specs sharply pared bullish bets to lowest in 19 weeks
Gold Non-Commercial Speculator Positions:
Large precious metals speculators strongly decreased 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.
The non-commercial futures contracts of Gold futures, traded by large speculators and hedge funds, totaled a net position of 56,273 contracts in the data reported through Tuesday April 16th. This was a weekly decline of -49,091 net contracts from the previous week which had a total of 105,364 net contracts.
The week’s net position was the result of the gross bullish position (longs) falling by -16,294 contracts to a weekly total of 183,213 contracts which combined with the gross bearish position (shorts) rising by 32,797 contracts for the week to a total of 126,940 contracts.
The net speculative position had risen for three out of the past four weeks before this week’s sharp decline. The current standing is now at the lowest level of the past nineteen weeks as the net position fell by almost half this week (-46.6 percent). The gold position has remained in a positive or bullish position for twenty-two straight weeks since a dip into bearish territory in November.
Gold Commercial Positions:
The commercial traders position, hedgers or traders engaged in buying and selling for business purposes, totaled a net position of -78,430 contracts on the week. This was a weekly boost of 54,379 contracts from the total net of -132,809 contracts reported the previous week.
Over the same weekly reporting time-frame, from Tuesday to Tuesday, the Gold Futures (Front Month) closed at approximately $1272.60 which was a loss of $-30.90 from the previous close of $1303.50, according to unofficial market data.
Silver specs sharply pulled back their bullish bets, down for 3rd week
Silver Non-Commercial Speculator Positions:
Large precious metals speculators continued to lower their bullish net positions in the Silver futures markets this week, according to the latest Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) on Friday.
The non-commercial futures contracts of Silver futures, traded by large speculators and hedge funds, totaled a net position of 5,885 contracts in the data reported through Tuesday April 16th. This was a weekly decrease of -10,533 net contracts from the previous week which had a total of 16,418 net contracts.
The week’s net position was the result of the gross bullish position (longs) dropping by -377 contracts to a weekly total of 76,033 contracts in addition to the gross bearish position (shorts) which saw a strong gain by 10,156 contracts for the week to a total of 70,148 contracts.
The net speculative position fell for a third straight week and for the sixth time out of the past seven weeks. This week’s decline was only the third time spec positions have dropped by over -10,000 net contracts in a week since the beginning of October.
Overall, the current standing remains in bullish territory but at the lowest level since December 4th when the net position was negative. The recent slide in speculator sentiment for silver has come fast and furious as net positions have fallen from a total of +58,313 contracts on February 26th to just +5,885 contracts this week.
Silver Commercial Positions:
The commercial traders position, hedgers or traders engaged in buying and selling for business purposes, totaled a net position of -23,672 contracts on the week. This was a weekly increase of 14,090 contracts from the total net of -37,762 contracts reported the previous week.
Over the same weekly reporting time-frame, from Tuesday to Tuesday, the Silver Futures (Front Month) closed at approximately $14.89 which was a loss of $-0.27 from the previous close of $15.16, according to unofficial market data.
US Dollar Index, Japanese Yen specs cut bets this week
US Dollar Index Speculator Positions
Large currency speculators reduced their bullish net positions in the US Dollar Index futures markets this week, according to the latest Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) on Friday.
The non-commercial futures contracts of US Dollar Index futures, traded by large speculators and hedge funds, totaled a net position of 28,938 contracts in the data reported through Tuesday April 16th. This was a weekly decrease of -508 contracts from the previous week which had a total of 29,446 net contracts.
This week’s net position was the result of the gross bullish position declining by -1,443 contracts to a weekly total of 43,126 contracts that overtook the gross bearish position total of 14,188 contracts which also saw a decline by -935 contracts for the week.
The speculative net position had risen for two straight weeks before this week’s decline. The current standing overall has remained very steady in bullish territory and above the +25,000 net contract level for thirty-nine straight weeks. Despite the bullish positioning streak, we have seen a little bit of weakening recently in the dollar sentiment as net contracts have now been below +30,000 contracts for the past five weeks.
“In fact, year after year, the firm has found that investors are often their own worst enemy, failing to exercise the necessary discipline to capture the benefits markets can provide over longer time horizons, while succumbing to short-term strategies such as market timing or performance chasing as they did in 2018, Dalbar has found.”
USAGOLD note: A powerful argument for a strong diversification in gold and silver – both of which have a low correlation to stocks and bonds. JP Morgan’s finding that gold ranks second among investments over the past twenty years speaks volumes. (Please scroll below.)
