No LATE REPORT tonight

Please see this morning’s EARLY REPORT further down the page.

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Albert Edwards: The end is finally nigh for stocks

Barron’s/Ben Levisohn/3-15-2018

“It all starts with the trade war that could be brewing between the U.S. and China, but also between the U.S. and Germany. Edwards argues that the U.S. and Europe, now confronted with a Japanese-style bust (even if we won’t except it yet), has caused voter anger to boil over. And that anger has resulted in a U.S. president, Donald Trump, who is willing to take an America first’ attitude, one that has the potential to upend the traditional economic order.”

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March madness is here. . . .

One of the all-time great Ed Stein cartoons. . . .

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Bitcoin bloodbath

Investopedia/Samantha Chang/3-15-2108

“Bitcoin prices suffered a meltdown Thursday after bottoming out at $7,676 before recovering somewhat. In a sell-off that kicked into high gear yesterday, the market capitalization of the entire cryptocurrency market lost a whopping $53 billion in value.  Market observers are attributing the recent price drop to a decision by Google to ban cryptocurrency advertising on its platform. The ban takes effect in June. Scott Spencer, Google’s director of sustainable ads, said the ban was necessary to protect consumers from being scammed.”

MK note:  Bitcoin, the new gold, is a bitvolatile. . .

Chart courtesy of
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Goldman sees U.S. dollar weakness persisting in 2018


“Goldman Sachs said on Wednesday it continues to expect broad weakness in the U.S. dollar and outperformance by emerging market currencies in 2018 amid investors’ concerns about escalating trade tension.”

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Keep your eye on the prize


Gold is trading lower this morning and most media reports attribute the weakness to next week’s Federal Reserve Open Market Committee meeting. At that meeting, as we have heard endlessly, the Fed is scheduled to raise interest rates by a quarter of a point, and rising interest rates are bad for gold.

But are they?  Paul Farrugia of First Macro Capital put together a fairly detailed analysis of the relationship between interest rates and the price of gold in an article published at ValueWalk and came to an interesting conclusion:

“Follow the commodity complex. Commodity cycles, which considers all commodities together, are more predictable over long-term time periods to gold than interest rates.”

We find that an agreeable conclusion. Interest rates are not a completely reliable indicator as to the future direction of the gold price, not at least when taken alone. Commodity prices indeed are the better, more reliable indicator. That said, there is something else we might want to watch – something that will affect both the commodities complex and gold (which is a part of it) and that is the Fed’s interest rate posture in relation to the inflation rate.

Is the Fed working to keep interest rates above or below the inflation rate?

At the moment the Fed is interested in keeping yields below the inflation rate, so as not to kill off any chances of economic recovery and drive wage and salary incomes relatively lower.  Incomes, if you look at any chart, have not kept up with the rest of the economy and that is probably why the inflation rate is stuck where it is. That, more than the unemployment rate, tells the Fed whether or not the American people are doing well or poorly in the contemporary economy – especially as we approach near full-employment.

Gold over the medium to long run responds not just to interest rates and yields or the inflation rate, but the relationship between the two.  It responds most directly, in other words, to the real rate of return on yield assets and that is why we spend so much time on that aspect of the analysis here at USAGOLD.

As we move into Fed week, gold investors should keep their eye on the prize and disregard the clutter and noise likely to be generated by the mainstream media. The prize is the longer-term relationship between yields and the inflation rate, i.e., the real rate of return on gold and the real rate of return on the dollar. In that regard I re-post the following two charts on real rate of return along with the latest gold-commodities’ complex overlay.

Chart[s] of the Day

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Import prices rise more than expected in February


“U.S. import prices rose more than expected in February as the largest increase in the cost of capital goods since 2008 offset a drop in petroleum prices, bolstering views that inflation will pick up this year. The Labor Department said on Thursday that import prices increased 0.4 percent last month after a downwardly revised 0.8 percent surge in January. Economists polled by Reuters had forecast import prices climbing 0.2 percent in February after a previously reported 1.0 percent jump in January.”

