Something for Nothing, Report 20 May 2018

By Keith Weiner

Money has a dual function. Please allow us to go deeper, and more philosophical than we typically do. We promise to tie this into our ongoing discussion of capital consumption. In the following, we will discuss some examples that use the dollar. We are not conceding that the dollar is money (i.e. the most marketable good, or the extinguisher of debt). We just need some simple cases to consider the medium of exchange. Today, that medium is obviously not gold but the dollar.

Money’s first function is flows. People experience this as income. If you work for an hour as a plumber, you might earn $25. If you work for an hour as a lawyer, you might earn $250. If you set up and operate a successful restaurant, you might earn $500,000 in a year. Every job, every profession, and every business earns a certain amount. The market value of everything is finite. These values are set by other market participants, who bid what they are willing to pay for what you do.

Money as Exchange Medium

The dollar is the general medium of exchange. This is how you take what your employer pays you, to buy something from a third party.

At any given moment in time, the market value of everything is fixed. You can take your wage or your profits to any other market participant, and buy whatever he produces. For example, the plumber might exchange an hour of his labor for a meal at the restaurant. Or he could exchange a day of his labor for an hour consultation with that lawyer.

We can abstract away the dollar, and see that there is a finite ratio of exchange of any good or service for any other. A plumbing repair is worth one restaurant meal, or one tenth as much as legal advice.

Continue reading Something for Nothing, Report 20 May 2018

Demand to Hoard, Report 13 May 2018

By Keith Weiner

[Biiwii comment: Gold and silver supply/demand report last segment]

Since 1981, interest rates have been in a falling trend. Last week, we said this trend will continue, and the present blip up in rates is just a correction. We did not argue technical analysis, nor quantity of dollars, nor the general price level.

Instead, we asked a question:

…It seems obvious that if one wishes to say that a trend has changed, after enduring for well over three decades, one needs to explain why. The Question of the Day is: what has suddenly happened?

For extra credit, no scratch that, to get any credit your answer should include an explanation of why the rate has been falling for so long. Is this too much to ask? Your explanation should contain three parts:

  1. The cause that drove interest rates to fall for most of the time that Generation X has been alive, for most of the duration of the careers of even the oldest Baby Boomers
  2. Why the old cause is now inoperable
  3. Identify a new cause, and show why it will drive the new trend for rising rates

We discussed a graph from the BIS, showing that as of 2015, 10.5% of corporations did not earn enough gross profit to pay the interest expense on their debt. Even at the lower interest rates of 2015, it is a sharply rising trend (from 5% in 2007). Who knows how much it would have risen even if rates had remained unchanged? And how much did it rise with the little blip up in interest rates we have had so far?

To answer part 1, we identified the cause of the trend. The cause is when interest > productivity (return on capital in this context), and each drop in interest drives down productivity. It’s a ratchet.

Continue reading Demand to Hoard, Report 13 May 2018

Wealth-Destroying Zombies, Report 6 May 2018

By Keith Weiner

The hot topic in monetary economics today (hah, if it’s not an oxymoron to say these terms together!) is whither interest rates. The Fed in its recent statement said the risk is balanced (the debunked notion of a tradeoff between unemployment and rising consumer prices should have been tossed on the ash heap of history in the 1970’s). The gold community certainly expects rapidly rising prices, and hence gold to go up, of course.

Will interest rates rise? We don’t think it’s so obvious. Before we discuss this, we want to make a few observations. Rates have been falling for well over three decades. During that time, there have been many corrections (i.e. countertrend moves, where rates rose a bit before falling even further). Each of those corrections was viewed by many at the time as a trend change.

They had good reason to think so (if the mainstream theory can be called good reasoning). Armed with the Quantity Theory of Money, they thought that rising quantity of dollars causes rising prices. And as all know, rising prices cause rising inflation expectations. And if people expect inflation to rise, they will demand higher interest rates to compensate them for it.

