Precious Metals

     

 

 

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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A Worrisome Trend

If you read gold analysis much, you will come across two ideas. One, inflation so-called (rising consumer prices) is not only running much higher than the official statistic, but is about to really start skyrocketing. Two, buy gold because gold will hedge it. That is, the price of gold will go up as fast, or faster, than the price of gold.

 

CPI monthly since 1914, annualized rate of change. In recent years CPI was relatively tame despite a vast increase in the money supply. However, relative prices in the economy were massively distorted as a result of the latter – and this is driving ever larger boom-bust cycles. [PT]

 

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Digital Asset Rush

The only part of our April Fools article yesterday that was not said with tongue firmly planted in cheek was the gold and silver price action (though framed it in the common dollar-centric parlance, being April Fools):

 

“Gold went down $21, while silver dropped about 1/3 of a dollar. Not quite a heavy metal brick in free fall, but close enough.”

 

Bitcoin, hourly – a sudden yen for BTC breaks out among the punters. [PT]

 

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Keynesian Rot

The prices of the monetary metals rose $11 and ¢27 last week. The supply and demand fundamentals is the shortest section of this Report [ed note: we are excerpting the supply-demand section for Acting Man – readers interested in the other part of the report can find it here].

 

The eruption of Mt. St. Helens in 1980 – prior to the cataclysmic event, numerous small earth quakes and steam venting from fissures warned that something big was about to happen, even if no-one suspected the actual magnitude of the outbreak. The eruption was so powerful that a fairly large chunk of the mountain went missing in the proceedings. There are always accidents waiting to happen out there somewhere, and the modern-day fiat money system is clearly one of them. There will be warning signals before it keels over – in fact, the final cataclysm usually happens fairly quickly, while the period that leads up to it tends to be a drawn-out affair. [PT]

 

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The new IGWT report for 2019 will be published at the end of May…

…and for the first time a Mandarin version will be released as well.

 

Gold compared to other financial assets – from the IGWT chart book

 

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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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Riding the Tailwinds of Fiat Money Inflation to Fame and Fortune

Warren Buffett bought his first shares of stock when he was 11 years old.  He saved up $114.75 and “went all in,” purchasing three shares of Cities Service preferred stock.  The day was March 11, 1942 – nearly 77 years ago.  Buffett recently reminisced about this purchase in his annual letter to shareholders:

 

“I had become a capitalist, and it felt good.”

 

The Oracle of Omaha – he was a great stock picker (lately he is suffering from “style drift”), but he also had the tailwinds of the greatest fiat money inflation in human history at his back during his entire career. Buffett would undoubtedly have been a great investor without it as well, but one cannot deny that the unanchored fiat money system was highly conducive to paving his way to success. [PT]

 

Buffett was merely getting started.  Over the succeeding 77 years Buffett’s investing acumen, and a rising tide of government sponsored fake money, garnered him a personal net worth over $80 billion.  That’s a breathtaking haul, indeed.

Most nights Buffett sleeps well.  Why wouldn’t he?  He’s got more dough than he could ever possibly spend.  And as for the burden of extreme wealth, Buffett’s been given a nifty – tax free – escape route from beneath the mass of this weighty condition.

His pal Bill Gates, via the Bill & Melinda Gates Foundation, offloaded his conscience and flattered his ego.  Thus, even in the late night hours, when the coyote’s howl at a full moon, Buffett sleeps soundly and with the full knowledge that his fortune will be used for noble philanthropic causes.

Buffett has pledged to give more than 99 percent of his wealth for benevolent endeavors. This we neither applaud nor do we find fault with it.  How one chooses to spend one’s wealth is a personal decision.  Perhaps some good will come of it.

As an aside, foundations are frequently used by the ultra-wealthy as a means to pass on their wealth, while avoiding estate taxes.  Remember, someone – likely a familial heir – has to run the foundation well into the future.  A well-structured foundation leaves descendants with good work, at good incomes, for generations.

We don’t know whether this is the case with Buffett’s ventures with the Bill & Melinda Gates foundation. We do know that Buffett is a master at limiting his income tax obligations.  Perhaps he has applied this predilection to limiting his estate tax disbursements too.