MK note:  As we have said consistently, the inflation surprise will start quietly. . . with import prices.

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Trillion-dollar deficits far as the eye an see

Daily Reckoning/Brian Maher/3-13-2018

“We have spotted a raven of foreboding… a portent of evil to come…Interest on the public debt struck $28.43 billion last month. That is the highest figure for any February on record. For the first five months of this fiscal year (Oct.–Feb.), interest on the public debt has risen 8% over the same period last year. At $203.23 billion… that too is a record.”

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This isn’t your grandfather’s (1960s) inflation scare


“For a variety of reasons, I don’t buy the argument that we’re about to take a 1960s–70s-style inflation ride. I get the LBJ comparisons, and I can appreciate them, but current policy makers should find it harder to lift inflation than at the post–WW2 high water mark for insularity, labor strength and stakeholder-friendly corporatism. Moreover, private debt levels and circular flow analysis both suggest any inflation increase would be short-lived. In other words, LBJ never faced America’s current mix of disinflationary forces, and those forces are no pushovers.”

MK note:  An argument contrary to the running inflation mantra. . . .With all the talk, as we have said before, the real headwind for the economy in the present is disinflation.

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Kudlow says he favors a strong dollar, has no reason to believe Trump isn’t for one either

CNBC/Thomas Franck/3-15-2018

“A great country needs a strong currency. I have no reason to believe [President Trump] doesn’t favor a sound and strong and steady dollar. . . I’m not saying the dollar has to go up 30 percent, I’m just saying let the rest of the world know that we are going to keep the world’s international reserve currency steady. That creates confidence at home.”

MK note:  Are we certain that the president wants a “strong currency?”  That, in our view, is still up in the air no matter how the manual reads on proper public posturing for incoming White House economic advisors.  Then there is Fed policy on interest rates, more specifically, the “real” rate of interest and its longer-term effect on the value of the dollar. . . .More on that in this morning’s EARLY REPORT.

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Gold posts lackluster day, shows evenly balanced sentiment


Gold, had a lackluster day today trading sideways for the U.S. session finishing down $2.50 at $1324.60. Silver also traded sideways finishing down 4¢ on the day at $16.52. Reuters quotes a couple of analysts as saying that the any downside in gold has been mitigated by political uncertainties, expansion of the trade wars, and building demand for commodities globally.  Its upside, others say, has been mitigated by the upcoming Federal Reserve meeting and the prospect of higher interest rates.  Sentiment, it would seem, is evenly balanced – at least for now. Gold volumes at the CME have been light indicating a wait and see attitude among speculators.

Quote of the Day
“I’m in the inflation camp. I think it’s coming. I have thought this for a while. People have looked all over for it as if looking for a lost sock or a hairpin: Where did it go? Where is that thing? But I do believe that the central bankers who have been kind of begging for inflation will be surprised at the generosity of the inflation gods over what they will ultimately be handed.” – James Grant, Grant’s Interest Rate Observer

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Letter to the Editor

E-mail from T. D.

“Your thoughts on gold price after 26 March and the oil/Yuan contracts?”

Hello, T.D. and thanks very much for your question. I know this subject is front and center for a good many of our readers.  Your e-mail is one of several I have received on the subject. Another of our regular readers asked by e-mail recently what I thought of the petroyuan contract. My response included a question as to whether or not Koos Jansen, the Netherlands-based gold market analyst, had written on the subject.  Jansen, as many of you are already aware, is an expert on China’s involvement in the gold market and on the Shanghai Gold Exchange. He deploys a logical, statistically-based approach in his writings that I appreciate. So when it comes to the inner workings of China’s gold market, I tend to rely on his analysis as a solid, fact-based starting point.

