Gold up 1.8% on week, silver 3.9%; ‘unrestrained liquidity’ seen as prime mover for gold’s bull market
(USAGOLD – 7/10/2020) – Gold is level this morning at $1811 in quiet trading. Silver is also level at $18.80. On the week, surprisingly gold is up 1.8% and silver, 3.9%. We say ‘surprisingly’ because typically the summer months are slow for the precious metals. This summer though has been a different story. Since May 1, gold is up 7% and silver over 25%. There is considerable speculation as to what might be driving investor interest and prices with the rising tide of liquidity increasingly garnering attention as the prime mover for both gold and stocks.
“…[U]nrestrained liquidity is one of the reasons for the rapid rise of stock prices since the March bottom,” writes analyst Clif Droke at Seeking Alpha. JPMorgan’s Nikolaos Panigirtzoglou has observed that a huge liquidity increase-visible in the form of a ‘significant expansion of global M2’ since the beginning of 2020 until late May is ‘similar to the magnitude of M2 creation during the financial crisis of 2008/2009.’ The chief difference being that this time around, the liquidity increase has occurred at a decidedly faster pace. He concluded: ‘But given that debt creation and QE will continue to be stronger than normal until 2021, we believe that the total money or liquidity creation could exceed $15 [trillion] or more globally by the middle of 2021.’ This massive effusion of liquidity is, ironically enough, also a major reason for gold’s bull market.”
Chart of the Day
Sources: ICE Benchmark Administration, St. Louis Federal Reserve [FRED]
Chart note: “Since the COVID-19 crisis hit,” says UK-based Edison Group’s Charlie Gibson, “the Federal Reserve has returned to bond-buying with a vengeance. After cutting interest rates to (effectively) zero and initially saying it would buy US$700bn in bonds, on 23 March it removed the brakes stating it will ‘purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy’. With the total US monetary base now at US$5.1tn (and given the close historical correlation between the two), the gold price could very reasonably be expected to rise to US$1,892/oz and potentially as high as US$3,000/oz.” The chart above shows the correlation between gold and the monetary base Gibson mentions.
“Gold demand in China, in particular, investment demand, has benefited from rising concerns for the economy as well as the lowered opportunity cost amid the COVID-19 outbreak and the central bank’s response to it. But with signs of a potential economic recovery emerging, can we expect gold’s attractiveness as a safe haven in China to fade? We believe that the answer is ‘No’.”
USAGOLD note: Seems like there are a number of demand sources merging at this juncture and it will be interesting to see how it affects availability, premiums and prices as move through the second half of the year – Asian demand (including China), global investment demand for bars and coins, ETF bullion demand, central bank demand, just to name a few.
“As the number of new coronavirus cases in the United States rose to a single-day record, fresh government data on Thursday showed another 1.3 million Americans filed for jobless benefits, highlighting the pandemic’s devastating impact on the economy.”
USAGOLD note: Some signs of moderation in the overall numbers but a cloud of uncertainty still hangs over the employment picture.
Sources: U.S. Bureau of Labor Statistics, St. Louis Federal Reserve [FRED]
“I’ve been saying for years that central banks can never step away from this. They can threaten to. And they can bluff, and they can do some probing bets like they did last year, and the market may fall for that, or call that bluff in the short term. But yes I think we’re in a position now where central banks can never back away, which sort of begs the question how can this ever end. Can asset markets get inflated forever?”
“The U.S. is in a very odd situation. Even as the official unemployment rate falls, the health of the underlying labor market is deteriorating as the coronavirus pandemic drags on. The country is in the middle of two simultaneous downturns – a short-term seizure caused by fear of coronavirus and a longer-term slump that will look more like a traditional recession. Unfortunately, the latter is just beginning.”
USAGOLD note: In other words, it would be foolhardy for investors to believe that addressing “the seizure” would put an end to the “longer-term slump”, i.e., that a vaccine or a treatment, as some have suggested, would be a magic pill that put all our worries to rest.
“Silver is in backwardation. Physical deliveries of silver this month, July 2020, are at all time records, and July isn’t even half over yet. Something big is happening in silver, and it’s best if gold bugs don’t miss it by paying too much attention to gold. Us precious metals guys, we know the gold numbers very well, but silver gets lost in the mix. The silver rallies tend to be so fast, furious and short-lived that we tend to forget what actually happened, making it difficult to prepare for the next one. How long has silver been in a bull market, using that hackneyed 20% off lows definition for bull markets? How long was the bear market?”
USAGOLD note: Austrolib goes on the list recent bull markets in silver and what they produced. A good review for those new to the precious metals market and want to catch up with some quick history. Since May 1, silver is up over 20%.
