Remember when it was pure tinfoil-hat conspiracy theory to accuse one or more banks of aggressively, compulsively and systematically manipulating the precious metals – i.e., gold and silver – market? We do, after all we made the claim over and over, while demonstrating clearly just how said manipulation was taking place, often in real time.
Well, it’s always good to be proven correct, even if it is years after the fact.
On Tuesday after the close, the CFTC announced that Merrill Lynch Commodities (MLCI), a global commodities trading business, agreed to pay $25 million to resolve the government’s investigation into a multi-year scheme by MLCI precious metals traders to mislead the market for precious metals futures contracts traded on the COMEX (Commodity Exchange Inc.). The announcement was made by Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division and Assistant Director in Charge William F. Sweeney Jr. of the FBI’s New York Field Office. In other words, if the Merrill Lynch Commodities group was an individual, he would have gotten ye olde perp walk.
As MLCI itself admitted, beginning in 2008 and continuing through 2014, precious metals traders employed by MLCI schemed to deceive other market participants by injecting materially false and misleading information into the precious metals futures market.
They did so in the now traditional market manipulation way – by placing fraudulent orders for precious metals futures contracts that, at the time the traders placed the orders, they intended to cancel before execution. In doing so, the traders intended to “spoof” or manipulate the market by creating the false impression of increased supply or demand and, in turn, to fraudulently induce other market participants to buy and to sell futures contracts at quantities, prices and times that they otherwise likely would not have done so. Over the relevant period, the traders placed thousands of fraudulent orders.
Of course, since we are talking about a bank, and since banks are in charge of not only the DOJ, and virtually every other branch of government, not to mention the Fed, nobody will go to jail and MLCI entered into a non-prosecution agreement and agreed to pay a combined – and measly – $25 million in criminal fines, restitution and forfeiture of trading profits.
Under the terms of the NPA, MLCI and its parent company, Bank of America, have agreed to cooperate with the government’s ongoing investigation of individuals and to report to the Department evidence or allegations of violations of the wire fraud statute, securities and commodities fraud statute, and anti-spoofing provision of the Commodity Exchange Act in BAC’s Global Markets’ Commodities Business, whose function is to conduct wholesale, principal trading and sales of commodities. Laughably, MLCI and BAC also agreed to enhance their existing compliance program and internal controls, where necessary and appropriate, to ensure they are designed to detect and deter, among other things, manipulative conduct in BAC’s Global Markets Commodities Business.
Translation: it will be much more difficult to catch them manipulating the market next time.
The Department reached this resolution based on a number of factors, including MLCI’s ongoing cooperation with the United States – which means the DOJ must have had the bank dead to rights with many traders potentially ending up in jail – and MLCI and BAC’s remedial efforts, including conducting training concerning appropriate market conduct and implementing improved transaction monitoring and communication surveillance systems and processes. Translation – no longer boasting about market manipulation on semi-public chatboards.
The Commodity Futures Trading Commission also announced a separate settlement with MLCI today in connection with related, parallel proceedings. Under the terms of the resolution with the CFTC, MLCI agreed to pay a civil monetary penalty of $11.5 million, along with other remedial and cooperation obligations in connection with any CFTC investigation pertaining to the underlying conduct.
As part of the investigation, the Department obtained an indictment against Edward Bases and John Pacilio, two former MLCI precious metals traders, in July 2018. Those charges remain pending in the U.S. District Court for the Northern District of Illinois.
This case was investigated by the FBI’s New York Field Office. Trial Attorneys Ankush Khardori and Avi Perry of the Criminal Division’s Fraud Section prosecuted the case. The CFTC also provided assistance in this matter.
Oh, and for anyone asking if they will get some of their money back for having been spoofed and manipulated by Bank of America, and countless other banks, into selling to buying positions that would have eventually made money, the answer is of course not.
Courtesy of ZeroHedge by Tyler Durden from Wed, 06/26/2019
◆ Bridgewater’s co-chief investment officer Greg Jensen told the Financial Times that gold prices could rally to $2,000 an ounce.
◆ The manager from the world’s biggest hedge fund cited increased income inequality in the U.S. and rising tensions with China and Iran as uncertainties that will prompt more safe-haven buying.
◆ Jensen also believes the Federal Reserve would let inflation run hot for a while, which also creates an environment for higher gold prices.
◆ Spot gold now trades at $1,551.40 per ounce, after crossing the $1,600 mark and hitting a seven-year high last week
FT via CNBC
Gold prices, which briefly topped $1,600 last week, could rally to $2,000 an ounce amid heightened political risks, Bridgewater’s co-chief investment officer Greg Jensen told the Financial Times Wednesday.
The manager from the world’s biggest hedge fund cited increased income inequality in the U.S. and rising tensions with China and Iran as uncertainties ahead that will prompt more safe-haven buying. Bridgewater manages $160 billion in assets, more than any other hedge fund.
“There is so much boiling conflict,” Jensen told the paper. “People should be prepared for a much wider range of potentially more volatile set of circumstances than we are mostly accustomed to.”
Jensen also believes the Federal Reserve would let inflation run hot for a while, which also creates an environment for higher gold prices as investors tend to use the precious metal as a hedge against inflationary forces.
Spot gold rose 0.3% to $1,551.40 per ounce on Wednesday, after crossing the $1,600 mark and hitting a seven-year high last week. The U.S.-China trade war and the Middle East unrest drove investors to more conservative investments for its stability during times of tumult, pushing gold prices higher.
Earlier last year, founder of Bridgewater Ray Dalio advocated putting money into gold as he saw a “paradigm shift” in investing due to global central banks’ expected moves to an easier monetary policy.
The Federal Reserve cut interest rates for three times last year to combat a slowing economy. Jensen said it’s possible the central bank could slash rates to zero this year to avoid a recession and disinflationary pressures.
Bridgewater is not alone in recommending gold bullion. DoubleLine CEO, Jeffrey Gundlach also said last year he was a buyer of gold on expectations that the dollar would weaken.
You can add another billionaire to the bullish gold camp as Thomas Kaplan, chairman and chief investment officer of Electrum Group said in a recent interview with Bloomberg that gold is on the cusp of a new decade long bull market.
In a preview clip of the interview Kaplan, who is also chairman of Novagold Resources (NYSE: NG, TSX: NG) said that because of economic fundamentals gold prices could rally as high as $3,000 to $5,000 within a decade.
Kaplan told Rubenstein he sees two possible scenarios for the yellow metal.
In the first, gold has already broken out and, as Jeff Gundlach puts it, “is coiling like a snake for its next move to take on the old highs.”
In the second scenario, gold could take one more head-fake to the downside, “just to shake out the weak hands.”
But then I do believe gold embarks on the next leg of its bull market and goes past $1,900 and ultimately $3,000 to $5,000, if not a lot higher, depending on macro circumstances that today seem dim but I can’t really quantify.”
Rubenstein asked how long he would have to wait to see that price level. Kaplan said he usually measures these kinds of moves in decades.
The first move, the first leg in gold took gold from $250 to $1,900. For 12 consecutive years, gold was up every single year whether there were inflation fears or deflation fears, strong dollar, weak dollar, political stability, political instability. It didn’t matter. Strong oil, weak oil. Didn’t matter. Gold went up for 12 years. That to me is a bull market. We’ve now been in a correction which has taken gold from $1,900 back to where we are today. You could easily see gold fall a couple of hundred dollars before going up a couple of thousand dollars. But each move has been a decade or more, which means that when gold embarks upon its next move, I believe that you will see that long wave take gold relatively quickly, but it will be measured in years, to the three to five thousand dollar target that I believe is fundamentally justified based on the facts that we have today.”
Kaplan is not the only billionaire investor to project an upcoming gold bull market. Earlier this month, SEC filings showed that Ray Dalio has increased his position in gold. During the Sohn Investment Conference, Jeff Gundlach said, “I love gold. I have owned gold since it was trading at $300.” And David Einhorn, founder of Greenlight Capital told Kitco News, “I hold gold, and I am never going to get rid of it. I hope that I never have to use it.
Kaplan is just the latest fund manager to jump on the gold bandwagon. Earlier this month, SEC filings showed that Ray Dalio’s hedge fund Bridgewater Associates increased its holdings in both SPDR Gold Shares (NYSE: GLD) and iShares Gold Trust (NYSE: IAU) in the first quarter of 2019.
This excerpt is from an original article published by Bloomberg.com on May 29, 2019
In 2018, central banks added nearly 23 million ounces of gold, up 74% from 2017. This is the highest annual purchase rate increase since 1971, and the second-highest rate in history. Russia was the biggest buyer. And not surprisingly, the lion’s share of gold is flowing into central banks of countries that are in the sights of America’s killing machine—the Military Industrial Complex that Eisenhower warned us about in 1958.
The Bank for International Settlements (BIS), located in Basal, Switzerland, is often referred to as the central bankers’ bank. Related to this issue of central bank hoarding of gold is the fact that on March 29 the BIS will permit central banks to count the physical gold it holds (marked to market) as a reserve asset just the same as it allows cash and sovereign debt instruments to be counted.
There has been a long-term view that China and other nations dishoarding dollars in favor of gold have been quite happy about western banks trashing the gold price through the synthetic paper markets. But one has to wonder if that might not change, once physical gold is marked to market for the sake of enlarging bank balance sheets.
This also raises the question with regard to how much gold the U.S. actually holds as opposed to what it claims to hold. James Sinclair has always argued that the only way the world can overcome the debt that is strangling the global economy is to remonetize gold on the balance sheets of central banks at a price in many thousands of dollars higher. This would mean a major change in the global monetary system away from the dollar, as China has been pushing for the last decade or so.
If banks own and possess gold bullion, they can use that asset as equity and thus this will enable them to print more money. It may be no coincidence that as March 29th has been approaching banks around the world have been buying huge amounts of physical gold and taking delivery. For the first time in 50 years, central banks bought over 640 tons of gold bars last year, almost twice as much as in 2017 and the highest level raised since 1971, when President Nixon closed the gold window and forced the world onto a floating rate currency system.
But as Chris Powell of GATA noted, that in itself is not news. The move toward making gold equal to cash and bonds was anticipated several years ago. However, what is news is the realization by a major Italian Newspaper, II Sole/24 Ore, that “synthetic gold,” or “paper gold,” has been used to suppress the price of gold, thus enabling countries and their central banks to continue to buy gold and build up their reserves at lower and lower prices as massive amounts of artificially-created “synthetic gold” triggers layer upon layer of artificially lower priced gold as unaware private investors panic out of their positions.