As it turns out, Jansen did write an article on the petroyuan published by Singapore’s Bullion Star in October of last year, and as expected, it goes to the heart of the issues on the petroyuan.  Koos is an old friend of the firm, so I wrote him today to ask if he stood by his earlier findings. He wrote back immediately saying that he did and that we had his permission to republish the article which you will find immediately below. Because of his expertise, I will defer to him on the subject for the time being, particularly since, by and large, I agree with his analysis. –MK

The Gold-Backed-Oil-Yuan Futures Contract Myth

On September 1, 2017, the Nikkei Asian Review published an article titled, “China sees new world order with oil benchmark backed by gold”, written by Damon Evans. Just below the headline in the introduction it states, “China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry”. Not long after the Nikkei piece was released ‘the story’ was widely copied in sensational analyses throughout the gold space. However, ‘the story’, as presented by Nikkei, doesn’t make sense at all. Allow me to share my 2 cents in addition to what I shared previously on the Daily Coin.

All the rumours and analyses on gold, oil and yuan that are making rounds now in the blogosphere are based on the Nikkei article. But the Nikkei article itself contains zero official sources. Basically, the whole story has been invented by Damon Evans. So, let’s start addressing the claims made in the Nikkei piece.

It’s true that the Shanghai Futures Exchange (SHFE) – not to be confused with the Shanghai Gold Exchange (SGE) – has recently set up a subsidiary called the Shanghai International Energy Exchange (INE), for foreign enterprises to trade a new oil futures contract denominated in yuan which is expected to be launched later this year (product symbol: SC). Specifications of the contract can be read here. In all official sources, though, there is no mention of gold. Officially this contract is not “convertible into gold”.

The only vague connection I could find is that the INE “will accept foreign exchange as … trading margin”. If this includes gold – which technically is not foreign exchange – we will see. In any case, even if gold will be used as trading margin that doesn’t mean the contract is “backed by gold”.

The Nikkei headline clearly reads “China sees new world order with oil benchmark backed by gold”. In this context, the word “backed” for most readers will refer to a fixed parity. In the past, for example, there was a fixed parity between gold and the US dollar; this meant the dollar was backed by gold through the US Treasury; dollars could be redeemed for gold at a fixed price and vice versa. In case of the Nikkei story it would imply a fixed parity between yuan, or oil (this is not clear), and gold. But how would China back anything with gold? Would China’s central bank (the PBOC) defend a fixed price of gold in yuan? And it would do so through an oil futures contract? Impossible.

Quickly ‘the story’ by Nikkei transformed through the blogosphere where analysts suggested the gold in SGE vaults would back the yuan. The problem with this theory is that gold in SGE vaults, (i) isn’t owned by the Chinese government, and (ii) isn’t allowed to be exported from the Chinese domestic market (not very convenient for foreign oil producers). Then analysts suggested the gold in vaults of the Shanghai International Gold Exchange (SGEI) would do the job. But SGEI gold, (i) isn’t owned by the Chinese government either, and (ii) can only have been sourced in the international gold market, payed for with US dollars. So much for the oil-gold trade circumventing US dollars as presented by Nikkei.

Now, let’s zoom in on the logic behind the phrase “crude oil futures contract priced in yuan and convertible into gold”. Futures contracts are an agreement between two traders about the future price of i.e. a commodity (usually denominated in a currency, in the case of the INE contract yuan). There can be no third asset, commodity or currency involved in a futures contract. It cannot be that upon physical delivery of SC – when oil is exchanged for yuan – one of the two traders will say, “you know what, I don’t want yuan (or oil), I want gold”. And, needless to say, the Chinese government will not mingle in the futures trade. The PBOC will not jump in when a SC short or long demands gold. Again, the new INE oil futures contract denominated in yuan will have nothing to do with gold.

What is possible is that when a SC short delivers oil in exchange for yuan, he is then free to buy gold with the proceeds. One can do so directly on the SGEI where three physical gold products denominated in yuan are listed.

Though, be reminded, currently no oil producer is prohibited from buying gold (or something else for that matter) when paid in US dollars. That’s actually the very function of money. Money is used, since ancient times, for what is called indirect exchange. Stuff is sold for money, and with that money all other stuff can be bought. Gold can be bought with the proceeds from oil sales since … forever. An oil futures contract will not suddenly change all that. In the Nikkei piece one analysts was quoted saying:

It’s a transfer of holding their assets in black liquid to yellow metal. It’s a strategic move swapping oil for gold, rather than for U.S. Treasuries, which can be printed out of thin air.