The quantity of dollars certainly rose during all those years (with some little dips along the way). Yet the rate of increase of prices slowed. Nowadays, the Fed is struggling to get a 2% increase and that’s with all the “help” they get from tax and regulatory policies, which drive up costs to consumers but has nothing to do with monetary policy. Nevertheless interest rates fell. And fell and fell.

Continue reading Wealth-Destroying Zombies, Report 6 May 2018

Macro Changes for Gold and Stocks

By NFTRH

Since early 2016 we have been carrying forward a theme illustrating that until the macro trends in place since 2011 change, the situation would be as is, stocks trending up and the precious metals in consolidation/correction. The current trends were kicked off symbolically, and functionally to a degree, by the Fed’s concoction of Operation Twist, a plan with the expressed goal of manipulating the macro (or in the Fed’s word, “sanitizing” inflation signals). Until this year it has been the gift that keeps on giving to unquestioningly bullish stock market participants.

We have also carried a theme forward that in order for a bull view to be widely recognized in gold, a bear view or at least a relative bear view will need to come about on the stock market, whether that means stocks rise nominally or not (ref. 2003-2007 when stocks rose nominally, but declined in terms of gold).

Gold does not move. It does not do much of anything other than mark its holders’ place, while the asset world goes in motion (up and down). Gold is a stable asset and its perceived value will diminish in the eyes of the average market participant during the risk ‘on’ good times, as instigated by the Bernanke and Yellen Fed and its perceived value will increase in line with a shift in other assets from risk ‘on’ to ‘off’.

Most recently we highlighted the following…

Gold and the Stock Market; It’s Not the Best of Both Worlds

In short, the general conditions of our handy Macrocosm graphic need to come into place.

macrocosm, nftrh 363 Continue reading Macro Changes for Gold and Stocks

Gold/Silver Ratio

By Tom McClellan

Gold/Silver Ratio
May 03, 2018

The ratio of gold prices versus silver prices is now up to the type of high reading that in the past 2 decades has marked an important low for both gold and silver prices.

The value of anything is always and in every case a ratio.  Most often the units are expressed as dollars per ounce, dollars per bushel, dollars per share, etc.  But expressing the price of an ounce of gold as being equivalent to 80 ounces of silver is perfectly legitimate.  We can understand the implications of the dollar price of something being expensive or cheap; it takes a little bit more energy to apply that same principle to such a comparison of the two precious metals’ prices, but it is still valid.

A high ratio like this says that gold is expensive relative to silver.  But turning that around, it says that silver is cheap relative to gold.  And there is information in that cheapness of silver.

Continue reading Gold/Silver Ratio

Savers Are Just Collateral Damage, Report 29 Apr 2018

By Keith Weiner

A reader asked us this week about the personal savings rate. Most people can sense that something is wrong if the rate is in a long-term falling trend, or if it falls too low (whatever level that may be). We argue that falling savings is part of the larger process of capital destruction. And unfortunately, one should expect falling savings rates when there is falling yield purchasing power.

The personal savings rate is defined as the ratio of personal saving to disposable personal income. Income excludes capital gains (as it should!) It is a measure of how much is left. This savings will pay for the saver’s own future, and in the meantime it is (presumably) invested to finance the production of new goods and services (and the government’s ever-growing welfare expense).

The personal savings rate is in a secular decline. As with other trends we have examined (e.g. marginal productivity of debt), the decline has a high correlation with the falling interest rate. Here is a graph.

Continue reading Savers Are Just Collateral Damage, Report 29 Apr 2018

An Update on Gold’s True Fundamentals

By Steve Saville

[biiwii comment: you go Steve; love the * at the end, which I obviously agree with]

I update gold’s true fundamentals* every week in commentaries and charts at the TSI web site, but my most recent blog post on the topic was on 20th March. At that time the fundamental backdrop was gold-bearish. What’s the current situation?

The fundamental backdrop (from gold’s perspective) is little changed since 20th March. In fact, it has not changed much since early this year. My Gold True Fundamentals Model (GTFM), a weekly chart of which is displayed below, turned bearish during the first half of January and was still bearish at the end of last week. There have been fluctuations along the way, but at no time over the past 3.5 months has the fundamental backdrop been supportive of the gold price.