The paper concludes that,
“In recent years, but especially in 2018, a jump in the price of goldwould have been the normal order of things. On the contrary, gold closed last year with a 7-percent downturn and a negative financial return. How do you explain this? While the central banks raided “real” gold bars behind the scenes, they pushed and coordinated the offer of hundreds of tons of “synthetic gold” on the London and New York exchanges, where 90 percent of the trading of metals takes place. The excess supply of gold derivatives obviously served to knock down the price of gold, forcing investors to liquidate positions to limit large losses accumulated on futures. Thus, the more gold futures prices fell, the more investors sold “synthetic gold,” triggering bearish spirals exploited by central banks to buy physical gold at ever-lower prices”.
The only way governments can manage the levels of debt that threaten the financial survival of the Western world is to inflate (debase) their currencies. The ability to count gold as a reserve from which banks can create monetary inflation is not only to allow gold to become a reserve on the balance sheet of banks but to have a much, much higher, gold price to build up equity in line with the massive debt in the system.
Investors continue to find the Equity markets attractive even with no end in sight to the China and Brexit negotiations.
With investors feeling confident that their investments are in good shape, safe haven investments like Gold and Bonds can be overlooked at this time.
But let us not forget that in 2018 market sentiment flipflopped back and forth daily between “Risk-On” and “Risk-Off” ideology. Every day we continue to see risk in the headlines, whether geopolitical or economic, anything can happen in a moment that will turn markets around. Not to mention the continued ongoing political rumor mill here in the States.
These headlines can take a toll on a trader and investors’ emotions, but can also provide opportunities.
That’s where a Dollar Gold cost averaging strategy can make a lot of sense. When the price of Gold declines, many smart Gold investors see it as a buying opportunity to create a truly balanced portfolio.
At the time of this report, Equity markets are called up over two hundred points. So, when the price of Gold is most ignored by investors that might be the best time to, so to speak, “put your toe in the water” and put in place your dollar cost averaging strategy.
Palladium
Palladium prices have experienced a much-needed correction in the past week and may be vulnerable to further declines in the short term. Despite this continued tightness in supply the market is likely to see prices test higher across the medium to longer term.
To back up that philosophy, Johnson Matthey estimates that the Palladium supply deficit could reach one million ounces in 2019. So maybe there still significant room to the upside in the price.
Today’s Palladium EFP is quoted by some dealers at Minus 40 minus 20. If the EFP stays in negative territory higher prices are always a possibility.
There are a multitude of false assumptions out there on what the collapse of a nation or “empire” looks like. Modern day Americans have never experienced this type of event, only peripheral crises and crashes. Thanks to Hollywood, many in the public are under the delusion that a collapse is an overnight affair. They think that such a thing is impossible in their lifetimes, and if it did happen, it would happen as it does in the movies – They would simply wake up one morning and find the world on fire. Historically speaking, this is not how it works. The collapse of an empire is a process, not an event.
This is not to say that there are not moments of shock and awe; there certainly are. As we witnessed during the Great Depression, or in 2008, the system can only be propped up artificially for so long before the bubble pops. In past instances of central bank intervention, the window for manipulation is around ten years between events, give or take a couple of years. For the average person, a decade might seem like a long time. For the banking elites behind the degradation of our society and economy, a decade is a blink of an eye.
In the meantime, danger signals abound as those analysts aware of the situation try to warn the populace of the underlying decay of the system and where it will inevitably lead. Economists like Ludwig Von Mises foresaw the collapse of the German Mark and predicted the Great Depression; almost no one listened until it was too late. Multiple alternative economists predicted the credit crisis and derivatives crash of 2008; and almost no one listened until it was too late. People refused to listen because their normalcy bias took control of their ability to reason and accept the facts in front of them.
There are a number factors that cause mass blindness to economic and social reality. First and foremost, establishment elites deliberately create the illusion of prosperity by rigging economic data to the upside. In almost every case of economic crisis or geopolitical disaster, the public is conditioned to believe they are in the midst of a financial “boom” or era of “peace”. They are encouraged to ignore fundamental warning signs in favor of foolish faith in the system. Those people that try to break the apathy and expose the truth are called “chicken little” and “doom monger”.
In the minds of the cheerful lemmings a “collapse” is something very obvious; they think they would know it when they saw it. It’s like trying to teach a blind person about colors; it’s not impossible, but it’s very difficult to get all these Helen Kellers to understand that what they perceive is not the whole reality. There’s a vast world hidden from them and they have no concept of how to observe it.
Crash events are like stages in the process of collapse; they create moments of clarity for the blind. However, they are also often engineered to benefit the establishment. There’s a reason why the elites put so much energy into hiding the real data on the state of the economy, and it’s not because they are trying to keep the system from faltering by using sheer public ignorance. Rather, a crash event is a tool, a means to an end. As Congressman Charles Lindbergh Sr. warned after the panic of 1920:
“Under the Federal Reserve Act, panics are scientifically created; the present panic is the first scientifically created one, worked out as we figure a mathematical problem…”
Central bankers and their cohorts manipulate economic data and promote the false notion of a boom before almost every major crash because they WANT to ambush the populace. They WANT to create panic, and then use it to their advantage as they rebuild and mutate the system into something unrecognizable only decades ago. Each consecutive crash contributes to the collapse of the whole, until eventually the society we once had is barely a distant memory.