But oil producers are free to buy gold with their moneys (yuan or dollars) with or without the new futures contract. The INE contract will not remove an obligation i.e. for Kuwait to invest in U.S. Treasuries. So, what will change when this new oil-yuan futures contract is launched?

Also bear in mind that futures are hardly ever physically delivered. Futures are used for hedging and speculation. In general, commodities are physically traded in the spot market. Oil for dollars, chocolate for Swiss francs, Dutch cheese for euros, etcetera. Futures contracts are not necessarily needed to sell oil for yuan. Nikkei wrote:

China’s move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan.

But effectively, Venezuela, Russia and Iran can sell their oil to China in exchange for yuan as of this very moment, before the oil-yuan futures contract is live. They also could have done so three years ago. So, in my very humble opinion the new INE contract will not be the instant game changer everybody is talking about.

Perhaps also noteworthy, one commentator on the Nikkei story wrote:

China just announced that any oil-exporter that accepts yuan for oil can convert the oil to gold on the Shanghai Gold Exchange and hedge the hard currency value of the gold on the Shanghai Futures Exchange.

My comments on this paragraph:

  1. As shown above China hasn’t announced anything but an oil-yuan futures contract. Gold has nothing to do with it.
  2. Yuan can technically be spend on gold at the SGE, but gold in the Chinese domestic market (SGE system) is not allowed to be exported. Gold from the SGEI is allowed to be exported but is bought in the international market via yuan with US dollars.
  3. Foreign enterprises, like oil producers, cannot hedge gold on the Shanghai Futures Exchange. The SHFE is not open for international customers. There’s only a spot deferred product listed on the SGE, which is comparable to a futures contract, through which foreign enterprises can hedge gold in yuan. But why would oil producers buy gold and subsequently hedge the metal in yuan. Their end position would be merely exposure to the price of yuan. Why then, not buy a yuan denominated bond with an interest rate? Or hold gold without the hedge?

Prior to publication of the Nikkei article in question I got an email from Evans. He asked me if “China will tie a gold guarantee to the new oil contract?”. I replied, “No. I would be surprised if they did that”. But my quote wasn’t selected for the final publication. The piece only quoted analysts singing the same song. In my view, that’s not what sound journalism is about. First of all Evans didn’t use any official sources, and second he picked analysts that confirmed his bias.

Aside from all the inaccuracies in the Nikkei article, what stands out for me is that indeed a large number of countries is willing to trade oil in yuan and the new INE futures contract is important for this development as it allows oil producers and users to hedge directly in renminbi. And so the INE contract will support oil for yuan trading. That’s what the article should have focused on.

Although not much has happened yet*, it’s clear Asia wants to get rid of the petrodollar, and it will be interesting to see how this initiative develops.

*Still the majority of global trade is conducted in US dollars, and most foreign exchange reserves are in dollars too. The share of yuan payments, compared to all other currencies,  tracked by payment service provider SWIFT were under 2 % in June, down slightly from two years ago. (I have no data on CIPS payments.)

Republished with permission – The Gold-Backed-Oil-Yuan Futures Contract Myth/Koos Jansen/Bullion Star/ 10-15-2017

End note:  So, to answer your question, T.D., at the moment I do not foresee anything in a fundamental sense evolving directly from the March 26 launch to affect the price of gold.  At the same time, over the longer run, the gold price will be affected to whatever extent this initiative erodes the market for the U.S. dollar as a reserve currency.  Beyond that, there could be an even greater indirect, but profound, psychological effect on markets – including gold and silver. The U.S. dollar, to my recollection, has never faced so direct, purposeful and potentially large-scale an assault on its hegemony, and from a country that highly values the precious metals. That perhaps is where the greatest value lies for long-term gold owners. Whether or not the effects are immediate depends upon how global gold, oil and currency traders view the threat. All of this comes into sharp focus in the context of the escalating trade war between China and the United States.  –MK

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Not a single Japanese 10-year bond traded Tuesday


Bloomberg/Chris Anstey and Hidenori Yamanaka/3-13-2018

“The upside for the BOJ is that with such little going on in the market, it makes it easier to control the yield curve, with less need for intervention. Governor Haruhiko Kuroda noted to lawmakers Wednesday that the central bank has bought 75 percent of the government bonds issued in the fiscal year ending this month.”