Again, we neither applaud nor find fault with how Buffett chooses to spend his personal wealth; we are merely adding context to the popular refrain of the goodness of his philanthropic benevolence.

 

Berkshire Hathaway, weekly – this is what the stock of Buffett’s company has essentially been doing since the 1970s, i.e., it went up and up and up. The “A” shares were never split to our knowledge, which is why buying a single one will set you back by more than 300,000 smackers. This is also the reason why a class of “B” shares was created, so as to enable the paupers  weighed down with slightly less moolah to partake in the BRK goodness as well. [PT]

 

“All In”

Beneath the wealth and affluence Buffett is still human, of course.  He will be asked to explain himself when he meets his Maker.  And in the interim, there is still one remaining fear that gets caught up in his mind’s eye during the darkness just before dawn… like a fly in a spider’s web.

Buffett first “went all in” to American business in 1942.  He has remained all in up to the present.  His timing has been impeccable.  He has ridden the crest of the American wave of economic dominance, and unprecedented issuance of debt based fiat money like no other man.

 

Top dog goes all in… at just the right time. [PT]

Illustration by C. M. Coolidge

 

What’s more, the success of his thrilling ride has led him to believe he can predict the future by extrapolating the past.  From his recent letter to shareholders:

 

“If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter).  That is a gain of 5,288 for 1.  Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

“Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion.  That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.”

 

Buffett then took a moment to knock the doom and gloom concerns of runaway debts and deficits.  He also took an errant swing at gold buyers:

 

“Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods.  That’s 40,000%!  Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency.  To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 ¼ ounces of gold with your $114.75.

“And what would that supposed protection have delivered?  You would now have an asset worth about $4,200,less than 1% of what would have been realized from a simple unmanaged investment in American business.”

 

Hidden within Buffett’s boasts and blusters is his final remaining fear…

 

Why Warren Buffett Should Buy Gold

Buffett, you see, is locked in – with no escape route – and will have to ride the American wave of economic dominance, and its fake money system, as it crashes down upon the jagged rocks.  His remaining fear is that the status quo will be overturned.  That a social, political, and financial reset obliterates the wealth edifice that he has erected over the last 77 years.

To clarify, a reset is a complete collapse of the world as we know it.  Certainly, history has seen plenty of resets.  WWI and WWII.  The French Revolution.  The Russian Revolution.  The War between the States.  The Great Depression.

 

Sometimes there is great upheaval, including revolutions. In this example from Russia in 1917, all capitalists ended up expropriated and many were hounded to death in waves of “red terror” organized by the new ruling class. Soon the whole country was even more miserable than before, but by the time the masses realized this, it was too late. [PT]

 

No doubt, the present order is long overdue for a reset.  And when the current reset hits its fever pitch, Buffett’s holdings – which are concentrated in American businesses – will be directly impacted.

Of course, wealth is more than just money.  And some of Buffett’s businesses will hold up better than others through the reset.  For example, his railroads will still be an important asset – assuming he has the capital to operate and maintain them.  But his insurance businesses – his greatest money makers of all – are a construct of dollar based fiat money, and their ephemeral value will disappear before you can say Jack Robinson.

Being “all in” – to use Buffett’s words – on anything is a bad idea.  This goes for being fully invested in American businesses, or an S&P 500 index fund.  It also goes for being all in with gold.

Buffett’s other mistake is in equating gold to an investment.  It is not.  Gold, on the other hand, is real money that retains its purchasing power over time – including through epic resets.  Hence, misconstruing gold as an investment will be fatal.

 

As indicated by the shape of the content of this treasure chest, gold was historically mainly used as money. It emerged as the most marketable commodity all over the world in a lengthy process of trial and error; no committees or government diktats were required for this to happen. Gold was the market-chosen money, and despite having been officially “demonetized” by governments, it retains its “moneyness” to this day – as is evidenced by how the markets are treating it. [PT]

 

Fiat money, unlike gold, has an unblemished record of perfection.  All fiat money eventually returns to its intrinsic value of fire kindling, toilet paper, or birdcage liner.  Fiat based digital monetary credits will also ultimately disappear, like AOC’s cow flatulence, into the atmosphere.

This is precisely why Warren Buffett should buy gold… and why you should too.

 

Chart by: StockCharts

 

Editing and chart & image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

     

 

 

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

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