Monthly Archives: May 2019
(AFTERNOON UPDATE – 5-31-2019)
In this morning’s DMR we wondered if gold might break through the $1300 price level as traders positioned themselves ahead of what could be an eventful weekend. Little did we know how forceful that push would be. Gold gained $16 on the day to finish at $1307. Today’s close puts gold $22 higher over the past two days (+1.7%) – its highest price level in nearly two months. We have to think that at least part of the run is due to short-covering. A healthy dose of fresh safe-haven buying didn’t hurt. Reuters reports higher premiums on bullion in China, a sign that safe-haven demand is on the rise there as well.
“The problem with currency wars is that all advantage is temporary and is quickly erased by retaliation. Not only is the world not better off, but it is worse off because of the costs and uncertainty resulting from the currency manipulations. Eventually, the world wakes up to this reality and moves to the trade war stage. Then to the shooting war stage. This new trade war will get ugly fast and the world economy, which is already slowing, will be collateral damage. Given the trillions in dollar-denominated debt in emerging markets, a full-scale foreign sovereign debt crisis could be in the making if emerging-market countries cannot earn dollars from exports to pay their debts.”
USAGOLD note: A dire forecast from James Ricards and a far cry from what many on Wall Street would like to believe as the likely outcome to TW1. A potential emerging country debt problem is one of the potential unintended consequences we have warned against for some time on this page.
Repost from 5-24-2019. . . . USAGOLD note: Little did we know. . .
“Healthy markets would adjust and correct to reflect heightened uncertainties and deteriorating prospects. Speculative markets instead promote excess and the ongoing accumulation of imbalances, maladjustment and impairment. There’s no operable release valve. Pressure builds and builds – risks accumulate in all the wrong places – Then Panic. The flaw in contemporary finance – especially within market psychology over recent years – is to believe central bankers have nullified market, economic and Credit cycles. They have certainly averted a number of market crises over recent years, in the process significantly extending cycles. Along the way risk market participants grew greatly overconfident in the capacity of central bankers to permanently forestall crisis. Moreover, they have turned completely blind to the historic crisis festering just below the surface of their delusional view of a ‘Permanently High Plateau’ of global peace and prosperity.”
USAGOLD note: In his famous work on financial bubbles – Extraordinary Popular Delusions and the Madness of Crowds – Charles Mackay writes “We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.” But before the millions move on, they are generally relieved of a generous portion of their wealth. . . .Unless, of course, they have taken pains to properly hedge the financial madness of the era (or found the discipline to avoid it altogether). Most of the delusions covered in Mackay’s work are built on the misguided belief that the new and enlightened era had rendered the age-old market cycle obsolete. It never does. . .
USAGOLD note 2: By the way, Michael Lewis, the financial journalist, rates Mackay’s book one of the six great studies in economics in league with the work of Adam Smith, Thomas Malthus, David Ricardo, Thorstein Veblen, and John Maynard Keynes. It is featured at our Gold Classics Library here.
Repost from 5-26-2019
A sovereign tale of gold’s historic undervaluation
Oil, gold and a hoard of British sovereigns stashed in an old piano
“British officials are trying to trace the owner of a trove of gold coins worth a ‘life-changing’ amount of money found stashed inside a piano. A coroner investigating the find on Thursday urged anyone with information to come forward. . . Anyone wanting to make a claim has until April 20, when coroner John Ellery will conclude his inquest.” – Associated Press, London, UK
The above notice was originally posted in the public interest at USAGOLD’s online daily newsletter in June, 2011. As such we are well past the coroner’s due date. If you happen to be the frugal individual who stashed that life-changing amount of money in the piano (a total of 913 old British sovereigns in hand-stitched pouches) and neglected to make your claim, you are officially out of luck. [Smile]
When I first read about the gold hidden in the piano, put away no doubt for a rainy day, I was reminded of the settlement between King Ibn Saud of Saudi Arabia and a consortium of oil companies on rights to that country’s vast oil riches in the early 1930s. That too involved a stash of British sovereigns – 35,000 of the roughly one-quarter ounce gold coins.
British sovereigns happen to be one of the most sought-after, accumulated and stored pre-1933 gold coins in the world, so it is no surprise that forgotten hoards of the coin turn up every once in a while, nor is it a surprise that Ibn Saud would have asked to be paid in these highly liquid, universally acceptable gold coins. We sell many thousands of this item annually. Some go into safe deposit boxes. Some get buried out on the property. Some get stashed in the living-room piano. Most are kept in the event of a social, political or financial breakdown, or some other unexpected calamity, against all of which the gold British sovereign has been a direct hedge for centuries.
At the time of Saudi Arabia’s oil concession, British sovereigns were valued at $8.24 each, or $288,365 for the 35,000 coin lot. The price of oil in 1933 was about 85¢ a barrel. A British sovereign, as a result, could buy 9.7 barrels of oil. Today those same sovereigns would bring a little less than $10.5 million at melt value ($303 each/$1290 per ounce gold price) and a barrel of oil is selling for about $64. Thus, today a British sovereign can buy about 4.75 barrels of oil — a statistic that gives you an inkling of gold’s current under-valuation.
For gold to buy the same amount of oil now that it did in 1933, the price would have to go to just over $2500 per ounce. All of which brings us to the USAGOLD’s current special offer launched just this afternoon. . . . . . . .
(USAGOLD – 5/30/2019) – Gold is up $9 on the day at $1298 and up $15 since the last Daily Gold Market Report posted yesterday morning. The move to the upside began late morning yesterday on what looked like short-covering related to general trade and economic concerns. It then gained momentum during Asian trading hours when the president stunned markets with an announcement of new and escalating tariffs on all Mexican imports beginning June 10th. Thus far in today’s early going, it has made two assaults on the psychologically important $1300 level only to be turned back. It will be interesting to see if it can penetrate that top-end barrier today as investors position themselves for what could be an eventful weekend.
Howie Lee, an economist at Overseas Banking Corporation, summed-up market concerns telling Bloomberg, “the U.S. is demonstrating that they can weaponize trade on a whim. From China to Mexico, it sends a message that no country is safe. Gold is picking that up.” CNBC reports that market players “moved aggressively to price in deeper rate cuts by the Federal Reserve over the coming months, while the closely watched 10-year Treasury yield dropped to lows not seen since 2017.” Silver is level on the day at $14.54. The dollar and stocks are down sharply.
Quote of the Day
“There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall. For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape.” – John Kenneth Galbraith, A Short History of Financial Euphoria, 1990 (With thanks to John Hussman, Hussman Funds)
Chart of the Day
Chart note: This interactive chart compares price appreciation for gold and the dollar index. Gold has consistently outperformed the dollar in twelve of the last eighteen years – a formidable record. Even if one were to add in average yields on dollar-based investments, gold still comes out the clear winner in those twelve years. Gold had an off-year in 2018 – down 1% while the dollar was up almost 7%. Given the performance record, though, contrarian investors might see the present disparity as a buying opportunity.
“On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP,” Trump tweeted. “The Tariff will gradually increase until the Illegal Immigration problem is remedied at which time the Tariffs will be removed.”
USAGOLD note: Out of the clear blue. . .
“History shows that countries in conflict have seen that such conflicts can easily slip beyond their control and become terrible wars that all parties, including the leaders who got their countries into them, deeply regretted, so the parties in the negotiations should be careful that that doesn’t happen. Right now we are seeing brinksmanship negotiations, so it is a risky time.”
USAGOLD note: One of the reasons we consistently post what Mr. Dalio has to say is that we find ourselves so frequently in agreement with him. The statement above falls into that category.
“What’s striking about the bounce from December’s lows is how eager Wall Street is to dismiss it in hindsight as ‘overdone,’ ‘reckless,’ and ‘stupid.’ Some blame the decline on nefarious ‘algorithms,”’while others credit the subsequent bounce to some behind-the-scenes ‘plunge protection team.’ Look. The next couple of years are likely to include several breathtaking waterfall declines, and several more ‘fast, furious, prone-to-failure’ clearing rallies. Investors who study market history will find the progression familiar. Investors who instead dismiss the fact that extreme valuations have always been followed by collapse to run-of-the-mill valuation norms (which would currently require a roughly -60% loss in the S&P 500) are in for a difficult history lesson.”
USAGOLD note: In Hussman’s latest, he says the upward trend in stocks since December is a bear market rally destined for failure. He was among the few top-drawer analysts who foresaw the oncoming 2008 credit crisis and warned of its ill-effects. His full report at the link above is highly recommended.