MK note:  The only reason I can think for the Bank of Japan to buy 75% of the bonds issued over the course of the past year is because no one else would buy them. So where does it all end?  Japan and its central bank are sailing uncharted waters.

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Stock investors slash risky bets as bull’s 10th year begins

Investopedia/Mark Kolakowski/3-14-2018

“The bull market can’t last forever, and investors are preparing for the next bear market by raising cash and rebalancing their portfolios towards less risky holdings, The Wall Street Journal reports. The specters of rising inflation, rising interest rates and international trade conflict threaten to put an end to the so-called Goldilocks Economy that has been propelling stock prices upward. “Until now, the expansion was seen as one that could go on and on without any signs of price inflation, and that’s being questioned now,” as Larry Hatheway, chief economist at Zurich-based asset management firm GAM Holding, which oversees $163 billion of client assets, told the Journal.”

MK note:  If this is true and the great migration is underway, private investors are likely to do what institutional and fund investors have been doing for two years now – rebalancing their portfolios in the direction of gold and silver.

Related:  Please see How professional investors radically altered the gold market/News & Views/October, 2017
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The fallout from higher U.S. yields: A global guide for traders

Bloomberg/Liz McCormick and Michelle Davis/3-14-2018

“It’s no secret that rising U.S. borrowing costs have the potential to roil global financial markets. But as worries grow that yields on Treasuries — the world’s lending benchmark — will once again start to grind higher, analysts across Wall Street are trying to figure out how painful and wide-ranging the knock-on effects might be. While risk assets have regained some of their footing since the selloff in February, market luminaries like Jeffrey Gundlach suggest cracks are likely to re-emerge as 10-year yields push toward 3 percent and beyond.”

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Gold stuck on pause at the $1323 mark, not for lack of incentive


Gold continues to be stuck on pause in and around $1323 mark where it has traded all week. Silver, similarly disposed, is stuck in the the low to mid–$16.50s. The media and gold punditry have struggled to explain this latest bout of complacency, but nothing we have read carries the real ring of truth. It’s not for lack of news, though, that the precious metals cannot seem to take the initiative. Between the latest melodramas at the White House, the burgeoning trade wars and North Korea’s sudden silence on disarmament talks, there is plenty to raise the market’s temperature, but nothing seems to motivate. Nothing seems to stir the animal spirits.

So we watch and wait. . . . . . .Back to this morning’s Financial Times and my cup of coffee. (It’s early here. . .)

Chart of the Day

Chart notes: “Short-termism,” says the Financial Times Lexicon, ” refers to an excessive focus on short-term results at the expense of long-term interests.” I have been in the investment business for over 45-years and I am trying to think of another market era when short-termism was a greater scourge on the markets than it is today. I’m having trouble finding a candidate. This chart encourages thinking on a whole different level – a bit of “long-termism,” if you will. It compares gold’s secular bull market, which many believe to be still in the creative state having begun in 2002, and the bull market in stocks from 1980 to 2000. As you can see the comparison is startling. The point is that bull markets can take many years to unfold and are full of twists and turns, up and downs, charges and retreats. In this particular instance and comparison, it is interesting to note that gold could be at the juncture on the timeline that stocks were before a major, five-year long blow-off when prices more than tripled.
Related: Please see Revisiting gold’s secular bull market – 2018 could be a critical year/ News & Views/January, 2018 – a more-detailed analysis of the subject matter treated briefly above.
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Dumb money is helping smart money exit the stock market