GTFM_270418

Continue reading An Update on Gold’s True Fundamentals

A Gold Sector Fundamental View

By NFTRH

With gold testing its 200 day moving average this morning I thought I’d reproduce the first part of the precious metals segment from week’s Notes From the Rabbit Hole (NFTRH 497), including a daily chart of gold at the end showing the anticipated SMA 200 test.

Precious Metals

We have done a lot of work delineating what the best investment environment would be for gold and especially the gold mining sector. The gold miners leverage (for better or worse) gold’s performance vs. cyclical items like stocks, commodities and materials. Gold vs. stocks is a macro fundamental indicator on investor confidence, or lack thereof. Gold vs. Energy and Materials are gold sector fundamentals directly informing a gold mining company’s bottom line performance (their product vs. mining cost inputs).

When inflation is taking root and the economic cycle is up, the gold sector is suspect for the reasons stated above. It is and has been suspect to this point by definition, because gold is either in long-term down trends (vs. stocks) or has been flat lining for 2 years (vs. commodities). Let’s realize that gold and the gold sector can and probably would go up in an inflationary boom (assuming gold were out performing stocks) but the fundamentals would degrade as long as the economy remained firm.

Continue reading A Gold Sector Fundamental View

Deficits and Gold

By Tom McClellan

Deficits and Gold

If you are a gold investor, then the one thing you want most is rising deficits.  Luckily for you, Congress appears to have granted just what you want.

This week’s chart compares the trailing 12-month federal deficit (as a percentage of GDP) to gold prices.  The correlation is not perfect, but it is pretty good over time.  The implication is that rising deficits should be bullish for gold prices.

That certainly was the case during the 2000s, following the supposed surpluses of the late 1990s.  Those were not actual surpluses, as the total federal debt actually went up in every one of those years.  But for federal bookkeeping purposes, they were counted as surplus years.  And gold certainly did poorly while that was going on.

Continue reading Deficits and Gold

There’s Something Strange Happening With GLD Inventories

By Otto Rock

It’s goldbug tinfoil hat time at IKN, because this is weird:

After running up the way it has recently and right in the middle of a period of intense market turmoil, just the type of action that makes gold safe haven strategies attractive, gold inventories at GLD have stalled at 856.89mt and stayed right there for nine days running. That’s also just under the record since Trump came to power. Parrot required:

Regular readers know that IKN doesn’t jump quickly into conspiracy theories and blather about Bildebergs and “THEM!!!”, but your humble scribe is also keenly aware that markets get rigged from time to time. There is something amiss here, it’s not as if gold should be ignored at the moment. Data from here of course.

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Gold and the Stock Market; It’s Not the Best of Both Worlds

By NFTRH

I was sent this article, which uses TA as a basis to debunk those who think the stock market must crash for gold to be bullish. I thought I’d comment publicly since it is such a divisive subject.

SPX and Gold Combo Chart: The Best of Both Worlds

There is a misconception out there that in order for gold to have a bull market the stock markets have to crash and burn. Gold investor literally pray for the stock markets to crash so they can get their bull market in the PM complex. Once an idea like that gets embedded into the minds of gold investors it becomes hard for them to see the truth. A simple combo chart can show you the truth about why the stock markets don’t have to crash in order for gold to enjoy a bull market.

Well, since I am probably fairly prominent out there in the interpipes with a view pitting Amigo #1 (Stocks vs. Gold) as a key consideration to turning the macro, I’ll assume that Rambus, the writer of the above either has me in mind or other people with various counter-cyclical, anti-risk ‘on’ views about gold.

First let’s bullet point a few things pertaining to the quoted material above. I don’t mean for it to sound like I am personalizing this, but since I speak from my own perspective that’s how it may sound.

Continue reading Gold and the Stock Market; It’s Not the Best of Both Worlds