Precious Metals

MILES FRANKLIN Lately, things are not working out the way they usually do!

David’s Commentary: I find it surprising that with a strong dollar, gold is not only holding its own, it’s rising. What is this telling us? Since gold is denominated in dollars, when the dollar rises, gold falls and when the dollar falls, gold rises. That is how it should be and that’s how it usually works. But lately,35

David’s Commentary:
I find it surprising that with a strong dollar, gold is not only holding its own, it’s rising. What is this telling us?
Since gold is denominated in dollars, when the dollar rises, gold falls and when the dollar falls, gold rises. That is how it should be and that’s how it usually works. But lately, things are not working out the way they usually do.
Eleven months ago the dollar bottomed at 89.65, which was the low point for 2018. Gold was $1,350 at the time. From that point forward, the dollar moved up to its current level at 96.52. In other words, the dollar is up 7.7% in the last 11 months. All things being equal, gold should be down 7.7% from its price then, of $1,350. Gold should be around $1,250. But it’s not. It’s $1,331.50
David’s Commentary:
Does that alert you to the fact that gold is performing very well now? It does to me.
The Fed has indicated that they are through raising interest rates. The next logical step would be for the Fed to start lowering them again, and if the economic data comes in weaker than expected, that should happen. That will send the dollar lower. If gold is rising while the dollar is rising, gold should rise even faster when the dollar starts to drop. Yes, there is reason to be bullish about gold. The anticipated “correction” that would pull gold down below $1,300 did not materialize.
Frank Holmes, CEO of U.S. Global Investor, told investors at the Vancouver Resource Investment Conference, “Currency differentials will be the key to rising gold prices. Any type of a drop in interest rates, gold in a blink of an eye, is $1,500.”
For the first time in a long time, gold has moved above its year-ago number, and is currently $7.50 higher than one year ago today.
As Ted has pointed out…the precious metal market certainly has a different feel to it over the last three months since the DoJ made the conviction of the ex-JPMorgan trader public. It remains to be seen whether or not this all ends in the same old way, or if it’s really different this time — and the commercial traders get overrun.
Check out his view on gold in the following Kitco interview.
David’s Commentary:
We are getting close to a point where gold will really break out to the upside. Gold is quietly moving up against the strong headwinds of a strong stock market and a strong dollar. There is big money behind the scenes accumulating gold. Otherwise, gold would be close to $1,000.
“The same old tired, failing inflationist responses are being lined up, despite the evidence that monetary easing has never stopped a credit crisis developing…”
Michael Oliver – We Are Going To See An Upside Crash In The Gold Market
With the Dow in the final phase of staging a bear market countertrend rally and gold surging to the $1,340 level, Michael Oliver, who is well known for his deadly accurate forecasts on stocks, bonds, and major markets, just said, “We are going to see an upside crash in the gold market.”
An Upside Crash In The Gold Market
February 19 (King World News) – Michael Oliver: We are going to see an upside crash in the gold market. Gold will spike violently once it clears $1,350 – $1,360. Gold is doing this with a strong dollar. Gold is doing this with a strong S&P. That’s because there’s a crisis coming…
Perhaps this is why gold is rising in spite of a strong dollar. Big money is bracing for something and this is a legitimate concern…
“Sounds ridiculous doesn’t it? What I said in 2006 sounded ridiculous too. I hope I am wrong, but fear that I will be proved right.” – Albert Edwards
Should we be worried about inflation – or is hyperinflation in the cards? Check out the following commentary from JSMineset.
Modern Monetary Theory (or as it should be known, Magic Money Tree).
“There is just one problem with this “theory”:
Alas, there is no free lunch. For one, the economy might not have enough resources — in the form of workers and industrial capacity — to meet the combined demand from the government and the private sector. The result would be inflation, as too much money chased too few goods and services.”
First Bill Gates saw the light:
‘… the establishment is starting to get worried. To wit, last week it was one of the world’s richest men, Bill Gates, who slammed MMT as “Crazy talk” saying that the theory’s core principle of “not worrying about the deficit” and that “we’ll just print the money and do it” is “Well crazy.
Now Dudley sees the light.
‘And not just inflation, but hyperinflation. However, to the socialists who pitch MMT, the fact that inflation hasn’t broken out yet – largely due to the relentless monetization of debt by central banks which has kept inflation in check so far, taking the experiment to its surreal extreme should not result in any dire outcome. And yet, that’s nothing but lunacy for two reasons. First, assume the current model remains in place indefinitely – the outcome would be as follows:
America as a whole consumes considerably more than it produces — and depends heavily on foreign investors to lend it the money needed to keep doing so. But they don’t have to make dollar-denominated loans or buy U.S. Treasury securities. If U.S. debts were to keep growing, at some point the Fed would face a dilemma. It could increase interest rates to maintain foreign (and domestic) demand for dollar assets, at the cost of damping U.S. economic growth. Or it could keep interest rates low and allow the dollar to weaken, which would push up inflation as imported goods and services became more expensive. Neither outcome would be pleasant.”
Lord help us all,
David’s Commentary:
It’s very possible that one of the recent drivers of the gold price is backing the yuan with gold. Pay attention to the gold price in yuan. When the dust settles, it will be gold dust in China and paper ash in the U.S.
The point here, in the article below, is not about China’s holdings of gold.
Or the mad rush by many nations to accumulate sizable quantities.
But rather, the move away from the U.S. Dollar.
More to the point, backing the Yuan with gold as a replacement to the Dollar in global trade and investment.
Crucially, the size of the gold addition is far less important than the signaling effect – why did China decide now was the right time to publicly admit its gold reserves are rising?
After months of seeming stability in the yuan relative to gold, Q4 2018/Q1 2019 saw China seemingly allow gold to appreciate relative to the yuan
One wonders if Alasdair Macleod is on to something when he notes that if the yuan is to replace the dollar for China’s trade, officials will have to back it with gold…
China Accelerates Renewed Gold-Buying Spree “To Diversify Its Reserves”
After China’s official gold reserves rose for the first time in around two years (since Oct 2016) in December, Beijing appears to have joined the global gold rush, increasing its gold reserves for the second month in a row in January to 59.94 million ounces.
As we previously noted, China has long been silent on its holdings of gold as many countries are turning away from the greenback.
The value the country’s holdings of the precious metal reached US$79.319 billion, increasing by more than $3 billion compared to the end of last year.
Yuan Gold is leading the way higher
Yuan Gold (XAUCNY) is gold leading the way higher through 9000 RMB per ounce and through US Gold $1380 US its swing high equivalent. And the only way to prevent much higher US Gold prices from there, is for more pronounced weakness in Chinese Yuan against the dollar (CNYUSD). IMO, a weaker Chinese Yuan (CNYUSD) exchange rate is not desirable by the Fed, Treasury, ESF, the President’s Working Group on Financial Markets nor the PBOC/SAFE. And to be sure, a higher Yuan Gold (XAUCNY) price is the last thing the Fed, Treasury, ESF, the President’s Working Group on Financial Markets seek but is at the top of the bullet point list of the PBOC/SAFE white papers for meeting the CCP goals of prosperity.