GoldSeek/David Haggith/3-11-2018

“Bloomberg this week ran a story telling us how the smart money gets out of the stock market when it hits its all-time peak and how the dumb money helps the smart money out. Only they didn’t know that was what they were writing. It typically happens this way: At the end of a deliriously euphoric market rally when the market is preparing to crash, all the Joe Sixpacks, mom and pop and the family dog open trading accounts and try to chase the tail of market action. Many throw in their entire retirement funds, pawn the dog’s collar and take out loans on credit cards to buy in as much as they can. By buying in late, they help provide a smooth exit for the smart money. At least for some of it. It is the little guys, tough from hard labor, whose muscles are employed to push the money bags of the rich to the top of the mountain from which the little guys are allowed to jump off. That appears to be happening right now.”

MK note:  A not-so-flattering look at the present stock market reality. . . . .

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Why does America have a persistent merchandise trade deficit?

Forbes/Ralph Benko/3-13-2018

“As Seth Lipsky, the editor in chief of The New York Sun, recently and shrewdly observed in his column the New York Post: ‘Trump hasn’t even played his ultimate economic-policy trump card — monetary policy. That would mean a campaign to end the era of floating exchange rates and currency manipulation. Candidate Trump complained bigly about that problem when he was on the stump. It offers a strategic way to level the playing field for China, America and others, without playing whack-a-mole with tariffs. Once Trump got elected, though, monetary reform was belittled and blocked by, among others, Gary Cohn. Maybe his departure will allow it to be brought to the fore.'”

MK note:    This article suggests a gold standard as a replacement to the old dollar-centric system, but it is unlikely that will ever happen.  At the same time, the article delves expertly into the problems inherent to the present system – the history as well as the dangers of the developing weak dollar policy.  In the absence of a gold standard, the best long-term solution for the private investor is to put himself or herself on the gold standard – by owning gold coins and bullion. Don’t let the topical, politicized headline at the Forbes site keep you from digging in . . . . . . .

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China’s enviro policies, EV growth two megatrends to boost most commodities

Creamer Mining Weekly/Henry Lanzenby/3-13-2018

“Chinese actions in recent years to embrace temporary production cuts and enforce stricter environmental regulations are probably here to stay for the long term and have already disrupted a range of commodities, including coal, aluminium, lithium and cobalt production chains. . .According to Robinson, the need for cleaner, healthier societies has become a commodity megatrend to look out for, as it has the power to create sudden, structural deficits. ‘What if the Chinese environmental production curtailments are the start of a new normal?’ he asked.”

MK note:  This article goes on to highlight the gains over the past 14 months on a basket of industrial metals “set against a backdrop of commodity optimism.” Cobalt is up 154%; zinc, 36%; nickel, 32%; copper, 27%; lead 25%.

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Only about 60% of potential new gold supply incentivised at $1 300/oz

Creamer Mining Weekly/Henry Lanzenby/3-13-2018

“Only about 60% of potential new gold supplies are incentivised for a 12% internal rate of return, at a gold price of $1 300/oz, Wood Mackenzie analyst Vince Madden-Scott told an audience during a recent mining convention, in Toronto. This spells a grim picture for an industry that is expected to see peak output this year, as reserve attrition bites and sends the industry into potential structural decline going forward.”

MK note:   Peak gold could become major impetus to higher prices down the road. Those short the physical metal will not want to stay that way. “The pantry,” says Madden Scott, “is all but empty, save for a few highlights.”

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Gold holds onto gains, Trump administration ratchets up trade war tensions


Gold managed to hold onto gains from earlier in the day to finish up $3.50 on the day at $1326.  Silver finished 4¢ higher at $16.56.

As we end the day, news is filtering into the markets that the Trump administration “is seeking to impose tariffs of $60 billion on Chinese imports and target the technology and telecommunications sectors,” according to a late afternoon Reuters report. You get a feeling akin to premonition that something menacing might be building in the background. Few thought the tariffs would stop with steel and aluminum, but this latest move on the chess board is undeniably intended to ratchet up the tension.