This process can take decades, and the US has been subject to it for quite some time now. Once again in 2019 we are seeing the lie of an “economic boom” being perpetuated in the mainstream. The public was growing too aware of the danger and had to be subdued. More specifically, conservatives were growing too aware. The sad thing is that the boom propaganda is most prominent today among conservatives, who are desperately trying to ignore the fundamentals in an attempt to defend the Trump Administration.
The same people who were pointing out the economic bubble under Obama are now denying its existence under Trump. Trump himself argued that the markets were a dangerous economic fraud created by the Federal Reserve during his campaign, yet once he was in office he flip-flopped and started taking full credit for the bubble. What is mind boggling to me is that many people, even in the liberty movement, still choose to dismiss this behavior in favor of worshiping Trump as some kind of hero on a white horse.
This only reinforces my theory that the system is due for another major engineered crash event, and that the ongoing collapse of the US is soon to accelerate. Each case of economic calamity in modern history was preceded by peak delusional optimism and peak greed. When the people traditionally most vigilant against crisis suddenly capitulate and claim victory, this is when reality strikes hardest. This is when the establishment triggers yet another controlled demolition.
In order to determine how long an empire will last, one has to take into account the agenda of the elites that control its institutions. As long as they are in key positions of power within the system and as long as they can inject their own puppet politicians, they will have the ability to influence the collapse timeline of that system.
Can they prolong and stave off crisis? Yes, for a short while. However, once the machine of a crash has been set in motion the best they can do is slow down the Titanic; they cannot change its path towards the iceberg. And frankly, at this point why would they? I hear it argued often that the elites are going to “keep the plates spinning” on the economy and that they don’t want to lose their “golden goose” in the US economy. This reveals an naivety among skeptics of the true agenda.
Firstly, the elites have a highly useful political puppet in the form of Donald Trump; he is useful in that he inspires sharp national division, and, he is a self proclaimed conservative champion and nationalist. If the elites did not trigger a crash under Trump, then this would give the public the impression that conservative ideals and national sovereignty works. This is the opposite of what they want. Why would globalists that want the erasure of nation states and the creation of a centralized socialist “Utopia” seek to make conservatives and nationalists look good? Well, they wouldn’t.
The only concern of the banks is that they do not take the blame as their engineered collapse of the old world order hits the public with increasingly painful consequences. These consequences are already becoming visible.
The next major crash has begun in the form of plunging fundamentals, and far too many conservatives are placing their heads in the sand for the selfish sake of proving the political left wrong. Declines in US manufacturing, US freight, global exports and imports, mass closures in US retail, as well as all time highs in consumer debt, corporate debt and national debt are being shrugged off and rationalized as nothing more than “hiccups” in an otherwise booming economy. The Fed’s repo market purchases, barely keeping up with demand from liquidity starved corporations are also not being taken seriously.
Conservatives and analysts are going to have to forget about supporting Trump, a Rothschild owned proxy, and start acknowledging reality once again. The only question now is, will the elites allow the crash to spread further into mainstreet and strike markets before or after the 2020 election?
As noted above, to predict the timing of a collapse in a nation or empire, one has to examine the agendas of the elites that dominate its institutions. We can gain some sense of timing from the public admissions of globalist organizations like the IMF and the UN. Each has announced the year 2030 as a target date for the finalization of globalization, a cashless society and sustainability goals. This means that the elites have around ten years to create a crisis and then “solve” that crisis with globalism.
Ten years is a narrow window, and if the elites intend for conservatives to take the blame for the next crash, they will have to initiate it soon. They may not have a choice anyway, as the chain of dominoes was already been set in motion by the Fed in 2018 with its liquidity tightening policies.
We can also gauge timing of a collapse to a point by understanding the common tactics the establishment uses to hide what they are doing. Generally, when a collapse is about to accelerate the elites use crisis events as cover to distract the public and produce scapegoats. In my article ‘Globalists Only Need One More Major Event To Finish Sabotaging The Economy’, I outlined three potential distractions that could be used in the near term, and if any of these events took place, then people should watch for the collapse to move faster. Two of these events now appear imminent: The first being a war with Iran, and the second being a ‘No Deal’ Brexit.
Finally, we can take into account the globalist need for a scapegoat, and it appears that conservatives and nationalists are their target for blame. This leaves less than one year for a crisis event if Trump is intended to leave the White House in 2020, or less than four years if he is intended to stay in for a second term. Keep in mind that A LOT can happen in a single year, and a second Trump term is certainly not guaranteed yet.
But why create a collapse in the first place? Crash events allow the establishment to consolidate control over hard assets as poverty forces the population to sell what they have to survive. This poverty also creates fear, which makes the public malleable and easier to control. Each new crisis opens doors to political and social changes, changes which end in less freedom and more centralization. Collapse is a succession of crashes leading to a complete erasure of the original society. It’s not a Mad Max event, it’s a hidden and insidious cancer that takes over the national body and warps it into a wretched form. The collapse is complete when the nation either breaks apart, or is so damaged for so long that no one can remember what it used to look like.
What we are witnessing today is the beginning of a new crash, and the final phases of a collapse of our way of life. The economic boom narrative among conservatives is a farce designed to trick us into complacency. The bubble that we warned about under the Obama Administration has been popped under the Trump Administration. Nothing has changed in the ten years since the 2008 crash except that the motivation for keeping the crash hidden is quickly disappearing.
