Chart Update

     

 

 

The Week Ends with a Surprise

The weekly closing prices of the precious metals were up +$5 and +¢11. But this does not tell the full story of the trading action. Prices were dropping until Friday. More precisely, Friday 8am in New York, or 1pm in London.

 

Gold and silver – back in demand on Friday… [PT]

 

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Special Guest Trey Reik and Board Member Jim Rickards Discuss Fed Policy

On occasion of its Q1 meeting in late January, the Incrementum Advisory Board was joined by special guest Trey Reik, the lead portfolio manager of the Sprott Institutional Gold & Precious Metal Strategy at Sprott USA since 2015 [ed note: as always, a PDF of the complete transcript can be downloaded further below].

 

Trey Reik of Sprott USA.

 

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Rise of the Zombies – Precious Metals Supply and Demand

Last week, the prices of gold and silver fell $35 and ¢70, respectively. But what does that mean (other than woe unto anyone who owned silver futures with leverage)?

The S&P 500 index and the euro was up a bit, though the yuan was flat and copper was down. Most notably, the spread between Treasury and junk yields fell. If the central banks can lower the risk of default premium, they can make everything unicorns and rainbows again extend the aging boom a while longer.

 

Non-Zombie vs. Zombie enterprises, via BIS and OECD. The Zombies won’t be able to withstand rising interest rates, which will unmask the misallocation of capital in the economy fostered by the extremely loose central bank policies of recent years. [PT]

 

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A Recurring Pattern

When the gold price recently spiked up to approach the resistance area even Aunt Hilda, Freddy the town drunk, and his blind dog know about by now, a recurring pattern played out. The move toward resistance fanned excitement among gold bugs (which was conspicuously lacking previously). This proved immediately self-defeating – prices pulled back right away, as they have done almost every time when the slightest bit of enthusiasm emerged in the sector in recent years.

 

There is a well-known resistance area in gold priced in USD between roughly $1360 and $1380. It has become the proverbial watched pot.

 

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Feel Good Now, Pay Dearly Later

The prices of the metals were up somewhat last week, gold +$7 and silver + ¢13.

The price of the S&P 500 index was up, as was the price of oil and copper, and the price of the euro, pound, and yuan. And bitcoin. Even the Treasury bond posted slight gains (i.e., there was a slight drop in yields).

 

There’s a reason why they call it the “everything bubble”. Its demise won’t be pretty, hence the recent frantic back-pedaling by assorted central bankers who tried to look “tough” for a second.  [PT]

 

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Introductory Remarks by PT

We have discussed the proprietary Incrementum Inflation Indicator in these pages on previous occasions, but want to quickly summarize its salient features again. It is a purely market-based indicator, this is to say, its calculation is based exclusively on market prices and price ratios derived from market prices.

However, contrary to most measures of inflation expectations, the Incrementum Inflation Signal is not primarily focused on yield differentials, such as is e.g. the case with 5-year breakeven inflation rates.

 

The 5-year breakeven inflation rate is derived from the differential between 5-year treasury note yields and 5-year TIPS yields. Interestingly, it has recently begun to tick up as well after declining sharply for several months.

 

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Intermarket Correlation Dance

Monday was Martin Luther King Day in the US. The price of gold dropped six bucks last week. The price of silver fell 26 cents, a greater percentage.

The price of gold can sometimes correlate well with the price of stocks. For example, from April 2009 – July 2011. The price of gold went from $892 to $1,626, while in the same time period the S&P went from 841 to 1,289. The percentages are different — gold’s was 82% and the S&P’s 53% — but they moved together. And now, they seem to be inversely correlated.

 

In the short term, the gold-SPX correlation has clearly turned negative (in fact, a negative correlation is generally thought of as “normal”). Over the short to medium-term, the correlation is cyclical, but it is indeed negative over the long term. The forces driving the cyclical element of the short-term moves are an agglomeration of contingent circumstances, time leads and lags and perceptions. The latter include the choices of market participants regarding which of the macroeconomic gold price drivers to particularly focus on. [PT]

 

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Something Odd is Happening

The price of gold went up two bucks, while that of silver fell ten pennies. Something’s odd about how the metals have traded. Back when the market thought that the Fed was tightening, the prices of gold and silver were rising. Silver is now about a buck higher than its Oct-Nov trading range.

 

A timeline of brief bubble trouble followed by bubble restoration via Hedgeye. It starts in early December (upper left corner) when Santa refuses to provide rising stock prices… Collective Wall Street yammering soon ensues and the socialist central planning agency at the center of our so-called market economy is begged to intervene… After consulting its crystal ball, it decides to make a “coo” sound in late December (lower right corner), and presto – everything is fixed! Oddly enough, gold seemed to like the less accommodative Mr. Powell better. This does actually make sense on one level, but one would normally expect gold to like the prospect of a retreat from a tightening cycle even better. We do have some ideas on that topic, which we plan to discuss in an upcoming Acting Man gold update. [PT]

 

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Fundamental Developments – Silver Looking Frisky

The price of gold went up four bucks, and the price of silver rose 32 cents. Silver has been going up in gold terms since the middle of last week, when the gold-silver ratio peaked at just under 87. It closed this week at just under 82 (a lower ratio means silver is more valuable).

 

Silver: more valuable since last week, both in absolute and relative terms. Just avoid dropping it on your toes – it’s still just as heavy as it always was. [PT]

 

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Unexpected Inflection Points

High inflection points in life, like high inflection points in the stock market, are both humbling and instructive.  One moment you think you’ve got the world by the tail.  The next moment the rug’s yanked right out from under you.

 

The yanked rug… [PT]

 

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Drain, drain, drain…

 

“Master!”, cried the punters,

“we urgently need rain!

We can no longer bear

this unprecedented pain!”

“I’m sorry my dear children,

you beg for rain in vain.

It is I who is in charge now

and mine’s the put-less reign.

The bubble dragon shall be slain,

by me, the bubble bane.

That rustling sound? That’s me…

as I drain and drain and drain.”

[ed note: cue evil laughter with lots of giant cave reverb]

 

a public service message by the Fed chieftain, rendered in rhyme by yours truly

 

Money from thin air going back whence it came from – circling the drain of a ‘no reinvestment’ black hole strategically placed in its way by the dollar-sucking vampire bat Ptenochirus Iagori Powelli.

 

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Fundamental Developments: Physical Gold Scarcity Increases

Last week, the price of gold rose $25, and that of silver $0.60. Is it our turn? Is now when gold begins to go up? To outperform stocks?

Something has changed in the supply and demand picture. Let’s look at that picture. But, first, here is the chart of the prices of gold and silver.

 

Gold and silver priced in USD – the final week of the year was good to the precious metals. As an aside: January is the seasonally strongest month for silver. [PT]

 

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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

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