We should keep in mind that China has not responded as yet to the steel and aluminum tariffs except rhetorically.  How would the markets react to live return fire?  I think we may be about to find out. It will be interesting to see how this news is received in the East when markets there open in a short while.

Quote of the Day
“We now face a potential economic catastrophe as the long period of very low interest rates comes to an end. The recent stock market meltdown has been attributed to rising rates. That is correct, but for the wrong reasons. True, the long march of rising rates beginning now will be a dramatic change from the long trend of declining interest rates that started nearly 40 years ago. The new upward trend is likely the beginning of a return to historic rates. . .Who will tell the American people that in a couple of years, almost half their income tax payments will go to pay interest on the debt to Japan, China and all the others who buy American bonds? Who will tell the American people that the debt service we pay will be greater than our expenditures for the military? – Peter J. Tanous, CNBC

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China banking crisis warning signal still flashing, BIS says

Bloomberg/John Glover/3-11-2018

“China, Canada and Hong Kong are among the economies most at risk of a banking crisis, according to early-warning indicators compiled by the Bank for International Settlements.”

MK note:  Canada?  That has to get your attention. And Italy, this report says, didn’t make the list? Have to wonder about that.  It’s not like Italy’s banking problems have suddenly disappeared.

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Gold suddenly heads North on Tillerson ouster


Gold suddenly took a turn to the North in early trading on news of President Trump’s decision to replace Secretary of State Rex Tillerson.  The yellow metal is up $2.00 at $1327.  Silver is also higher – up 7¢ at $16.64.  News of Tillerson’s ouster sent the dollar into a nosedive coming on the heels of economic advisor Gary Cohn’s resignation a week earlier. A tepid inflation report is also adding to dollar weakness this morning. Bloomberg reports that the “middling inflation reading fueled speculation the Federal Reserve won’t be forced to accelerate the pace of rate hikes.”

Chart of the Day

Chart note:  This chart courtesy of shows the ratio between the gold price and the St. Louis Monetary Base.  In the early 1930s and again in 1980 gold peaked when the ratio reached the 5 to 1 level.  In 1971, when the ratio reached .56 to 1, gold entered a bull market.  At the present, the Fed’s balance sheet (the monetary base) is at an all-time high and the ratio is now at .34 to 1, an all-time low.
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‘9th inning of stock bull market’ – Gluskin Sheff’s Rosenberg

CNBC/Stephanie Landsman/3-13-2018

“Wall Street may be embracing the Nasdaq’s return to all-time highs, but Gluskin Sheff’s David Rosenberg isn’t ready to abandon his bear case for stocks — he’s strengthening it. ‘What I’m seeing is the makings of a double top in the stock market,’ the firm’s chief economist and strategist said Monday on CNBC’s ‘Trading Nation.’ ‘We are in basically the ninth inning right now, and it’s not going into extra innings. So I say, you don’t play the momentum.'”

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Gold to silver ratio reaching an extreme

Value Walk/Christopher Aaron/3-12-2018

“This is the technical setup for a second significant surge in both gold and silver, following that of 2016. While in investing, as in life, nothing can ever be guaranteed, the above formation shows the potential for silver to start outperforming gold within the next several months, and for both metals to thus rise on the occasion.”

MK note: This article explores the possible ramifications of the silver-gold ration reaching 80:1 and suggests gold and silver currently are at “important lows.”

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Jim Grant: The great Bond Bear Market has already begun

MacroVoices/Interview of James Grant/March, 2018

“By way of confession and truth to podcast – let’s see, I confessed I was born in 1946 and that makes me, like, 37? Okay, I was born in 1946 and I was bullish on gold in 1945. I hope that puts my view on this into context.  I’m chronically, sometimes profitably, but certainly very nearly continuously, well-disposed to the legacy monetary asset. I think that so many arrows point to it in the present day. I think it will become the beneficiary of – I’m talking about gold now – gold will become the beneficiary of so many trends. From the tinkering and the unprecedented experimentation of our central bankers’ fiscal profligacy – I’m starting to sound moralistic – I think that paper money is in a secular bear market and that the institution of managed currency will be seen to be a species of pretense, if not outright intellectual fraud. And I use that word advisedly. And I think that come the dropping of the scales from the eyes of the money holders of the world, gold will do better against almost every currency.” – James Grant/Interest Rate Observer

MK note:  The interview linked above is well-worth your time if you want to better understand the bond market and what might lie ahead for investors.  “[S]omething to bear in mind,” says Grant, “is that nobody issues a press release at the start of an inflationary cycle.”