Crashes are inevitable, but collapse is only possible when the public remains unprepared. Our civilization and its values are under attack, but they can only be destroyed if we stay apathetic to the threat and refuse to prepare for their defense. We must adopt a philosophy of decentralization. We need localized and self sufficient economies, as well as a return to localized production. Beyond that, we have to prepare for the eventuality of a fight. The fate of the US economy has already been sealed, but the people who are destroying it can still be stopped before they use the collapse to force society into subservience. We have to offer security, we have to offer alternatives to the “new world order” and we have to remove the globalist threat permanently.
Make no mistake, we are living in the midst of an epoch moment; the outcome of collapse depends on us and our reactions. This is not the task of the next generation, it is a task for our generation. We do not have another couple of decades to take the danger seriously. The plates are not spinning, they have already dropped.
‘I think this market is fully valued and not undervalued, but I don’t think it’s overvalued’, says Jeremy Siegel
Courtesy of Market Watch by Mark Decambre
‘Actually, one of the dangers is that people could be throwing risk to the wind and this thing could be a runaway. We sometimes call that a melt-up and produces prices too high and then if there’s a shock, you come down to Earth and that could impact sentiment.’ Jeremy Siegel
That is Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School of Business, expressing what he perceives as one of the biggest market risks in 2020, in an interview with Barron’s Group’s Market Brief, which aired on Monday.
The Wharton professor who forecast that the Dow Jones Industrial Average DJIA, -0.40% would see 20,000 at the end of 2015 says that market fundamentals are sufficient to support the recent run-up in U.S. equity benchmarks but worried that euphoria, or a meltup, could take stocks to unsustainable peaks.
That said, he thinks, we’re not quite at the juncture yet.
“I think this market is fully valued and not undervalued, but I don’t think it’s overvalued,” Siegel told Market Brief, pointing to low interest rates fostered by the Federal Reserve and signs of a detente between Beijing and Washington on the tariff front, as reasons for his fairly positive outlook.
The academic’s comments come as markets briefly faced selling pressure, with the Dow, the S&P 500 index SPX, -0.27% and the Nasdaq Composite Index COMP, +0.01% on the verge of producing a second straight decline , until bouncing back, following a U.S. airstrike on Friday that killed Iranian Major Gen. Qassem Soleimani, escalating Middle East tension that could ripple across the globe.
Siegel, however, says that he’s not expecting the Iranian developments to derail the domestic market or economy unless Mideast tensions flare up considerably more this year.
The U.S. is “much less impacted by oil shocks than we were years ago,” the professor said. “I suspect minimal economic impact from this,” adding that he believes that Saudi Arabia would also come into pump additional oil to deflate the price of crude, which has soared in the past two sessions after Soleimani’s assassination. West Texas Intermediate oil for February delivery CLG20, -0.96% was trading at a roughly seven-month high, gaining 0.5% on Monday.
See: As tensions mount with Iran, should you be worried about rising oil prices?
As for his longer-term view, Siegel said he’s looking at a more modest gain for stocks compared against last year’s powerful annual rally. “I’m looking for a zero to 10% increase in prices this year.”
In 2019, the Dow ended the year up 22.3%, its best year since 2017, while the S&P 500 saw its best year since 2013, gaining 28.9%. The Nasdaq also had its loftiest annual performance in six years after rallying 35.2% in the year.
Looking even longer term, Siegel is forecasting that the Dow may hit 40,000 in the next four or five years, unless something derails the market’s bull run.
“One could say we are four or five years away from Dow [40,000],” he speculated.
Markets likely to remain volatile amid expectations for intensifying Middle East conflict
Iranians hold anti-U.S. banners during a demonstration in Tehran on Friday, following the killing of Iranian Revolutionary Guard Major General Qasem Soleimani in a U.S. strike on his convoy at Baghdad International Airport.
Courtesy of MarketWatch by William Watts
Consider it a wake-up call.
Stock market investors shouldn’t panic, but intensifying U.S.-Iran tensions bring home the potential for geopolitical turmoil to make for more volatile price action in 2020 after a blockbuster 2019 rally, investors, analysts and economists said.
Oil prices jumped Friday, while investors dumped equities and piled into haven assets like gold and Treasurys in a knee-jerk reaction to a U.S. airstrike in Baghdad that killed a top Iranian military commander. Tehran vowed to retaliate — and most observers expect them to follow through.
Here’s what market participants should keep in mind:
Things could get choppy
“We came into this year calling for a continuation of the equity bull market, but with a single-digit return profile and elevated volatility,” said David Donabedian, chief investment officer at CIBC Private Wealth Management, in an interview.
And with the U.S.-Iran conflict unlikely to be a “one-and-done” event, the effect on oil and other markets is unlikely fade quickly as it did in September after an attack on Saudi Arabia’s oil infrastructure that was widely blamed on Iran, he said.
Short-term market volatility is almost entirely driven by policy or geopolitical uncertainty, said Brian Levitt, global market strategist at Invesco, in a Friday note.
“This time will likely be no different. We expect that uncertainty may persist in the near term as markets await potential retaliation from Iran and disruption in the global oil markets,” he wrote.