Repost from 3-7-2019
“The go-ahead from the U.S. Commodity Futures Trading Commission, announced Wednesday, comes after ICE announced in February that it planned to impose a 3-millisecond trading delay on gold and silver contracts. The pause would be the first-ever speed bump for futures, showing that an idea popularized in Michael Lewis’s 2014 book ‘Flash Boys’ to rein in high-frequency traders is gaining more adherents.”
USAGOLD note: Interesting that ICE would choose gold and silver as the two streets in which to install the speed bump. The CFTC says that the speed bumps “have the potential to significantly impact futures’ markets function and quality” and that it would promote more trading through “slowing down high-speed traders engaged in latency arbitrage.” The CFTC, it would seem, is handing high-speed trading a ticket. Hopefully the net effect will be something of a return to normalcy as the advantage of high-speed trading is throttled.
Repost from 5-17-2019
Bloomberg/Liz McCormick and Alex Harris/5-21-2019
“As soon as next year, analysts say the Fed will resume large-scale buying of debt securities — this time just U.S. Treasuries — in amounts that may ultimately exceed its crisis-era purchases. According to an estimate by Wells Fargo & Co., the central bank’s balance sheet will rise past its historic peak as it adds over $2 trillion to its Treasury debt holdings in the next decade.”
USAGOLD note: We used to call this kind of government debt buying by the Federal Reserve monetization, which was a fancy name for printing money. Now, it is repackaged with a nice big bow and passed off to the public as a means to “keeping ample reserves in the banking system.” Nowhere in this article is it even mentioned that the buying might have to do with the large needs of the federal government at a time when foreign lenders are in retreat.
Repost from 5-21-2019
“Traditional hedges gold and the yen have performed poorly since the beginning of the U.S.-China trade war, but that could now change given the more dovish monetary backdrop, according to JPMorgan Chase & Co. A combination of a Federal Reserve that has stopped tightening policy and investor positioning that suggests the two assets are under-owned, could see their performance as hedges improve in 2019 and 2020, wrote strategists including John Normand in a note Friday.”
USAGOLD note: As we say repeatedly here, the ideal time to buy gold is when everything is quiet. . . .or to put it another way, when it is under-priced, under-owned and under-appreciated. Gold and the Japanese yen, as you can see in the charts below, have been travelling companions since the last financial crisis. The markets perceive both to be safe-havens, though there is no guarantee that the two will remain travelling companions in the future.
Repost from 5-23-2019
(USAGOLD – 5/30/2019) – Gold inched higher in early U.S. trading under generally calm financial market conditions across the boards – up $2 at $1282. Silver is up 6¢ at $14.49. Gold has gotten a minor boost from the hardening of positions in the trade war between the U.S. and China, but it has had trouble breaking free of the current trading range.
Overriding all other market inputs, disinflation continues to be the primary influence in gold’s pricing. Such circumstances generally favor the demand side of the fundamentals equation as investors seek safe-havens globally. That physical demand, however, does not always translate to price increases – at least not until systemic and credit risks begin to crop up in the headlines and dominate investor thinking. Then the price has had a history of moving quickly and forcefully to the upside with the 2008-2011 market being a prime example. In that time period, gold went from $725 to nearly $1900 per ounce.
Along these lines, Electrum Group’s Thomas Kaplan joins the growing list of billionaires who subscribe to gold ownership for longer-term fundamental (supply and demand) and economic reasons. In a Bloomberg TV Peer-to-Peer interview yesterday, he said that the yellow metal was on the cusp of a new decade long bull market capable of lifting it ultimately to between $3000 and $5000 per ounce.
Quote of the Day
“Gold is money – a rather rock-steady type of money, at that – and it cannot be debased by central banks’ money printing. Thus it stands in sharp contrast to bank deposits and short-term debt. Gold also does not carry any default or credit risk. It cannot go bankrupt, so to speak. For thousands of years, gold has already served as ‘premium money’. It would be surprising if gold were not to withstand the ‘Sword of Damocles’ (in the form of unbacked paper money) that central banks have hung over the economies.” – Thorsten Polleit, Degussa Market Report
Chart of the Day
Illustration courtesy of HowMuch.net
Chart note: “You don’t fight a trade war without ammunition on both sides,” says HowMuch.net. “In compiling the data of the largest reserves–or total reserves measured in U.S. dollars – you’ll find a keen perspective as to why the markets seem to react to every headline related to the U.S.-China trade wars. Why do liquid reserves matter? As it relates to trade wars, a country’s reserve stockpile has a large say in how much economic weight it can throw around. If China stockpiles a large amount of U.S. dollars, it can influence the value of its own currency, the yuan, which is pegged in U.S. dollars. Given that China holds over $3 trillion in reserves–far higher than Japan’s second-place $1.24 trillion–any movement from China can mean massive economic consequences for the globe.”