“Bullion banks are between a rock and a hard place. For years they’ve been playing the hedge funds as an angler hooks and plays a fish. That game has ceased and there is no easy way for them to get level. For the moment they are trying to put a lid on the price, but the cost has been rising open interest, and therefore rising mark-to-market positions. The August active contract runs off the board at the end of this month and bullion banks are likely to be forced into large delivery volumes again. Furthermore, the exchange for delivery arbitrage facility between Comex and the LBMA is broken, allowing Comex premiums to London spot to go unchallenged.”
USGOLD note: Conclusion similar to what we posted yesterday with the Bloomberg article on increased delivery commitments in silver and platinum as well ……… Macleod fills in the blanks in this short piece.
“Gold prices are near an 8-year high but investors should keep adding exposure to the precious metal, that’s the advice of Clear Harbor Asset Management CEO Aaron Kennon.”
USAGOLD note: We once estimated that the price of gold reached over 100 billion marks per ounce during the 1920s nightmare German inflation having started in 1918 at 119 marks per ounce. Caveat venditor – Let the seller beware! It’s all a matter of currency value. As pictured, currency denominations went from 20 marks to 20 million marks on roughly the same piece of paper – same intrinsic value – in a few short years. A 20 mark gold coin, on the other hand, bought roughly the same amount of groceries at the height of the hyperinflation in 1923 that it did in 1918.
“Yet that view attaches too much importance to the change in U.S. foreign policy since 2016, and not enough to the change in Chinese foreign policy that came four years earlier, when Xi Jinping became general secretary of the Chinese Communist Party. Future historians will discern that the decline and fall of Chimerica began in the wake of the global financial crisis, as a new Chinese leader drew the conclusion that there was no longer any need to hide the light of China’s ambition under the bushel that Deng Xiaoping had famously recommended.”
USAGOLD note: Insights from historian Niall Ferguson on what happened to U.S.-China relations and what we might expect in the future. A lengthy, important read on the developing new Cold War with China that Ferguson sees as “inevitable and desirable.”
Repost from 7-5-2020
“Although silver has picked up significantly since its March low it has greatly underperformed gold over the past two years. But this is normal during the earliest stages of a major sector bull market, when gold is favored over silver. On its 20-year chart we can see that silver remains stuck within a giant base pattern that started to form as far back as 2013. This chart makes clear that once gold breaks out to new highs against the dollar, then silver should break out of this base to enter a dynamic advancing phase.”
USAGOLD note: Maund says silver can go either way – and that its plight is dependent on exogenous factors like the direction of the stock market, gold, and Fed policy.
Repost from 7-5-2020
“I’m fully aware that the provocation is that of, seemingly, an act of God or at least a viral mutation or something so we ought not to begrudge the Fed its humane impulses. But how do you not mobilize every single possible tool in your kit or bomb in your arsenal next time there’s a downturn in anything? I think this introduces the possibility of everything that gold bugs have been praying for. Are we going to talk about gold? I can’t wait.”
USAGOLD note: Grantian wisdom at its best ……With his sense of humor (as you can tell from the above) well in place.
Repost from 3-28-2020
“But these deficit-financed interventions must be fully monetized. If they are financed through standard government debt, interest rates would rise sharply, and the recovery would be smothered in its cradle. Given the circumstances, interventions long proposed by leftists of the Modern Monetary Theory school, including helicopter drops, have become mainstream.”
USAGOLD note: Doctor Doom outdoes himself in this one. He warns at one point that even if the coronavirus is contained his year, it could potentially return next flu season and cause markets to crash again. The engame? …… a “persistent depression and a runaway financial-market meltdown,” he says.
Repost from 3-24-2020
“’As real yields continue to move lower, it makes gold more attractive,” said [MKM Partners’ JC] O’Hara. “We plotted gold along with real yields and that’s the spread between the U.S. 10-year yield less the 10-year breakeven rate. … Yields have been negative and declining for the majority of 2020, and we see no end to that trend for the foreseeable future.’ That tailwind could lift gold as high as $1,900, says O’Hara, implying nearly 7% upside.”
USAGOLD note: The Fed has said it will keep rates near zero to “at least 2022” [CNBC – 6/10/20]. If that be the case, gold has a long way to go with the wind in its sails.
Repost from 7-5-2020
Part 2 of 5 . . . . .