Room to fall
Stocks ended 2019 on a tear, with major U.S. indexes logging a series of records in December and following through with another set of records on the first trading day of 2020 on Thursday.
On Friday, the Dow Jones Industrial Average DJIA, -0.38% ended with a loss of 233.92 points, or 0.8%, at 28, 634.88, but off session lows. The S&P 500 SPX, -0.24% gave up 23 points, or 0.7%, to close at 3,234.85, while the Nasdaq Composite finished at 9,020.77, a loss of 71.42 points, or 0.8%. Stocks began Monday with moderate losses.
Friday’s decline didn’t even erase Thursday’s gains, but even bullish analysts warned that overbought conditions and expectations Iran will indeed retaliate leave scope for a pullback and increased volatility.
The 2019 stock market rally wasn’t confined to the U.S., with the MSCI World Index rising 12% since early October, said analysts at ING, in a Friday note.
“ And the big rally in risk assets in December certainly looked like a play on the 2020 story – benign conditions, a trade truce and more money printing in G3 economies. Were events in the Middle East to escalate severely, overweight positioning in risk assets could easily trigger a 7%-10% correction in global equity markets,” they wrote.
Not your father’s oil shock
Middle East tensions mean worries over the threat to the world’s oil supply. And while a wider conflict with Iran could create havoc, the potential economic pinch isn’t the same as it was in past decades.
“Our reliance on fossil fuels to generate economic growth has come down substantially over the years. It’s not the ‘70s,” Donabedian said.
It would take a “significant and sustained” jump in oil prices — for example, West Texas Intermediate crude trading above $75 a barrel for an extended period — to begin to raise serious questions about the sustainability of the economic recovery, he said.
In addition, the U.S., thanks to the shale boom, is now a global oil exporter. The growth of the domestic fossil-fuel industry means that higher oil prices are less of a drag on the U.S. economy.
Ian Shepherdson, chief economist at Pantheon Economics, in a Friday note, observed that domestic U.S. oil production runs at almost 13 million barrels a day, while consumption is at 21 million barrels a day.
But while that should mean higher oil prices would depress economic growth, recent experience suggests otherwise. That’s because in the shale area, oil-sector capital expenditures are “acutely sensitive” to prices, even in the short term, he said, in a note.
“When oil prices collapsed between spring 2014 and early 2016, the ensuing plunge in capital spending in the oil sector outweighed the boost to consumers’ real income from cheaper gasoline and heating oil, and overall economic growth slowed markedly,” he said. “This story played out in reverse when oil prices rebounded in the three years through spring 2018, and economic growth picked up even as consumers’ real incomes were hit.”
Bulls remain bold
While analysts see scope for volatility and a near-term pullback, so far events haven’t been enough to turn bulls into bears.
“Historically, regional geopolitical happenings are not the events that end business and market cycles,” said Invesco’s Levitt, noting that market returns, on average, have been positive 12 months after spikes in economic uncertainty, as measured by a widely followed index (see chart below).
“The larger market narrative of slow growth, benign inflation globally, generally accommodative monetary policy globally, and equities still attractive relative to bonds, has not changed. In our opinion, the backdrop for equities and other risk assets remains favorable,” he said.
Courtesy of ZeroHedge by Tyler Durden Sat, 01/18/2020 – 14:30
Submitted by Jan Nieuwenhuijs of Voima Insight.
There are reasons to think that the gold price will rise faster than expected.
Since 2009 China has withdrawn 12,000 tonnes of gold from the rest of the world, where the short and medium-term gold price is set. For reasons I will explain, a tighter market outside of China can make the price of gold price rise faster than many expect. I believe the gold price will rise, because of excessive debt levels around the world, and incessant money printing by central banks. Central banks will try and resolve the debt burden through currency depreciation (inflation). China has been preparing for this scenario by buying gold.
One of the key drivers in recent decades for the US dollar gold price is real interest rates. It is thought that when interest rates on long-term sovereign bonds, minus inflation, are falling, it becomes more attractive to own gold as it is a less risky asset than sovereign bonds (gold has no counterparty risk). However, gold doesn’t yield a return (unless you lend it). So, when real rates rise, it becomes more attractive to own bonds.
Although the correlation is clear, it might change in the future. Possibly, when real rates fall, the gold price will rise faster than before. Let me explain why.
In my previous post, we have seen that the gold price in the short and medium-term is mainly set in the West by institutional supply of and demand for above-ground stocks. For the gold price, what matters is how much above-ground stock is in strong hands, i.e., owners of gold that will not be easily persuaded to sell.
A significant change in the global economy in the past two decades was the rapid expansion of China’s economy. As early as the 1980s, China started to liberalize its economy, but it was only after it joined the World Trade Organization in 2001 that its economy gained significance internationally. At the time of writing, the size of China’s economy is second globally. In 2002 China freed up its gold market with the opening of the Shanghai Gold Exchange (SGE).
Because of the aforementioned developments, and its Eastern mentality regarding gold, a few years after the Great Financial Crisis (GFC), China became a major player in the global gold market. It was a net importer since the 1990s, but imports grew in 2010 and exploded in 2013.