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.
“Government by tweet and investing by ETF represent the death of thought, responsibility, and moral action. Investors must resist these falsehoods. Technological demagogues convince people to surrender their freedom, to believe that the world is binary and capable of capture in 140 tweets. Free people must reject these tyrannies. Monetary charlatans tell citizens that it is prudent to print trillions of fiat dollars to bail out governments and businesses from their inability to competently manage their affairs. Citizens must reject these delusions.”
USAGOLD note: Lawrie Williams builds a solid piece around a long quote from Credit Strategist‘s Michael Hewitt. Williams cites a persistent mantra in Hewitt’s newsletters: “Buy gold and save yourselves.” This article is worth a visit. The rest of Hewitt’s observations will strike a chord with many of you.
“Investors need to wake the hell up. Just because the market is ‘holding up well’ during the past month or so of dreary trade war headlines doesn’t mean everything is fine and dandy. The signs are starting to build that the global economy is cooling down more quickly than many balding pundits and aging stock price predictors would have investors to believe.”
USAGOLD note: The upshot of this opinion piece is that Wall Street is about to get a dose of trade war reality and that investors should prepare for it. “Think 10% nosedive, or more,” says Sozzi. “In other words, a classic collapse.” He lays out a compelling case for hedging what might be ahead but does not get around to uttering the words “gold” or “silver.”
“Investors have increased bets that the Federal Reserve will cut US interest rates not once but twice this year, to counter concerns about slowing global economic growth that have been inflamed by the worsening US-China trade war. The probability that the central bank will cut rates two or more times by the end of 2019 rose above 48 per cent on Wednesday morning in New York, according to futures prices, exceeding expectations of a single cut.”
USAGOLD note: Amazing how quickly things change. . . . . .It is less than six months ago that the Fed was intimating that it would raise rates.
U.S. gold bar and coin demand up 38% over last year
Map courtesy of the World Gold Council
The World Gold Council reports U.S. bar and coin demand rose 38% over the past year (through the first quarter). Global central banks and financial institutions drove physical gold demand the past 12 months raising once again the question if professional investors know something that retail investors do not. As the map above illustrates, the United States ranked at the top globally for growth in gold coin and bullion demand over the past year, while Asian demand fell back. Most of the U.S. demand, as previously mentioned, originated with funds and institutions, not individual private investors.
Here’s the World Gold Council’s summary of demand trends through the first quarter of 2019:
“Central banks bought 145.5t of gold, the largest Q1 increase in global reserves since 2013. Diversification and a desire for safe, liquid assets were the main drivers of buying here. On a rolling four-quarter basis, gold buying reached a record high for our data series of 715.7t. Q1 jewellery demand up 1%, boosted by India. A lower rupee gold price in late February/early March coincided with the traditional gold-buying wedding season, lifting jewellery demand in India to 125.4t (+5% y-o-y) – the highest Q1 since 2015. ETFs and similar products added 40.3t in Q1. Funds listed in the US and Europe benefitted from inflows, although the former were relatively erratic, while the latter were underpinned by continued geopolitical instability. Bar and coin investment softened a touch – 1% down to 257.8t. China and Japan were the main contributors to the decline. Japan saw net disinvestment, driven by profit-taking as the local price surged in February.”
Could China dump its US Treasuries to fight the trade war? A contrarian view is emerging in Beijing
“This would devalue US bonds, causing yields to rise, potentially sharply. If China converted the dollar proceeds from its sale back into yuan, it would strengthen the Chinese currency against the US dollar, potentially significantly. However, one line of thinking is that because the trade war could remove the US as a viable market for Chinese exports, a strengthening yuan against the dollar – which would make Chinese goods more expensive for American buyers – may be seen as an acceptable outcome by Chinese policymakers.”
