Alasdair Macleod’s Market Report: Physical Demand Underwriting Prices

Gold and silver continued their rally this week, with Tuesday an especially strong day. Initially, gold was marked down to $1228 before buyers stepped in, and on heavy futures volume the price rose to $1247. Comex open interest that day rose by 16,494 contracts.

On the week, gold is up $14 from last Friday’s close by early European trade this morning, at $1243. Silver rose from $17.40 to $17.59 over the same timescale. Silver’s underlying strength relative to gold has picked up again, with the price tending to rise slightly relative to gold in consolidation periods.

Next week sees options expiry for gold, and a large position in the April futures contract must be liquidated, or rolled over into June. In the absence of good physical demand, one would expect the bullion banks, who are almost always net short, to mark prices down to encourage selling by the hedge funds. So far, this is not happening.

The likely reason is good underlying demand for physical gold. Indian demand is picking up again, following the banning of cash notes, with Switzerland exporting 37 tonnes in February. Chinese demand in February was also good, with Swiss exports at 21.5 tonnes last month. European interest appears to be strengthening as well, and the physical market is reasonably tight. Furthermore, the Russian central bank acquired a further 9.33 tonnes. ETF inflows picked up this week, rising by 9 tonnes in two days, according to Commerzbank.

Central bank demand can be expected to continue. Their tactics are to buy bullion quietly when it’s offered, which could be a good reason why the market appears so firm underneath. So, for the futures market, the physical background suggests that the market is underwritten, and any attempt to mark it down risks backfiring. The hedge funds are generally unconcerned over the physical position, because for them buying gold contracts is the other side of shorting the dollar. And there are signs the dollar rally is over.

Having been gung-ho over interest rate rises, a note of caution has crept into markets, with various indicators suggesting the US economy is slowing. At the same time as the Fed increased in interest rates last Wednesday, the Atlanta Fed downgraded its Q1 growth estimate from 1.2% to 0.8%. Consequently, with growth in the Eurozone showing some signs of life, the dollar’s trade weighted index looks set to ease further, and a lower dollar equates with a higher gold price. Furthermore, US Treasury bond yields have eased, with the 30-year bond falling from 3.2% to 3.0%, a significant correction.

The dollar’s weakness this year is reflected in our last chart, which is of the daily closing gold price in the four major currencies. Prices expressed in euros, sterling and yen have all risen less than in the dollar.

While the outlook for gold seems set fair, there is still the hurdle of next week’s option expiration, and the rolling over of futures contracts. The slightest justification, such as news seen as supportive for the dollar, will encourage the option takers to mark prices down.

- Source, Alasdair Macleod

Gold & Silver Soar After The Fed’s Clown Show

The Federal Reserve’s FOMC predictably nudged the Fed Funds rate up 25 basis points (one quarter of one percent) to set its “target” Fed Funds rate level at .75%-1%. Nine of the faux-economists voted in favor of and one, Minneapolis Fed’s Neil Kashkari, voted against the meaningless rate hike.

Or is it meaningless? Ex-Goldman Sachs banker Neil Kashkari was one of the Treasury’s Assistant Secretaries when the Government made the decision to bail out Wall Street’s biggest banks with nearly $1 trillion in taxpayer money. It was also when the Fed dropped the Fed Funds rate from about 5% to near-zero percent. Despite Yellen’s official stance that the economy is expanding and the labor market is “tight” (with 37% of the working age population not considered part of the Labor Force – a little more than 94 million people) Kashkari voted against the tiny bump in interest rates. This is likely because he is fully aware of risk to the banking system – perched catastrophically on hundreds of trillions in debt and derivatives – of moving interest rates higher.

The Fed’s goal is to “normalize” interest rates. The financial media and Wall Street analysts embrace and discuss this idea of “normalized” interest rates but never define exactly what that means. For the better part of the Fed’s existence, the “rule of thumb” was that long term rates (e.g. the 10-yr Treasury rate) should be about 3% above the rate of inflation. And the Fed Funds rates should be equal to or slightly above the rate of inflation.