Mathematically: Yuan Gold (XAUCNY) x Chinese Yuan (CNYUSD) = $US Gold Price
Albeit a weaker Chinese Yuan (CNYUSD) may have been tolerated by the FED and Treasury when the U.S. and world economy was buzzing along nicely with PBOC/SAFE accumulating new U.S. Treasury offerings. However, a weaker Chinese Yuan (CNYUSD) is certainly not desired by U.S. now. Trade wars, embargoes, worldwide economic slowdown, and debt saturation still can’t create an environment that encourages PBOC/SAFE or other foreign CB’s to accumulate U.S. Treasuries. And for China itself, a lower Chinese Yuan (CNYUSD) may help Chinese exports but conversely also increases the FX debt burden of Chinese borrowers, albeit a small one, who borrow in dollars but whose revenue is denominated in Yuan. However, a higher or stable Chinese Yuan (CNYUSD) clearly increases the standard of living for its burgeoning middle class that represents the biggest meal ticket for the next 50 years for those same Chinese companies that are currently exporting to U.S. but have their eye squarely on their own domestic market’s near and long-term growth. Conclusion: Chinese Yuan (CNYUSD) stability at a minimum and strength are likely now that the world economic slowdown, ensuing financial collapse is on. And when the dust settles, it will be gold dust in China and paper ash in the U.S.
Correspondingly, a higher Yuan Gold (XAUCNY) price is also not desired by the Fed, Treasury, ESF, and the President’s Working Group on Financial Markets because that will drive worldwide gold prices higher, allow for a Chinese gold price discovery market based on physical gold not U.S. paper contracts levered 92:1, and create even more havoc for U.S. dollar’s reserve currency status and balance of trade account. But the Fed, Treasury, ESF, and the President’s Working Group on Financial Markets are helpless in preventing a significant rise in Yuan Gold (XAUCNY) either. They no longer have the means to do so because so much physical gold has moved East over the last 10 years and is now being accumulated in record amounts by central banks worldwide at a time when world production is set to decline with M&A in mining exploding. This is a perfect storm for higher gold prices worldwide. Conversely, higher Yuan Gold (XAUCNY) prices would greatly benefit China’s saving minded middle-class households who have plowed some 17,000 MT or 530 million ounces of physical gold since restrictions were lifted in 2008.
According to Credit Suisse Wealth Databook 2018 (pages 63 & 103) total Chinese Household Net Worth equals about $51.8T. Average Chinese wealth has enjoyed a 10% annual increase since 2008 while the median Chinese household has enjoyed a lesser yet respectable 7% annual increase. At the current Yuan Gold (XAUCNY) price of 8879 the value of 530 million ounce is about $700B US representing 1.4% of total Chinese Household Net Worth. Bearing in mind that not all of that non-monetary gold is in the hands of households, but it is clear that it is not in the hands of the PBOC/SAFE. So ask yourself two questions. Do you think that the PBOC/SAFE would encourage its private sector and households to accumulate so much gold if it was not meant to be a sound investment that increased in value? Do you think that the private sector in China has accumulated more gold than the PBOC/SAFE? IMO the answer is “no” to both questions.
But how much Chinese PBOC/SAFE monetary gold or how much value of that monetary gold is enough to create a new Chinese Style Bretton Woods agreement so to speak with a twist that involves true price discovery of physical Yuan Gold (XAUCNY) not just a U.S. dictated price that the 1944-45 agreement dictated. Paraphrasing James Dines’ in The Invisible Crash published in 1975, “Back then only the U.S. could change the price of gold, and all other nations were forced to upvalue or devalue in terms of dollars. And the world’s currencies were expressed in and closely held in dollars. The problem was that Bretton Woods required reserves to be composed of either gold or any currency convertible into gold. And that was the killer because it included the dollar that was run into the ground through debt creation while gold prices were fixed at an abnormally low price.” For a Chinese Style Bretton Woods system to work, true price discovery for Yuan Gold (XAUCNY) must exist and PBOC/SAFE need an ample amount of current gold reserves and future gold reserves to maintain the value of the YUAN. According Charles A. Coombs, former Senior Vice President of Federal Reserve Bank of New York responsible for U.S. Treasury and Federal Reserve operations in the gold and foreign exchange markets in his book The Arena of International Finance, to paraphrase, “At the end of the war and beginning of Bretton Woods system the U.S. gold stock amounted to $20B roughly 60% of total official central bank gold reserves and amounted to 4x the value of total dollar reserves of all foreign central banks and foreign dollar deposits.” Doing that today for the US would be impossible with only 8,133 MT or 261.5M ounces unless it were valued at 4x the $6.7T of allocated and unallocated US dollar exchange value held by foreign central banks. That would require the value of 8,133 MT of US gold to be worth $26.8T or $100,000/oz. But for the Chinese the picture is quite different.
