… Something Wicked this Way Comes

Last week the price of gold went up $18, and that of silver 6 cents. Looking at the ongoing stock market drop, someone asked us if this is “it”. So far in Q4, the stock market (S&P 500) has now lost more points than in any quarter during the great financial crisis (though so far less as a percentage). Is this it, will gold hit $10,000?


S&P 500 Index, daily – an unseemly slipping on the banana peel. [PT]


There is certainly something more serious happening than at any time post-2009. We mean: after all this time of falling rates and zero (short-term) rates, the Fed presumes to hike rates. They are trying to head something off which is not occurring. Commodity prices aren’t rising (witness the big drop in oil, again).

Consumer prices, especially in some urban markets may be rising. Taxes, regulations, zoning, permitting, compliance, inspections, user fees, environmental impact studies, labor law, and litigation can push up retail prices. However, they are not a monetary phenomenon. The Fed cannot do anything about them, and should not try.

Meanwhile, everyone focuses on the effect of rising rates on the US government. They should instead look to the marginal debtor. The US government is not the marginal debtor. For a good list of candidates, one could start with all the firms that the Bank for International Settlements identified as zombies in 2015.


The global share of Zombie companies according to the BIS [PT]


A zombie is a corporation whose profits < interest expense. 2015 is before the Grand Interest Hike Gambit. If they were unable to service their debts even then (without borrowing more), just imagine what the change in 6-month LIBOR from 0.38% to 2.9% has done to them. Just think what it’s done to the firms that weren’t zombies then at 0.38%, but are now at 2.9%.


3-month LIBOR since 2015: from practically nothing (17 basis points) to 2.81% – that does make a difference. [PT]


And this is not counting the decline in revenue to, e.g. the home builders. At higher rates, people can afford less house (assuming they want to buy a house when they see the market dropping). And move upstream to manufacturers of building products, furniture, etc.

And cars. Ford and the others are still advertising 0% financing for 72 months. We wrote this May about the increase in the cost of this subsidy to Ford–$1.4 billion or 28% of its net profit. Since that article, the cost has risen by more than another quarter billion. Ford still isn’t letting off the gas pedal, out of fear of the even-greater loss they will suffer from the drop in sales that would cause.

Even if the Fed were inclined to reverse itself immediately (which we do not see any signs of), we expect there will be some big bankruptcies and lots of smaller ones. Investors will regret moving out on the risk curve in the reach for yield, as many junk bonds default and the even the survivors incur big capital losses. The spread between junk and Treasury bonds has widened, it can widen a lot further.


US high yield spreads – since breaking out from a sideways channel near multi-year lows, junk bond spreads have soared. [PT]


But $10,000 gold? Collapse of the dollar? We don’t see it in our macroeconomic analysis — and we don’t see it in the basis spread. There is no sign of backwardation (in the USD — there is permanent backwardation in the Swiss franc). We would expect to see serious gold backwardation before a banking system or currency crisis.


Fundamental Developments

Speaking of the gold basis, let’s look at the only true picture of the supply and demand fundamentals of gold and silver. But, first, here is the chart of the prices of gold and silver.


Gold and silver priced in USD as of last week


Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). It rose last week.


Gold-silver ratio


Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.


Gold basis, co-basis, and the USD priced in milligrams of gold


It is interesting to see a rise in scarcity (i.e., the co-basis) along with fall in the price of the dollar (i.e. rise in the gold price). At least in the February contract. However, it did not occur in the Gold Continuous Basis.

The Monetary Metals Gold Fundamental Price rose $19 to $1,307.

Now let’s look at silver.


Silver basis, co-basis, and the USD priced in grams of silver


In silver, we see the same pattern. And less. A small change in price. And a small change in scarcity.

And unlike in gold, the Monetary Metals Silver Fundamental Price fell 8 cents, to $15.11.

© 2018 Monetary Metals


Charts by: StockCharts, BIS, St. Louis Fed, Monetary Metals


Chart and image captions by PT


Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Circling the Drain
      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...
  • Washington’s Latest Match Made In Hell
      Almost Predictable One of the more enticing things about financial markets is not that they’re predictable.  Or that they’re not predictable.  It’s that they’re almost predictable... or at least they seem they should be.   For a long time people believed – and from what we read and hear, many still do – that economic cycles move in easily predictable, regular time periods. All you had to do was create a chart of the up and down waves of your favorite cycle model...
  • The Bear Market Hook
      Has a Bear Market in Stocks Begun? The stock market correction into late December was of approximately the same size as the mid 2015/early 2016 twin downturns, so this is not an idle question. Moreover, many bears seem quite confident lately from an anecdotal perspective, which may invite a continuation of the recent upward correction. That said, there is not much confirmation of said confidence in data that can be quantified.   Our proposed bearish wave count for the...
  • The Real or Imagined Third Fed Mandate - Precious Metals Supply and Demand
      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...
  • The Downside of Mindless Investing
      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]   Where the stock market is concerned, several critical factors are revealed following a high inflection point.  These factors are not always obvious at first.  But they become...
  • The Strongest Season for Silver Has Only Just Begun
      Commodities as an Alternative Our readers are presumably following commodity prices. Commodities often provide an alternative to investing in stocks – and they have clearly discernible seasonal characteristics. Thus heating oil tends to be cheaper in the summer than during the heating season in winter, and wheat is typically more expensive before the harvest then thereafter.   Silver: 1,000 ounce good delivery bars [PT]   Precious metals are also subject to...
  • Change is in the Air - Precious Metals Supply and Demand
      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...
  • The Chairman's Curse - Precious Metals Supply and Demand
      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...

Support Acting Man

Item Guides

Austrian Theory and Investment


The Review Insider


Dog Blow


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

Realtime Charts


Gold in USD:

[Most Recent Quotes from www.kitco.com]



Gold in EUR:

[Most Recent Quotes from www.kitco.com]



Silver in USD:

[Most Recent Quotes from www.kitco.com]



Platinum in USD:

[Most Recent Quotes from www.kitco.com]



USD - Index:

[Most Recent USD from www.kitco.com]


Mish Talk

Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist