Chart Update

     

 

 

Silver Price Driven by Reservation Demand

The price of gold went up a buck last week, but the price of silver dropped back 13 cents. And the gold-silver ratio marches further upwards.

Keith spoke at a conference this week, about how to analyze the fundamentals of supply and demand in gold and silver. He talked about the basis of course.

 

Silver coins – silver prices are partly influenced by an industrial demand component, but the fact that they move most of the time with the price of gold indicates that the main price driver remains reservation demand by investors. [PT]

 

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Lira Comeback?

The price of gold jumped 35 bucks last week, and that of silver 48 cents. The dollar is now down to 23 milligrams of gold.

Keith is on the road this week, so we will just comment on one thing. If Italy is serious about moving back to the lira, that will make the euro less sound (to say nothing of the lira). That will drive people mostly to the dollar, but also to gold.

 

Italian deputy prime minister Matteo Salvini (as the leader of the Lega party he is actually the most powerful politician in Italy, despite not being prime minister). In the course of an escalating dispute with the European Commission over the country’s budget deficit and debt, he threatened that Italy would consider introducing a parallel currency in the form of so-called “mini-BOTs” – non-interest bearing Italian treasury notes which the Italian state would print and accept in payment. Not quite a return to the lira yet, as mini-BOTs would actually be denominated in euro, but they would certainly represent a lira-in-waiting. The people who have come up with the idea apparently believe that such a scheme would be in compliance with EU/ euro zone regulations. We are not so sure about that, but ultimately Brussels would not really be able to do much about it. No-one seems to be taking the threat seriously at the moment, but if the Italian government were to go through with it, it would undoubtedly undermine the euro. [PT]

 

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Traders and Analysts Caught Wrong-Footed

Over the past week gold and gold stocks have been on a tear. It is probably fair to say that most market participants were surprised by this development. Although sentiment on gold was not extremely bearish and several observers expected a bounce, to our knowledge no-one expected this:

 

Gold stocks (HUI Index) and gold, daily. As noted in the annotation above, a Wells Fargo gold analyst turned bearish at the worst possible moment – exactly one day before gold took off like a scalded cat. We mention this mainly because it demonstrates that markets often defy widespread expectations.

 

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Is Silver Still Useful as a Monetary Metal?

The price of gold jumped a whole twenty bucks last week. We imagine that the marginal gold bug is relieved to be rid of his gold, in this opportunity afforded by the highest price since early April. OK, all kidding aside, the price of silver went up a penny.

 

 

The gold-silver ratio keeps hitting new highs recently (this is actually a long-term trend, frequently interrupted by strong rallies of silver against gold). Is silver losing its usefulness as a monetary metal? [PT]

 

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The Money of the Free Market, not of Governments

Monday was Memorial Day holiday in America. Last week the price of gold rose 8 bucks, and silver 16 cents. With Keith traveling in Asia right now, this will be a brief report. But speaking of Asia, everyone seems to be talking about China’s (and other countries, such as Russia) accumulation of gold.

 

Accumulation of gold reserves over the past decade by various emerging market central banks (from the new Incrementum In Gold We Trust 2019 Report) [PT]

 

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The New Annual Gold Report from Incrementum is Here

We are happy to report that the new In Gold We Trust Report for 2019 has been released today (the download link can be found at the end of this post). Ronnie Stoeferle and Mark Valek of Incrementum and numerous guest authors once again bring you what has become the reference work for anyone interested in the gold market.

 

Gold in the Age of Eroding Trust

 

A chart from the introduction to the 2019 IGWT report: trust in governments is eroding all over the world from what were already extremely low levels. The same applies to the realms of the media and science. Many people are (rightly, we believe) concerned that these once well-respected spheres can no longer be trusted to be neutral. In many cases they have become extremely politicized and are pushing agendas that are opposed by a growing number of people.

 

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The Seeds of the Next Bust Are Closer to Sprouting

The price of gold was up this week, by $10 and that of silver by ¢6. Something is brewing in the fundamentals that we haven’t seen since… last year. We will show a picture of this, below.

There are many problems with assuming a rising stock market means a growing economy. We’ve written many times about the much-greater growth of debt, i.e., borrowing to consume, which adds to GDP.