Using the Government’s highly rigged CPI index, it implies the Fed Funds rate would be “normalized” at approximately 2.7% and the 10-yr bond around 6% based on Wednesday’s CPI report. Currently the Fed Funds rate is 3/4 – 1% and the 10-yr is 2.5%. Of course, since the early 1970’s, the CPI calculation has been continuously reconstructed in order to hide the true rate of price inflation. For instance, the current CPI index does not properly account for the rising cost of housing, education, healthcare and automobiles.

John Williams’ of Shadowstat.com keeps track of price inflation using the methodology used by the Government to calculate the CPI in 1990 and 1980. Using just the 1990 methodology, the rate of price inflation is 6.3%. This would imply that a “normalized” Fed Funds rate would be around 6.5% and the 10-yr bond yield should be around 9.5%. So much for this idea of “normalizing” interest rates. Using the Government’s 1980 CPI methodology, Williams calculates that the stated CPI would be 10.3%.

Most of the hyperinflated money supply has been directed into stocks, bonds and real estate. But based on the cost of a basket of groceries, healthcare and housing alone, price inflation is accelerating. If the Fed were to “normalize” interest rates at 6.3%, it would crash the financial and economic system. In other words, the Fed is powerless to use monetary policy in order to promote price stability, which is one of its mandates.

- Source, Sprott Money Blog

The Demise of the Gold and Silver Bull Run is Greatly Exaggerated

A few analysts are once again beating the drums for much lower gold and silver prices - supposedly just around the corner. They mistake the testing of a recent breakout for a turnaround in the main trend. In the process, they are sowing confusion. Here are some charts that show the main trend, along with reasons why the price of gold and silver is on track for a sharp rise, thanks to bullish fundamentals.

In view of the fact that we expect mining stocks tolead the way, we will start with the HUI index of gold miners. Price has just finished a test of the January 2017 breakout. The green arrow points to confirmation of the uptrend that began at the blue arrow. This is referred to as an ‘ABC bottom”. The target for this breakout is 365. The supporting indicators are positive with room on the upside. 

This chart, courtesy of Goldchartsrus.com, shows the long-term trend in the US rate of inflation, along with the short-term trend in red. Both long-term and short-term rates are rising. This trend provides energy for gold and silver to rise.

Featured is the long-term gold chart in log format. Price has found support at the 150 month moving average. A breakout at the $1300 level will be very bullish and will set up a target at $2100.

Featured is the US dollar index. Price appears to be carving out a 'head and shoulders' pattern. The set-up will be confirmed in the event of a breakdown at the purple arrow. The target for this potential breakdown is at the green arrow. Gold and silver can be expected to benefit in the event. The supporting indicators are negative.

- Source, Sprott Money, Read the Full Article Here

Canada Flagged For Recession By BIS

As if Canadians needed more proof that the country’s real estate is in a bubble, and that this misallocation has spread to other sectors of the economy, the Bank of International Settlements released its latest quarterly confirming what any critical observer can see: binging on debt is rarely a good idea.

Canada’s debt-to-GDP gap is widening and even the central bank of central banks is concerned.

The BIS uses its credit-to-GDP analysis as an indicator and predictor of troubling economic waters. They claim successes in predicting financial crises in the United States, England and a few other economies. Generally speaking, according to the BIS, when a country’s credit-to-GDP gap is higher than 10% for more than a few years, a banking crisis emerges which is followed by a recession.

Canada entered that territory in 2015, warmly welcomed by the Chinese who’s debt-to-GDP gap has put them in the danger zone for at least the last five years.

In another parallel universe, perhaps Canadian authorities took the correct measures to counteract this high credit-to-GDP gap or to even prevent it from getting this out of control. But in our reality, we kept trudging across the tundra, mile after mile, pushing our credit-to-GDP gap up to 17.4%.

China’s “basic dictatorship” means they can turn their economy around on a dime, or so goes the thinking. Perhaps they will better absorb the economic slap in the face compared to Canada’s relatively freer market and less dictatorial government.