China’s central bank (which supervises the SGE) and other government departments have been stimulating physical gold ownership. One reason the government erected the SGE, was to allow the people to have direct access to the wholesale market and to be able to trade 999.9 fine gold at the lowest spreads. The stimulation program is sometimes referred to as the “People’s Gold.” In 2012, President of the China Gold Association, Sun Zhaoxue, wrote in Qiushi, the leading academic journal of the Chinese Communist Party’s Central Committee:
Because gold possesses stable intrinsic value, it is both the cornerstone of a countries’ currency and credit, as well as a global strategic reserve. Without exception, world economic powers established gold strategies at the national level. … the state will need to elevate gold to an equal strategic resource as oil and energy, …
In addition, because individual investment demand is an important component of China’s gold reserve system, we should encourage individual investment demand for gold. Practice shows that gold possession by citizens is an effective supplement to national reserves and is very important to national financial security. … We should advocate to ‘store gold among the people’ [“People’s Gold”] and guide a healthy positive development in this segment. … This is the objective under our gold strategy.
The world economy faces new changes, new challenges and new opportunities. Therefore, we must relook the status and function of gold from a strategic height, and create and implement a national gold strategy, to strengthen our country’s ability to counter complex situations.
Several national central banks in Europe will agree with Sun Zhaoxue, as they’re slowly preparing for Plan B: gold.
In 2016 the SGE launched a smartphone application called “Yijintong” to further ease gold trading for everyone. Note, the government has mainly facilitated the infrastructure for gold trading in China. Nobody forces Chinese citizens to buy gold. “China has been infatuated with gold for thousands of years,” according to former Managing Director of the Far East for the World Gold Council, Albert L.H. Cheng.
When the Chinese population had an opportunity to buy gold, so they did. According to my estimates, there are currently 20,398 metric tonnes owned by the private sector in China. The People’s Bank of China (PBoC) holds 1,948 tonnes, bringing the total to 22,346 tonnes. Up 230% from 2009.
Since the GFC, China has net imported 12,000 tonnes of gold. The gold came from the rest of the world, where the price is set in the short and medium-term. At this stage, it’s prohibited by the PBoC to export gold from the Chinese domestic market—all 20,398 tonnes of it. Gold owned by the Chinese is in strong hands. The fact the market in the West has become tighter can make gold go up faster than expected, according to my analysis. Needless to say, when sovereign bonds are downgraded (rated as riskier), the dynamic between real rates and gold will change too.
From industry insiders and circumstantial evidence, I believe the PBoC holds at least twice the amount of gold officially disclosed. Underreporting their gold reserves allowed the PBoC to accumulate at lower prices. Metal held by the PBoC, in addition to officially reported, was bought abroad and would add another 2,000 tonnes to China’s net import since the GFC. But I will leave this subject for a forthcoming article. I exclude speculative data in the paragraphs and charts above.
One reason for the gold price to rise is because the global debt-to-GDP ratios are excessive, and will be lowered, partially, through inflation. Debt in moderation can cause real economic progress. However, debt in excess can cause bubbles, stagnation, or depressions; too much debt caused the GFC. Unfortunately, the medicine we took was more debt. Last week, the World Bank warned the current debt wave is “the largest, fastest, and most broad-based wave of debt accumulation in advanced economies as well as in emerging and developing economies” since the 1970s.
NEW TODAY | Global debt reached a new all-time high of 322% of GDP in Q3 2019, with total debt nearing $253 trillion.
Access the Global Debt Monitor report and database here: https://t.co/UyFYqwNRPx pic.twitter.com/jhEGoD1evz— IIF (@IIF) January 13, 2020
In the stalemate, Christine Lagarde, the new head of the European Central Bank, is urging the few countries with relatively low debt levels, to “stimulate” the economy by borrowing and spending. Meanwhile, she holds key interest rates below zero and the printing press active. The Federal Reserve has reignited its printing press last September, which gave the US stock market another catalyst. When push comes to shove, our monetary “leaders” will always revert to printing money. There is a sense of logic in this, as to not intervene would undermine a central banks’ right to exist.
My concern is that money printing and more government-induced debt will ultimately lead to high inflation. Central banks will be reluctant to raise interest rates when that happens, as it would make the debt unserviceable. A “side effect” of high inflation, is that it reduces the debt burden. (Debt is fixed in nominal terms, of which the real value is eroded through inflation.) It’s an old trick to get out of debt through inflation, and governments are likely to choose this route.
In the scenario described above real rates will fall, and the price of gold will go up.
Above-ground silver stocks are an order of magnitude higher than what is widely assumed.
In total, there were an estimated 1.6 million metric tonnes of physical silver above ground by late 2018. This amount is 20 times higher than what The Silver Institute discloses as “identifiable above-ground stocks,” which is what’s widely assumed to be the total above-ground stock. The huge discrepancy is important to analyze, as it reveals silver’s true stock to flow ratio and supply and demand dynamics. Misunderstanding these dynamics would mean failing to understand the price of silver.
Relatively shortly after humans discovered silver (and gold) thousands of years ago, they started using it as money and a store of value. Accordingly, silver has always been a highly valued monetary metal, and economic agents have been cautious not to waste any. While mining continued throughout the millennia, the total above-ground stock has been ever increasing.
One of the earliest “price” (ratio) ever written down by humanity might be 1 shekel of silver (8.33 grams) for 5 litres of fat, in the 4th millennium BC.