Markets are closed today. Happy Easter to all. . . . .
“By that I mean that the suppression of interest rates has served to advantage one class of people: The savers have been disadvantaged whereas big banks have been very greatly advantaged, and the financial community has been advantaged. In short: the saver’s loss has been the speculators’ gain. So, the ordinary working person has been disadvantaged and that is apolitical. To speak metaphorically but, I still think truthfully, that kind of policy is bordering on criminal – and I stand by that.”
USAGOLD note: A strong position taken by one of our favorite Wall Street commentators (who also happens to be a long-time advocate of gold ownership).
“The second part of our forecast in 1981 said that according to our very long-term cycle study, that bear market would be followed by a 30-year rise in gold. We even said we had no idea what would cause it, but the cycles said it should happen. If the forecast I made in 1981 still holds true, gold could have a continued secular bull market until 2030. That means the gold bull market could have about 11 more years to go. Historically, the final phase of a bull market is the most spectacular.”
USAGOLD note: Dohmen’s conclusions are worth noting in that he called the twenty-year bear market for gold that began in 1981 and ended in 2001.
“The fact that golden cross remained untouched for some people is a clear sign of divine protection of Our Lady Blessed Virgin Mary. Without prejudging the matter, let’s note the unique nature of the yellow metal, which helped the golden cross to survive intact even though the wooden roof burned down. You see, wood burns at around 600°C, while the melting point of gold is about 1064°C. The flames could not harm gold.”
USAGOLD note: A cleverly written essay that ends with the thought that “Healthy societies consist of responsible people who accumulate and preserve wealth.”
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USAGOLD specializes in gold and silver coins and bullion delivered to our client’s safekeeping. For over 45 years, we have resolutely advocated owning precious metals for asset preservation purposes rather than speculation. Admittedly, this philosophy does not resonate with all prospective gold and silver owners, but if it does with you, we think you will find our firm a kindred spirit.
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“The survey generated responses from more than 1,500 chief financial officers, including 469 from North America, and showed that 67% of those surveyed predicted the U.S. economy would be in recession by the third quarter of 2020, and 84% believe a recession will have begun by the first quarter of 2021. Thirty-eight percent of respondents predicted a recession by the first quarter of next year.”
USAGOLD note: Report from the corporate frontline. . . . . .
Dollar Collapse/John Rubino/4-16-2019
“In the decade since the trough of the Great Recession, nearly every sector of every major economy took on historically unprecedented amounts of new debt. And now the old “optimal” inflation rate of 2% isn’t enough to make interest payable for a growing number of borrowers. The solution? Higher inflation of course. The old 2% target was arbitrary in any event. And as with so many other things in life, if a little was good, a little more must be better, right?
USAGOLD note: As Alan Greenspan reminded us this past week, a 4% inflation rate in the early 1970s was enough for the Nixon administration to impose wage and price controls. Now with a 2%, even 2.5%, as a worthy goal for the Federal Reserve, a temporary 4% inflation rate would likely be passed off as something to be watched but not a major concern. The problem with inflation, and it has always been so down through history, is that the controlled blaze can suddenly and inexorably slip outside its designated parameters. Worst case examples – like Zimbabwe in the late 1990s (currency pictured) or Venezuela today – abound, as do lesser examples. Though hyperinflation in the United States is a distant concern, even inflation of the runaway, double-digit variety would wreak havoc on the markets, the economy and personal finances. The old admonition to “be careful what you wish for” comes to mind.
“About an hour and a half’s drive north from New York City lies a treasure — the gold kind. But it’s not one that you can go and find. In fact, you can’t get anywhere near it. Because this treasure belongs to the United States Treasury. Nearly a quarter of the U.S. government’s gold sits beneath a windowless building on the campus at West Point.”
USAGOLD note: You will enjoy this! Each bar is worth $500,000. . . . The Mint strikes the American Buffalo (pictured) and Eagle gold coins at the West Point facility.
JP Morgan study ranks gold second best
investment over past twenty years
J.P. Morgan Asset Management released a report recently ranking investments over the past twenty years. It shows gold as the second best performer over the period at a 7.7% average gain annually. REITs (Real Estate Investment Trusts) were number one at a 9.9% gain. Stocks ranked fourth at 5.6%.
“When the Fed accumulated bonds to fight the 2008 financial crisis and its aftermath, the hoard proved useful to banks. Financial institutions could include those cash balances in their stable of high-quality liquid assets to satisfy post-crisis regulatory requirements. With the Fed still shrinking its balance sheet, policy makers are now trying to determine the optimal level of reserves. It currently stands at about $1.6 trillion.”