 

S&P 500 Index, monthly – the huge rally since 2009 was accompanied by the weakest economic recovery of the post-WW2 era. Evidently, the stock market does not necessarily reflect economic growth. Very often numerous other factors prove to be far more important drivers of stock prices. A pertinent example is Venezuela’s soaring stock market, which is up by 88,500% in the past year alone (this is not a typo). Meanwhile, the country’s economy is contracting since 2014, with the slump accelerating to a stunning -16.5% y/y in both 2017 and 2018. The S&P 500 Index is an island of sanity by comparison, at least superficially (the ceteris are of course not paribus). [PT]

 

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Coffee, Milk and Gold

Last week was holiday-shorted due to Good Friday (it’s not an official holiday in the US, but it is in the UK. And this week’s report is a day late due to Easter Monday). The price of gold dropped $15, but the price of silver rose ¢4. Perhaps silver traders got word that we are paying interest on silver, which gives people a reason to hold silver? J

 

A silver bar plus interest…  [PT]

 

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Learning From Other People’s Mistakes is Cheaper

One benefit of hindsight is that it imparts a cheap superiority over the past blunders of others.  We certainly make more mistakes than we’d care to admit.  Why not look down our nose and acquire some lessons learned from the mistakes of others?

 

Bitcoin, weekly. The late 2017 peak is completely obvious in hindsight… [PT]

 

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Investors are Oblivious to the Market’s Downside Potential

This is a brief update on a number of sentiment/positioning indicators we have frequently discussed in these pages in the past. In this missive our focus is exclusively on indicators that are of medium to long-term relevance to prospective stock market returns. Such indicators are not really useful for the purpose of market timing –  instead they are telling us something about the likely duration and severity of the bust that will follow on the heels of the current market mania. The first chart is an update of the current situation in RYDEX funds. Despite their small size, these funds have always represented a quite accurate microcosm of general market sentiment.

 

A RYDEX overview: RYDEX money market fund assets have recently declined to new all time lows; the pure non-leveraged bull-bear fund ratio is back above 29 (i.e., bull funds assets are more then 29 times larger than bear fund assets). At the top of the tech mania in early March 2000, this ratio peaked at roughly 17. Lastly, the amount of assets in RYDEX bear funds demonstrates that bears remain extremely discouraged. It is fair to say that at this stage almost no-one expects that the market could suffer a serious slump.

 

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Is Silver Hard of Hearing?

The price of gold inched down, but the price of silver footed down (if we may be permitted a little humor that may not make sense to metric system people). For the gold-silver ratio to be this high, it means one of two things. It could be that speculators are avoiding the monetary metals and metal stackers are depressed. Or that something is going on in the economy, to drive demand for the metals in different directions.

 

As a rule the gold silver ratio acts as a proxy for credit spreads – this is attributable to the fact that silver prices are partly driven by the metal’s large industrial demand component (by contrast, the vast bulk of gold demand consists of monetary or investment demand; industrial and fabrication demand in the gold market are negligible by comparison). In the chart above we compare the gold-silver ratio to the IEF-JNK ratio, which serves as a proxy for corporate credit spreads (note: “unadjusted” means that only prices are compared, not total returns – interest payments received by holders of IEF and JNK are not included). An interesting divergence has emerged since the 2014-2016 oil patch mini-bust – while the gold-silver ratio is streaking to new highs, the IEF-JNK ratio has established a lower high in late 2018. We believe this is mainly due to the massive distortion of credit markets in the wake of the QE and ZIRP/NIRP policies pursued by the world’s largest central banks. One of these markets is wrong and it is a good bet that the market that has been manipulated by central bank interventions is the one that is giving a false signal. [PT]

 

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Boom Times Compared

It has become abundantly clear by now that the late 2018 swoon was not yet the beginning of the end of the stock market bubble – at least not right away. While money supply growth continues to decelerate, the technical underpinnings of the rally from the late December low were actually quite strong – in particular, new highs in the cumulative NYSE A/D line indicate that it was broad-based.

 

Cumulative NYSE A/D line vs. SPX – normally the A/D line tends to deteriorate before the market peaks, as the advance narrows and fewer and fewer stocks participate in the rally. This did in fact happen shortly before the early October top.

 

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