USAGOLD note: The South China Morning Post is thinking the unthinkable in this article. The repercussions of the yuan “strengthening significantly against the dollar” would no doubt be felt in the gold market. We should not forget that many analysts question China’s publicly-stated gold reserve number of 1850 tonnes and say it is probably closer in reality to 5000 tonnes.* If that number is correct, a significantly higher gold price would go a long way toward repairing the harm inflicted through bond sales. If China actually did acquire an immense gold reserve prior to the trade war, it will likely be seen in future years as one of the more astute policy plays of the era.
*In 2015, Bloomberg Intelligence estimated China’s gold reserve at 3510 tonnes. The China Gold Association in a 2012 study forecasted the optimal official gold holding to be 5787-6750 tonnes by 2020.
Related: Trade war sparks fears of China weaponising US Treasuries/Financial Times/Joe Rennison and Colby Smith/5-23-2019
Repost from 5-23-2019
(USAGOLD – 5/29/2019) – Gold firmed in overnight markets as global stocks weakened reflecting investor concern about a trade war-induced economic slowdown and a retreat to safe-havens. Gold is up $3 at $1283. Silver is up 12¢ at $14.48. In a break with the recent past, both metals rose along with the dollar in overnight markets.
As posted at our Live Daily Newsletter this morning, SafeHaven’s Alex Kimani reports one widely-followed indicator – CNN’s Fear and Greed Index – swinging notably from “greed” to “fear” over the past few weeks. (We note the Index updating to an “extreme fear” reading yesterday.) Simultaneously, he points out, wealthy investors are moving heavily into cash. At the end of the first quarter, high-net-worth investors globally had 32% of their portfolios in cash, according to a UBS AG survey. Further validating investor concern, the spread between 3 month and 10 year yields – a closely watched recession indicator – went to 13 basis points this morning, the largest inversion since 2007.
“Throughout history,” Real Investment Advice’s Lance Roberts reminds us, “financial bubbles have only been recognized in hindsight when their existence becomes ‘apparently obvious’ to everyone. Of course, by that point far too late to be of any use to investors who have already suffered a significant destruction of invested capital. This time will not be different. Only the catalyst, magnitude, and duration will be. Believing the ‘Fed has it all under control’ has historically been a bad bet.”
Quote of the Day
“The ‘threat’ is best seen through the emergence of exchange-traded funds (ETFs), which allow investors to get a proxy physical gold exposure through an investment via their stockbroker. In truth, these products are, in many cases, more expensive than trading and storing physical gold (especially for larger investors with a long-term investment time frame), have less trading flexibility, and are less secure than owning real physical gold.” – Jordan Eliseo, ABC Bullion/Australia
Chart of the Day
Chart note: 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 were number one at a 9.9% gain. Stocks ranked fourth at 5.6%.
“Meanwhile, Morningstar data on more than 1,000 funds shows that net cash allocation has hovered around three percent since late last year compared to a historical average of 2.7 percent. Wealthy investors are guilty of hoarding more than everybody else, with high net-worth individuals having more than a third of their portfolios in cash during the first three months of the year compared to less than a quarter by the end of last year.”
USAGOLD note: There could be multiple reasons for this developing trend. One, as reported in this article, is a quick big swing – in the space of a month – from greed to fear as registered on CNN’s Fear & Greed Index. Another could be the persistence of disinflation as the governing trend in the economy despite the Fed’s efforts to ignite inflation.
“Unlike in China, home to the world’s biggest mobile payments market, most of Vietnam’s 97 million citizens rely on paper currency — and precious metals — to buy everything from groceries to automobiles. Shop owners make numerous trips to banks during the week, hauling sacks of Vietnam dong like Santas on motorbikes.”
USAGOLD note: The Orient sees gold differently than the Occident. That attachment is real. It is visceral and it has proven itself to be a healthy, justifiable attachment over a very long period of time – including during the modern era.
“These restructuring efforts were haphazard, mostly inadequate and didn’t address the issue of moral hazard. So why the more forceful approach now? To begin with, there’s the concern of direct contagion. Baoshang’s assets of 576 billion yuan ($84 billion) are a drop in the ocean for a banking system with about 270 trillion yuan of assets. Yet a collapse, if allowed, could still threaten some disruption, particularly in the interbank market.”