What makes this gold market rally
different from all others
Day-to-day price reversals often originate
in Asia and Europe, not just the United States
For decades, the U.S. commodity markets set the tone for gold pricing and the rest of the world was content to follow. Even the old London price fix tended to follow along with trends established in the United States. That all changed when the Shanghai gold market began offering its own pricing mechanism and the effects of Brexit began to have a profound impact on both sides of the English Channel. Now, price reversals often begin in Asian or European markets overnight and carry over to the open in New York rather than the other way around. All of this is a reflection of ramped up global investor interest in gold and a leveling of the playing field in terms of who and what influences the price on a daily basis. As such, it comprises our second important difference between the current gold price rally and rallies in the past.
“I have found throughout my long investment career that an investor needs to make very few investment decisions in their lifetime. The key is to identify a long-term trend as it begins to emerge, invest in that trend, ride it until it ends and another trend replaces it. As an example, U.S. stocks in the 50s and 60s, commodities in the 70s, Japanese stocks in the 80s, tech stocks in the 90s, commodities in 2000s, and tech and paper assets in the 2010s. The next trend that is emerging will favor things or hard assets. This is what the gold markets are telegraphing now. This trend will be inflationary driven by resource shortages and a tsunami of money printing.”
USAGOLD note: A very well thought out piece from Jim Pulava – well worth the visit at the link above. Everything cycles and he believes we are moving into a part of the investment cycle that will favor “things” over “paper”.
Repost from 7-5-2020
Gold holds onto ground taken over $1800 mark; drop in real yields, inflation worries determining factors
(USAGOLD – 7/9/2020) – Gold held onto ground taken beyond the $1800 mark over the past two days as concerns lingered about ramped-up coronavirus cases in the United States and the future direction the U.S. dollar. It is trading up $2 on the day at $1813. Silver continued to plow higher – up another 21¢ today at $19.01. Saxo Bank’s Ole Hansen – often quoted in financial media – says that surging prices for both metals have been driven predominantly by sagging real yields on U.S. Treasuries.
“Spot gold has broken above $1800/oz thereby succeeding what it failed to do on two previous occasions most recently in 2012,” he wrote yesterday in the bank’s regular client advisory. “With silver at the same time breaking resistance at $18.40/oz the path towards higher prices have now opened up. The break could now signal an extension for gold towards the 2011 record high at $1920/oz while silver could take aim at the next level of resistance just below $19/oz followed by $19.65/oz. … The single biggest input that has driven the latest move higher has been the recent developments in U.S. yields. While the yield on ten-year notes remain anchored in a relative tight range, we have seen breakeven yields, an expression of inflation, move higher leading to a drop in real yields to the current -0.8%. These developments basically highlight what a U.S. market with yield-curve control would look like into a rising inflation scenario.”
Chart of the Day
Sources: Federal Reserve Board of Governors, ICE Benchmark Administration, St. Louis Federal Reserve [FRED]
Chart note: “A ‘perfect storm’ of surging government debt levels, plunging real bond yields, rising coronavirus cases and deteriorating economic forecasts pushed the price of gold to an eight-year high [in late June], and some analysts now project the metal to top its all-time high within the next 12 months,” says analyst Frank Holmes of US Global Investors. Holmes finds himself in the company of a large number of analysts who have predicted the metal would reach all-time highs in the near future. He says gold is trading inversely to falling bond yields – something illustrated unambiguously in our Chart of the Day.
“A resurgent coronavirus pandemic in the United States and the prospect of improving growth abroad are souring some investors on the dollar, threatening a years-long rally in the currency. … A decline in the dollar earlier this week set off a technical formation known as a ‘Death Cross,’ which occurs when the 50-day moving average crosses below the 200-day moving average, according to analysts at BofA Global Research.”
USAGOLD note: A heads-up is in order as death crosses are something that garner considerable attention in trading circles. “The death cross indicator,” says Investopedia (with reference to the stock market), “has proven to be a reliable predictor of some of the most severe bear markets of the past century: 1929, 1938, 1974, and 2008. Investors who got out of the stock market at the start of these bear markets avoided large losses that were as high as 90% in the 1930s.” Could be good for gold and silver.
“After months of living with the coronavirus pandemic, American citizens are well aware of the toll it has taken on the economy: broken supply chains, record unemployment, failing small businesses. All of these factors are serious and could mire the United States in a deep, prolonged recession. But there’s another threat to the economy, too. It lurks on the balance sheets of the big banks, and it could be cataclysmic. Imagine if, in addition to all the uncertainty surrounding the pandemic, you woke up one morning to find that the financial sector had collapsed.”
USAGOLD note: With that, Partnoy, a law professor at UC Berkeley who once structured securities at Morgan Stanley, launches into a lengthy dissertation on how a financial sector collapse could happen centering around a breakdown in the CLO market (collateralized loan obligations).