USAGOLD note: Excess reserves are a remnant of the big-bang monetary experiment following the 2007-2008 financial breakdown. Now the Fed is trying to figure out how to manage what it wrought. Interest rates have taken a back seat to expanding and shrinking the central bank’s balance sheet as the primary policy tool. No one, as this short article – and perhaps painfully so – points out, is quite sure how all of this is going to work out. Confusion reigns not only at the Fed but daily within the financial markets. Gold ultimately will be among the beneficiaries if investors come to a scary realization that the new monetary system has flaws programmed into its onboard guidance system.
Repost from 4-11-2019
“Conservative high net worth gold investors prefer physical bullion over ETFs, says State Street Global Advisors. Private banks in Asia mainly use ETF vehicles when making active bets on gold based on a short-term outlook, Robin Tsui, gold ETF strategist at SSGA, said during an event in Hong Kong. For strategic allocations or longer-term investing, buying physical bullion and storing it in a safe remains the norm.”
USAGOLD note: The same is true in the United States and Europe. Financial institutions and funds tend to favor the ETFs while private investors tend to prefer coins and bullion stored nearby.
Repost from 10-10-2019
“If there’s one thing the prophets agree on, it’s that the end will come in the bond market. Even for stocks. Prophesies of doom are everywhere. There’s billionaire investor Stan Druckenmiller, who says our ‘massive debt problem’ will ignite a crisis. Oaktree Capital’s Howard Marks warns that public and private debt will be ‘ground zero when things next go wrong.’ And Citadel’s Ken Griffin sees a credit binge ending badly.”
USAGOLD note: A singular theme appears regularly in the media. We are on the edge of something about to end badly. If compiled, the list of doomsayers – many big names in the investment business – would stretch down the page.
Repost from 10-8-2018
“There is an old saying that someone has a tiger by the tail. In other words: they think they have the situation under control, but when they let go, the tiger will maul them and kill them. That’s the problem central bankers have gotten themselves into. There is almost no way out of the situation they have created. As these radical policies have incrementally been implemented, they open the door for acceptance of the next increment of radical policies.”
USAGOLD note: In this interview Gundlach also warns that the stock market is “ripe for a correction” and to be ready for “potential chaos in the 2020 presidential election.”
Repost from 4-12-2019
USAGOLD note: “Men, it has been well said,” says Charles Mackay in Extraordinary Popular Delusions and the Madness of Crowds, “think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.” At present we are experiencing a modern-day version of that process at USAGOLD. We do not have a rush to buy gold at the moment. Instead, we are experiencing a steady stream of new clientele interested in hedging the extremes Polleit outlines in the report linked above. In addition, clients who bought early in gold’s secular bull market (the early 2000s) and then later sold at higher prices (2010-2015) are now returning to the market as buyers. Usually they cite a combination of attractive pricing and the presence of various underlying risks in the financial system as driving that decision
(USAGOLD – April 18, 2018) – Gold – at $1274 per ounce – remains on the straight and narrow this morning posting its second successive no-change day thus far and looking about for incentive to move in one direction or the other. Silver is down 1¢ at $14.97. As reported yesterday, Thursday’s sell-off appeared related to Venezuela’s liquidation of $400 million worth of its gold reserves. As for the Monday’s follow-through decline, Commerzbank attributes it to “technical selling after the price dropped below the technically important 100-day moving average . . .We do not understand why the gold price should be weak given the very loose monetary policy pursued by many Western central banks – apparently the ECB [European Central Bank] is even considering price-level targeting.” [Scrap Register, 4-16-2019] We agree that stimulus and response in the gold market seem out of kilter at the moment.
Quote of the Day
“Were Keynes alive today, he would likely be arguing along with German Chancellor Angela Merkel for more monetary discipline and a return to a more balanced international system. No doubt, however, his neo-Keynesian acolytes would be dismissing his concerns as hopelessly outdated and reactionary. Keynes was an economic theorist, but he was also a clear-eyed market analyst, and a passionate and committed speculator for his own account and for Cambridge University. If he took in today’s economic vista of near-zero interest rates and quantitative easing, it is clear that he would be buying gold hand over fist—regardless of what his disciples might think.” – Richard Hurowitz, Octavian Report (in a Wall Street Journal editorial published September 2015)
Chart of the Day
Chart note: This quarterly chart zeroes-in on why the national debt matters. Elevated interest rates and massive growth in the gross debt will push federal government interest expense much higher – so much so that it could exceed in the near future what the nation spends on national defense. One would think that, like Italy or Greece, at some point the level of debt and interest payments will affect the national credit rating. Last, please note the acceleration in debt payments over the last twelve months (the last bar represents Q4-2018).