For gold, the consensus is there are about 190,000 metric tonnes above ground, and yearly mine production amounts to 3,260 tonnes(2018). The above-ground stock divided by mine output is called the stock to flow ratio—an important variable for the price formation of commodities—which for gold is 58.
Now, let us have a look at silver. The Silver Institute doesn’t collect its own data but hires the GFMS team at Refinitiv for this purpose. Once a year, The Silver Institute and GFMS publish a report that includes statistics on supply and demand. The most recent report is the World Silver Survey 2019 (covering 2018). On page 37, we can read the following quote, accompanied by a table:
Following nine consecutive annual increases, identifiable above-ground stocks fell 3% year-on-year to 2,549.8 Moz (79,308 t) in 2018.
From the quote and the table, readers are supposed to believe the above-ground silver stock stood at 79,308 tonnes by late 2018. Annual mine production in 2018 was 27,000 tonnes, implying a stock to flow ratio of 3.
However, in the World Silver Survey 2019, we also read:
Jewelry, silverware and other finished fabricated products that are in the possession of end-users are not included in our definition of above-ground refined stocks.
But why is jewelry excluded from the data? Silver jewelry should be included for the same reason gold jewelry is included in the above-ground stock of gold: if the price is right, jewelry can and will be sold into the market. We must conclude that the data from The Silver Institute is incomplete. Additionally, in the World Silver Survey 2019, we find all sorts of supply and demand figures that are not correlated with the price of silver, confirming this data is incomplete.
Strangely, in 1992, The Silver Institute published complete data on above-ground silver, disclosing above-ground volumes to be an order of magnitude higher than current “identifiable above-ground stocks,” but it stopped doing that.
To learn more about the above-ground stock of silver, I reached out to the United States Geological Survey (USGS). I asked how much silver has been mined throughout history, and how much of that has been lost. They replied 1,740,000 tonnes of silver had been dug up by 2017, of which 7 to 10 % has been lost. Based on their numbers, I’ve computed that 1,616,805 tonnes were still with us by late 2018.
I also found a spreadsheet on the USGS website with silver mining statistics going back to 1900. With the data at my disposal, I could reverse engineer the total above-ground silver stock from 1900 through 2018. See the chart below:
One can argue that because of the use of silver in industrial products since the late 19th century, much of above-ground metal is in industrial products. And I agree. So, how much silver is in bullion, coin, jewelry, and silverware form, and how much is in industrial products?
To find out, I turned to the CPM GroupSilver Yearbook 2019. The above-ground volume of silver disclosed by CPM Group is in line with the numbers from USGS. CPM Group estimates that by 2018, there were a little more than 1.7 million tonnes above ground, although to them, it’s unknown how much of that has been lost. Luckily for us, we have an estimate on how much has been lost from USGS.
CPM Group’s breakdown of above-ground silver is shown in the chart below:
Not displayed in the chart above, but CPM Group discloses “inventories” to be roughly 90,000 tonnes, which is more or less what the Silver Institute discloses as “identifiable above-ground stocks.” CPM Group discloses “inventories” to consist of “reported inventories” (exchange vault inventory, ETPs, etc.) and “unreported inventory” (i.e., estimated U.S. depositories and private holdings), and “unreported bullion and coins” (estimates for which they rely on industry sources and historical data).
Most important, we can see in the chart, based on CPM Group’s data, there are nearly 800,000 tonnes of silver in “jewelry, decorative, and religious” forms, and roughly an equal tonnage in industrial products.
Circling back to the question of what the silver stock to flow ratio is, I would suggest it’s somewhere between 30 and 60. If you take all bullion, coins, jewelry, and silverware, you will arrive at 30. If you add the silver in industrial products, you will arrive at 60.
For the ones that are skeptical towards my approach, consider the next quotes from CMP Group, for example on silver jewelry, decorative and religious objects (brackets added to convert ounces into tonnes):
Another [791,000 tonnes] are estimated to exist in jewelry and decorative and religious objects, much of which is recoverable and easily refined into bullion or used directly in various manufacturing applications. These are enormous volumes of a precious metal that has been cherished and held fast throughout history.
Surely, silver jewelry plays an essential part in this metal’s supply and demand dynamics. Another quote by CPM Group on “silver in product form” points out, that when the product turns into waste (or the silver inside the product is worth more than the product), the silver is recycled into, i.e., bullion and coins:
Everyone involved in silver refining and manufacturing of silver products knows that there are continuous unreported flows of silver in product form that are melted and reused directly in new jewelry, decorative objects, and other fabricated products, metal that does not get reported anywhere as silver entering the market. As a result of this flow of unreported metal the amount of silver that exists in bullion and coin form tends to rise over time at a rate that is greater than the amounts captured in estimated newly refined supply and demand.
The silver in industrial products is also part of this metal’s supply and demand—not surprisingly—just like jewelry and silverware.
CPM Group is honest that all their numbers are estimates of a market that is opaque. Their figures are based on their industry sources and their experience in precious metals research since the 1980s.
My conclusion, and the reason I wrote this article, is that silver is a monetary metal with a much higher stock to flow ratio than 3 (as suggested by The Silver Institute). Although it’s difficult to assess an exact stock to flow ratio for silver, it’s at least ten times higher than 3. In my next post, we’ll shift our attention back to gold to discuss gold’s high stock to flow ratio, zoom in on gold’s supply and demand dynamics, and how all this relates to gold’s price formation.