Still, both countries have a massive real estate bubble. In China, entire cities are centrally planned and built by government-connected contractors only to house absolutely nobody.

Wealthy Chinese families, witnessing the crony-capitalist chaos and subsequent malinvestments, have taken their hard-earned cash and moved it overseas. Enter stage-right the true north strong and free enough. Foreign speculation has helped drive up real estate prices in places like Vancouver and Toronto.

Of course, despite the pandering of Vancouver’s local politicians to angry locals that have been priced out of their home markets, foreign buyers are not the sole cause of Canada’s housing bubble and may in fact have little if anything to do with it.

Foreign speculation on Canadian real estate is to Canada’s housing bubble what subprime mortgages was to America’s infamous bubble. It’s more of an effect than a cause.

So what is the cause?

Don’t look to the BIS to own up to the disastrous and downright criminal actions of central banks around the world.

They’ve identified the disease of debt, but they’re mum on the cure as well as where all this speculative credit is coming from.

The Bank of Canada revealed that Canadians have taken on $2 trillion dollars in consumer debt. And while large numbers like these are thrown around a lot in the age of low interest rates, deficit spending and quantitive easing, it helps to have some perspective. It takes 31,709 years to count to one trillion. Now multiply that by two.

71.6% of that $2 trillion consumer debt is in mortgages. The BIS warns that large debt binges like this are almost always followed by a proportional recession. Thus, Canada has been flagged for bad times in 2018.

Of course, one doesn’t need the BIS’ empirical analysis to arrive at these conclusions. Following the sound economic logic of Mises and Rothbard not only reveals exactly what’s going on here but how we got here, what to do about it, and how to avoid it in the future.

- Source

Here Is What You Need To Know Ahead Of Tomorrow’s Fed Rate Hike

With markets awaiting the interest rate decision, here is what you need to know ahead of tomorrow’s Fed rate hike.

Here is what Peter Boockvar wrote today as the world awaits the next round of monetary madness: The February NFIB small business optimism index moderated a touch to 105.3 from 105.9 in January and vs 105.8 in December. It still though is pretty much holding its gains post election where the October print was 94.9 and November saw 98.4. There is one very important component that has not seen any improvement and that is plans for Increased Capital Spending which stands at 26% vs 27% in January and 27% back in October. This number touched 40 multiple times in the late 1990’s and the mid 30’s in the mid 2000’s. Likely companies are still waiting for what the tax reform will look like or maybe with capacity utilization sitting at 75% vs the historical average of 80% we still have an easy money driven overcapacity overhang…

Looking elsewhere within the report saw Plans to Hire fall 3 pts to 15%, the same level as November but up from 10% in October. Plans to Increase Inventory rose 1 pt to 3% but that’s not much different than the 2% seen in October. Expectations is where the real optimism still is as those that Expect a Better Economy sits at 47%, down 1 pt m/o/m but up from -7% in October. Those that Expect Higher Sales dropped 3 pts to 26% but was at 1% in pre election. Those that said it’s a Good Time to Expand was down by 3 pts to 22% but higher by 13 pts post election. The Positive Earnings Trends component fell 1 pt and still remains negative at -13% but up 8 pts from October.

Inflation

On the inflation front, Higher Selling Prices was up 1 pt to 6% which matches the highest since December 2014 and up from 2 in October. On the wage side, current Compensation Plans fell 4 pts to 26% after rising by 4 pts in January and not much different than the 25% seen in October. Future Compensation Plans also hasn’t changed much as it sits at 17% vs 19% in October and 14% in September. There remains the issue of finding qualified employees as job openings Not Able to Fill is at the highest level since December 2000 which provides hope that wages will improve from here.

To this last point, the NFIB said “Many small business owners are being squeezed by this historically tight labor market. They are not confident enough to raise prices on consumers, which limits how much they can increase compensation and makes them less competitive in attracting qualified applicants.” This also helps to explains the very low level of jobless claims. The NFIB said the 2nd biggest problem of small business is “finding qualified labor”, ahead of regulations, weak sales and insurance costs. Taxes is the top problem.