“The majority of Chinese public debt is not officially owed by the central government. However, all of that debt is ultimately guaranteed by the national government of China and should rightfully be recorded in its entirety as the Chinese national debt. True debt to GDP ratio for China’s national debt up to 92.8%” . That includes central government debt, municipal debt, shadow banking debt, local government debt, and all other hidden debt. GDP is about 83T Yuan or $12.2T and places total Chinese “public and public guaranteed” debt at about 76T Yuan or $11.2T. “Yet the majority of debt issued by Chinese government and organizations is in local currency. And the great bulk of that, in turn, is held by domestic institutions and individuals. China’s external debt is at 13 percent of GDP. And is very low by world standards. External debt refers to the total amount of public and private debt owed to non-resident individuals and entities. Foreigners own a tiny 3 percent of China’s debt. By comparison, Japan’s external debt is 74 percent of GDP. It’s 126 percent in Australia, 97 percent in the U.S., 38 percent in Brazil, and 24 percent in India (and the U.S. 30%+).” China Gross External Debt owed by official sector is only about 11.3T Yuan $1.7T US. That includes throwing into that mix external debt not officially owed by the central government but guaranteed by same including debt owed in dollars or foreign currencies.
China Domestic Gold Production amounted to 426 MT or 13.7m oz in 2017 accounting for 13.03% of global gold production, making China the world’s largest gold producing nation for the 11th consecutive year and double that of the U.S. China’s Established in Ground Gold Resource Reserves were 13,195 MT in 2017, for YoY growth of 8.45%
If PBOC/SAFE true current gold reserves were to amount to 60% of all central bank reserves like the US had in 1945 or even 70% like the US had as late as 1957, some 20,000 MT seems reasonable, and it also amounts to slightly more than the Chinese private sector’s 17,000 MT. If those 20,000 MT or 643 million ounces had a value of 4x external Yuan debt, it would need to be valued at $6.8T or US Gold $10,575. That means either a stable Chinese Yuan (CNYUSD) and an 7x increase in Yuan Gold (XAUCNY) or a combination thereof. Makes no difference to $US Gold because mathematically: Yuan Gold (XAUCNY) x Chinese Yuan (CNYUSD) = $US Gold Price.
And it makes no difference to Chinese Official or private sector as it is a win win for them too.
David’s Commentary:
As you know, I have always believed that Harry Dent was way off target with his projections that gold would drop to $500 or $750 an ounce. Dent doesn’t believe that there is any meddling in the gold market either. By my count he is zero for two. He should stick to writing about what he knows best, demographics.
Federal Judge Tells Traders They Can Combine Cases Accusing JP Morgan Of Rigging Metals Market
A group of traders from across the U.S. who allege that J. P. Morgan Chase manipulated precious metals markets for years are one step closer to bringing a class action suit against the nation’s largest bank.
Earlier this month, a federal judge said five separate lawsuits making similar allegations against the bank could be combined, potentially including thousands of people who traded in the precious metals market from Jan. 2009 through Dec. 2015.
Litigation in a separate civil case has been put on hold until at least May at the behest of the Justice Department, which is investigating a “related criminal case” that involves alleged market manipulation by precious metals traders at J. P. Morgan.
JP. Morgan declined to comment on this story.
So what is the best asset to own to protect your wealth when things finally start to fall apart? David Stockman say GOLD. So do we.
“It should be no surprise that the financial planners or pension fund managers never recommend gold or silver as part of an investment portfolio. This will turn out to be a huge mistake.” – SRSrocco
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