Posted in MK Short & Sweet |

Volatile period ahead is positive for gold and silver

Investing News/Melissa Shaw interview of CPM Group’s Jeffrey Christian/3-12-2018

“Well, I think what you’ve seen since February, since we got together in January in Vancouver, I think what you’re seeing is a transition in the financial markets. We’ve been gone through an extended period of time of low interest rates, low volatility, steadily rising stock prices, and low volatility in the bond market, and relatively weaker commodity prices. And I think what you started to see with the stock market correction which really started with rising interest rates is a movement and a transition away from that long period of economic time to a period of more volatile stocks with downward exposure, more volatile bond prices with upside interest rate exposure, and probably stronger gold and silver prices, and an increased uncertainty about economic financial stability and political developments.”

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Gold rallies off lows to finish level on the day


Gold rallied back from its lows on the day to close level on the day at $1323.  Silver also rallied off it lows but still finished the day 4¢ lower at $16.53.  The dollar did pretty much the opposite – rising then falling to finish pretty much level on the day. The Treasury bond auction we mentioned in the EARLY REPORT went better than expected contributing to gold’s rally and the dollar’s demise.  Commodities were down today offering little help to gold.  We’ll see what happens after the consumer price report is made public.

Goldman Sachs today offers the interesting observation that the Bank of Japan has “very limited” options for reigning in yen appreciation. “If the BOJ wants to prevent a further decline [in yen bond yields], it would need to reduce [Japanese Government Bond] purchase amounts, but that could lead to further yen appreciation. Conversely, precisely because of this risk, the BOJ is likely to allow the 10-year rates to remain at a low level for the time being. . .” As we have reported here consistently, the yen and gold seemed to be joined at the hip these days. If the Bank of Japan is going to allow the yen to rise, and that seems likely out of necessity, it bodes well for gold.

Quote of the Day
“For the first time since the global financial crisis, the global economy is growing reasonably strongly, with all major economic regions contributing. Our research shows that continued economic growth underpins gold demand. As incomes rise, demand for gold jewellery and gold- containing technology, such as smartphones and tablets, rises. Income growth also spurs savings, helping increase demand for gold bars and coins. Increased consumer demand also supports the investment case for gold and highlights its dual nature. Investors often focus on gold’s effectiveness as a hedge against financial shocks. But rising wealth underpins gold consumer demand, which, in turn, supports gold prices over the long- run. The interaction between investment and consumption also results in gold’s lower correlation to other mainstream financial assets, making it an effective diversifier.” – World Gold Council, 2017 Annual Review

What you need to know before you buy your first ounce of gold
Useful initial guidelines for first-time investors

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Bond market’s most feared traders threaten Treasuries once again

Bloomberg/Liz McCormick/3-12-2018

“It’s been a generation since traders like Coats last imposed their will on Washington and Wall Street alike. Yet the original vigilante says he’s seeing signs that the once feared punishers of profligate spending are lurking again, lured back by an expansionary fiscal policy and signs of resurgent inflation — just as the world’s central banks dial back years of unprecedented bond buying that’s largely shielded politicians from market pressures.

‘Some of the stirrings from what we used to know about the old days of inflation are really starting to rear their head,’ Coats, now retired, said from Florida. Back then ‘people paid a lot more attention to the deficits and the cost from the standpoint of what it was to the Treasury. Not so much now, but I think those days are going to be coming back.’”

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U.S. national debt approaches $21 trillion

Source: U.S. Treasury Department

MK note: $464.6 billion added since January 1, 2018. Could surpass $21 trillion mark this week.

Posted in MK Short & Sweet |