Reflecting the rise in LIBOR which sits at the highest level in 8 years, “The percent of owners reporting paying higher interest rates on their last loan jumped 7 pts to 11% in January and held at 9% in February, after averaging less than 2% since the recovery started in 2009.”

Hope

Bottom line, hope is what has driven the optimism but actual economic improvement has been more modest. The NFIB CEO made clear that “The sustainability of this surge and whether it will lead to actual economic growth depends on Washington’s ability to deliver on the agenda that small business voted for in November. If the health care and tax policy discussions continue without action, optimism will fade.” We will get this reform in some fashion I’m very hopeful but the market expectations bar is very high.

With the US 10 yr yield sitting at its highest level since September 2014 at 2.62%, Bill Gross we know is of the opinion that this is the breaking point that separates the end of the bond bull market or not (I believe it’s over and my readers know I’ve been saying that since August/September).

Overseas

Sovereigns in Europe and Japan are also testing their recent high yields today. The JGB 40 yr yield is just 1.5 bps from a 13 month high. The German 10 yr yield is 1 bp from a 14 month high and the French 10 yr yield is 2 bps from a 1 ½ yr high. I remain bearish on these bonds.

We saw some mixed data out of China overnight where authorities combined the January and February levels in order to take out the Lunar holiday distortion. Retail sales in February ytd rose 9.5% y/o/y, below the estimate of 10.6%, down from 10.4% seen in December and the slowest pace of gain since December 2003. The blame is being attributed to a drop in auto sales y/o/y because of a new tax on small cars and off a higher base last year. Industrial production grew by 6.3% ytd y/o/y, a hair above the estimate of 6.2% and up from 6% in January. Also out was fixed asset investment ytd y/o/y which grew by 8.9%, a quicker pace than the 8.3% that was forecasted. Bottom line, fixed private investment and property continued to lead the Chinese growth but I’ll say for the umpteenth time, I have no idea what’s temporarily stimulus driven and what is organic. The Shanghai comp was unchanged but the H share index was higher by .6% after jumping by almost 2% yesterday.

Of note in Europe was the German ZEW March economic confidence expectations index rose to 12.8 from 10.4 last month, vs 16.6 in January and about in line with the estimate of 13. It stood at 6.2 in October. Current conditions did match a nearly 6 yr high. The comments from ZEW were somewhat mixed: “The fact that the ZEW Indicator of Economic Sentiment only shows a slight upward movement is a reflection of the current uncertainty surrounding future economic development. With regard to the economic situation in Germany, no clear conclusions can be drawn from the most recent economic signals for January 2017. While industrial production and exports witnessed a positive development, the figures for incoming orders and retail sales were less favourable. The political risks resulting from upcoming elections in a number of EU countries are keeping uncertainty surrounding the German economy at a relatively high level.” We can add the possibility of a BAT tax in the US to the list of uncertainties for German exporters. The euro is down a touch with the DAX flat.

Ahead Of Tomorrow’s Rate Hike

Ahead of the Fed hike tomorrow we see PPI today and CPI tomorrow. The energy driven headline number is expected to result in a 2.7% print tomorrow. I include one more chart before we hear from the FOMC. It is C&I loans and we can see clearly that they’ve plateaued here. Why? I’m not exactly sure yet.

- Source King World News

White House Daily Briefing, Sean Spicer - Vault7, WikiLeaks, CIA, Budget Blueprint, Border Crossings...

In this daily White House briefing, Sean Spicer discusses recent news affecting the President of the United States and his administration, such as the reduced illegal border crossings, the recent CIA hacks by Wikileaks, Vault7 and Trumpcare.

- Source

GATA Chairman On Silver MASSACRE: We Know Who Did It and Why

Murphy reveals why shares were slaughtered ahead of today’s silver BOMBING, and why this is leading to something spectacular in the silver market…

A big move is coming and almost no one is prepared for it.

- Source, SD Bullion