“‘We are living at a time of high political discord or polarization in America,’ says Mark Hamrick, Bankrate’s senior economic analyst. ‘One can imagine these concerns reflect their lack of confidence in officials’ ability or willingness to resolve problems.'”
USAGOLD note: The Bankrate survey found that 44% believe that “the political environment in Washington is the biggest threat to the economy over the next six months.” That number is likely to expand as we move closer to the November 2020 election.
“What I referred to in 2014 and what El-Erian refers to today is that central bank policy in both countries has been completely ineffective at restoring long-term trend growth or solving the steady accumulation of unsustainable debt. In Japan this problem began in the 1990s, and in the U.S. the problem began in 2009, but it’s the same problem with no clear solution.”
USAGOLD note: More and more, analysts are migrating to a realization that the economy is gripped by a powerful, seemingly inescapable, disinflationary undertow. In such an environment, the greatest danger is to the financial system itself, i.e., systemic risks and the possibility of another financial system breakdown similar to what happened in 2008.
“Iron ore’s glory days seem to be back. Singapore-traded rust climbed to its highest level since 2014 as it hit $93.83 a metric ton Friday, while port inventories in China suffered their sharpest weekly decline since 2015 – a typically bullish sign.”
USAGOLD note: Fickling, who focuses on the commodities markets, believes that China is experiencing a new building boom that will be good for commodities – a story that is quietly evolving while trade negotiations dominate the headlines. The Goldman Sachs Commodities Index (shown below) has risen 19% thus far in 2019. Gold demand in China remains strong as well.
Chart courtesy of TradingEconomics.com
“’The Fed is evolving to a ‘whites-of-the-eyes’ approach in terms of inflation’ under which it won’t hike rates until price rises accelerate,’ said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC.”
USAGOLD note: I can remember a time when economists thought that if the Fed waited for inflation to become obvious, it was already too late. . . . . . .
“‘Over the last two decades, U.S. corporate profit margins have surged and have contributed more than half of the excess return of equities relative to cash,’ said Bridgewater, which oversees more than $160 billion in assets. Without that consistent expansion of margins, U.S. equities would be 40% lower than they are today.’”
USAGOLD note: A 40% decline would put the Dow Jones Industrial Average at just under 16,000 and quite possibly ignite a financial crisis.
A very old yet very new thought
from Mr. Charles Dickens
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” – Charles Dickens, A Tale of Two Cities (1859)
Things change little. Things change a great deal. The opening passage to A Tale of Two Cities – a very old yet very new thought.
(USAGOLD-April 1, 2019) – The U.S. Mint reports sales of American Eagle gold and silver bullion coins running well ahead of last year’s pace at the end of March. Gold Eagle sales were up 33.3% over last year’s first quarter performance while Silver Eagle sales were up 37.9% over the same period. Month over month, Gold Eagle sales were more than three times higher than sales from March of last year. Silver Eagle sales were down 7% when compared to March of last year. Many analysts consider bullion coin sales a bellwether for interest in the precious metals. This year’s strong uptick indicates increased activity among American investors interested in including gold and silver in their holdings as safe-haven hedges and an underpriced asset class.
Repost from 4-3-2019
“Savers are still paying due to the financial crisis,” said [Wells Fargo’s Mike] Mayo. “It’s absolutely a wealth transfer from prudent savers to the borrowers and risk takers.”
USAGOLD note: The net effect on peoples’ lives is hard to calculate and probably exceeds the $500 billion price tag Mayo puts on the savings/interest rate debacle.
Repost from 4-10-2019
“Bottom line: Whatever the Fed might add to its balance sheet in the next round of stimulus, if history is any guide, it likely won’t have much of an impact. Which is why Rosenstein ‘firmly expects’ the central bank to engage in outright monetization ‘in the next couple of years.’ Even before MMT started gaining all of this political momentum, the Fed and Ben Bernanke had been dropping a trail of breadcrumbs to lead us to the idea that outright monetization wasn’t out of the realm of possibility.”
USAGOLD note: Gluskin Sheff’s David Rosenberg has a few well-thought out ideas where we go next with Fed monetary policy at the link above.
Repost from 4-8-2019