USAGOLD note: Apparently, there is more in the mix than meets the eye initially with respect to Baoshang. More generalized problems in the banking system, this article points out, have left the “bigger lenders with struggles of their own” and not well-positioned to help with the smaller problem banks.
(USAGOLD – 5/28/2019) – Gold dropped suddenly about an hour before U.S. trading opened in response to China’s takeover of Mongolia-based Baoshang Bank late last Friday. Baoshang’s failure – the first in China in nearly 30 years – sparked a sell-off this morning in China’s bond market and undermined the yuan. Gold responded in knee-jerk fashion by dropping $7. Silver is down 25¢ at $14.35. The strong market reaction is the result of growing worries about China’s credit markets as a whole and that Baoshang might be a canary in the coal mine for its troubled banking sector.
inChart courtesy of TradingEconomics.com
Quote of the Day
“Start then with inflationary fire. Much of what is going on right now recalls the early 1970s: an amoral US president (then Richard Nixon) determined to achieve re-election, pressured the Federal Reserve chairman (then Arthur Burns) to deliver an economic boom. He also launched a trade war, via devaluation and protection. A decade of global disorder ensued. This sounds rather familiar, does it not? In the late 1960s, few expected the inflation of the 1970s.” – Martin Wolf, Financial Times
Chart of the Day
Chart note: Rate convergence, or the flattening of rates in the popular financial parlance, is the subject of much concern on Wall Street and this chart, drawn in log scale, tells the reason why in a glance. In pulling together the data for these charts, we could not help but take special note of the two previous occasions in which there was a similar convergence – in 2000 just before and during the bursting of the dotcom bubble and in 2007-2008 just before and during the Bear Sterns/Lehman Brothers’ implosions and the launch of the global financial crisis. When the financial press bemoans the flattening of rates as a portent for a future recession, it is telling only part of the tale. Beyond the threat of recession lies a much deeper concern – the threat of another all-out financial crisis.
“J.P. Morgan economists said they now see much slower second-quarter growth of just 1%, down from their prior forecast of 2.25% and way off the 3.2% reported in the first quarter.”
USAGOLD note: JPM says the statistical evidence points to a slowing economy. In Japan over the weekend, the president once again pointed a finger at the Fed blaming previous interest rate increases for the slowing economy and an anemic stock market. JPM says it “now see the risks of the next move [by the Fed] as about evenly distributed between a hike and cut.”
“‘Short-term fluctuation of the yuan exchange rate is normal, but in the long-run, China’s economic fundamentals determine that the yuan will not depreciate persistently,’ Xiao Yuanqi, the spokesman for the China Banking and Insurance Regulatory Commission (CBIRC), told a finance forum in Beijing. ‘Those who speculate and short the yuan will for sure suffer heavy loss.’”
USAGOLD note: It is well understood that in China these kinds of statements from government officials are orchestrated and intended to deliver a message. Whether or not policy can deliver on national objectives is another story. All in all, there is little doubt at this juncture that China intends to defend the value of the yuan as a policy matter whereas a week or two weeks ago that prospect was up in the air. Putting speculators on notice is an attempt to put a lid on the amount of reserve liquidation required to keep their activities in check. Though a stronger yuan is not a slam dunk for gold, it isn’t going to hurt either.
Chart courtesy of TradingEconomics.com/Inverted scale
“Data compiled by Ned Davis Research shows the S&P 500 would be 19% lower without buybacks. The firm looked at the S&P 500′s performance between the first quarter of 2011 and the first three months of 2019. Then they subtracted the amount of net monthly repurchases to arrive to that conclusion. The broad market is up more than 125% in that time while net buybacks have totaled about $3.5 trillion.”
USAGOLD note: Doing the math that would put the S&P 500 at just under 2300 and the Dow Jones Industrial Average at just under 21,000. The question becomes how much of that is inflated value that will come back out of stock values once the market understands the full import of Ned Davis Research’s findings.
“Trump’s tariff-driven attack against the world’s No. 2 economy has shown that expanding trade powers has indeed been the easy part. But as events this week show, winning a trade war against China – which Trump once tweeted would also be ‘easy’ – looks increasingly like a more difficult and protracted endeavor than anticipated, with Beijing now showing more signs of digging in than capitulating.”
USAGOLD note: China has certainly altered its public posture over the past week – since the White House put the kabosh on Huawei – and radically so. Now, as reported in another Bloomberg article this morning, the president says “they[Chinese officials] probably wish they made the deal that they had on the table before they tried to renegotiate it. They would like to make a deal. We’re not ready to make a deal.” We will see how all of this plays when Asian markets open later in the day and Wall Street returns tomorrow morning.
“The Trump administration has proposed punitive duties on countries that artificially lower their currencies — a sweeping trade policy tool that could be used against US allies as well as adversaries such as China.”
USAGOLD note: We first brought this proposal to our readers’ attention in a post last week. For those wanting to learn more on the subject, this FT article delves into some of the details and initial reaction. The upshot is that these proposed policies will go a long way to wall-off the devaluation escape exit for nation states who would deploy it as a countermeasure to tariffs.
Note: Commitment of Traders reports are published Friday with data from the previous Tuesday.
Gold speculators sharply lowered their bullish bets by most in five weeks
Gold Non-Commercial Speculator Positions:
Large precious metals speculators cut back on 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 88,805 contracts in the data reported through Tuesday May 21st. This was a weekly decline of -35,731 net contracts from the previous week which had a total of 124,536 net contracts.
The week’s net position was the result of the gross bullish position (longs) lowering by -22,733 contracts (to a weekly total of 203,628 contracts) while the gross bearish position (shorts) gained by 12,998 contracts for the week (to a total of 114,823 contracts).
The net speculative position fell for the first time in four weeks but dropped by the highest weekly amount since April 16th. Gold speculative bets had previous gained for three straight weeks and ascended to the highest net position since February before cooling off this week.
Overall, the gold spec position remains in a relatively strong bullish position and has been in positive territory for twenty-seventh straight weeks.
Gold Commercial Positions:
The commercial traders position, hedgers or traders engaged in buying and selling for business purposes, totaled a net position of -107,938 contracts on the week. This was a weekly gain of 29,245 contracts from the total net of -137,183 contracts reported the previous week.
Over the same weekly reporting time-frame, from Tuesday to Tuesday, the Gold Futures (Front Month) closed at approximately $1273.20 which was a decline of $-23.10 from the previous close of $1296.30, according to unofficial market data.
Silver specs sharply boost bearish bets to most since November
Silver Non-Commercial Speculator Positions:
Large precious metals speculators sharply added to their bearish 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 -14,662 contracts in the data reported through Tuesday May 21st. This was a weekly change of -12,453 net contracts from the previous week which had a total of -2,209 net contracts.
The week’s net position was the result of the gross bullish position (longs) falling by -2,060 contracts (to a weekly total of 75,482 contracts) while the gross bearish position (shorts) increased by 10,393 contracts for the week (to a total of 90,144 contracts).
The net speculative position has now had rising bearish bets three straight weeks and for eight out of the past nine weeks as speculator sentiment for Silver has clearly turned negative.
This week’s fall by over -12,000 net positions was the largest one-week decline of the past eleven weeks and puts the current standing at the most bearish level since November 13th of 2018 (-17,145 contracts). Silver net positions spent a total of seventeen weeks in bearish territory from August to early December before turning bullish in December (and strongly bullish during the December stock selloff).
Silver Commercial Positions:
The commercial traders position, hedgers or traders engaged in buying and selling for business purposes, totaled a net position of -5,183 contracts on the week. This was a weekly gain of 7,595 contracts from the total net of -12,778 contracts reported the previous week.
Over the same weekly reporting time-frame, from Tuesday to Tuesday, the Silver Futures (Front Month) closed at approximately $1441.00 which was a loss of $-40.20 from the previous close of $1481.20, according to unofficial market data.
US Dollar Index specs edge bets higher
US Dollar Index Speculator Positions
Large currency speculators slightly edged their bullish bets higher 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 26,712 contracts in the data reported through Tuesday May 21st. This was a weekly increase of just 35 contracts from the previous week which had a total of 26,677 net contracts.
This week’s net position was the result of the gross bullish position (longs) increasing by 3,189 contracts which just overcame the gross bearish position (shorts) which rose by 3,154 contracts for the week.
The net speculative position had previously fallen for two straight weeks and for four out of the previous five weeks. This week’s slight uptick does not change the recent trend of the USD Index bets steadily trending downward. Overall, the current standing has now been under the +30,000 net contract level for ten straight weeks.