Crude Oil Swooping Up On Schedule

By Tom McClellan

Gold's leading indication for crude oil
March 23, 2018

The movements of gold prices lead similar movements in crude oil about 20 months later.  So if you watch what gold has already done, you can see the script for what oil prices are going to do.

It does not work perfectly; it is merely amazing, not perfect.

Crude oil prices had a brief swoon, dipping to $59/barrel in early February.  That matched a brief dip in gold prices 20 months earlier in May 2016.  Now oil prices are recovering, just as gold recovered to its July 2016 top.  But the recovery in oil prices should only be a brief one, as gold’s chart plot shows a big decline ahead for oil prices.

There is agreement in this next chart for that thesis that oil prices are headed lower.

Continue reading Crude Oil Swooping Up On Schedule

Another Look at Gold’s True Fundamentals

By Steve Saville

The major long-term driver of the gold price is confidence in the official money and in the institutions (governments, central banks and private banks) that create/promote/sponsor the official money. As far as long-term investors are concerned the gold story is therefore a simple one: gold will be in a bull market when confidence in the financial establishment (money, banks and government) is in a bear market and gold will be in a bear market when confidence in the financial establishment is in a bull market.

In real time it often doesn’t seem that simple, though, because on a weekly, monthly or even yearly basis a lot can happen to throw an investor off the scent. However, the risk of being thrown off the scent can be reduced by having an objective way of measuring the ebbs and flows in the confidence that drives, among other things, the performance of the gold market. That’s why I developed the Gold True Fundamentals Model (GTFM). The GTFM is determined mainly by confidence indicators such as credit spreads, the yield curve, the relative strength of the banking sector and inflation expectations, although it also takes into account the US dollar’s exchange rate and the general commodity-price trend.

Continue reading Another Look at Gold’s True Fundamentals

Standing Ready to Lease Gold

By Keith Weiner

We will take another break from capital destruction, to treat a topic which has come up this week. On March 11, we said:

“…central bankers do not think about gold.

Granted, they once did. In the 1960’s, there was the now-infamous London Gold Pool to keep the price of gold at $35. This is endlessly cited as evidence of current central bank price suppression, without bothering to mention that until 1971 the official US policy was to maintain the dollar to gold exchange rate of $35 to the ounce. …

But today? We see no sign that central bankers care about the price of gold.”

This turned out to be very controversial. Some conspiracy theorists cited Deputy Secretary of State Thomas O. Enders in 1974. The State Department records the minutes of a meeting with Secretary of State Henry Kissinger. Here is an excerpt:

“Henry Wallich, the international affairs man, this morning indicated he would probably adopt the traditional position that we should be for phasing gold out of the international monetary system…”

Changing the Dollar

This meeting can only be understood in context. So let’s review three key changes to the dollar that led up to it. The dollar had long been redeemable in gold. However, in 1933 President Roosevelt was desperate to stop the run on the banks (and to push interest rates down). He ended gold redeemability to Americans in 1933 (and criminalized the possession of gold).

When the soon-to-be-victorious Allied Powers met in 1944 at Bretton Woods, they agreed to an insane postwar monetary system, in which the national currencies would be pegged to the US dollar which would be redeemable in gold at a fixed exchange rate. This system contained the seeds of its own destruction as Robert Triffin said in the 1960’s. However, the Allied economies were in ruins (not to mention the Axis)—so who was in a position to say no?

Continue reading Standing Ready to Lease Gold

Open Letter to GATA

By Keith Weiner

Dear GATA and Mr. Chris Powell:

I am writing this in response to your article Monetary Metals’ Weiner refuses to see anything wrong in the gold market.

There is a certain irony for me to read that I refuse to see. I have spent eight years studying the mechanics of the market, building a model, developing software to run the model through several generations, and licensing nearly three terabytes of data giving every bid and offer in both the spot and futures markets with sub-millisecond resolution, going back to 1996.

In my previous company, I architected a massively scalable 3D voice server. In a normal world, I would be working on another Internet software company. Instead, I made a huge investment in drilling deeper into the gold market. The reason is that I am driven by a powerful need to see.

Two theories compete to explain the gold and silver markets. One, the conspiracy theory, holds that the big banks are naked short futures in a long-term effort to keep the gold price far below what it should be. The other, my theory, is that the banks are primarily market makers and they do not hold a massive and perpetual short position.

Continue reading Open Letter to GATA

Super-Duper-Irrational Exuberance, Report

By Keith Weiner

Think back to the halcyon days of the dot com boom. This was a time after Greenspan declared “irrational exuberance”. Long Term Capital Management collapsed in 1998, and Greenspan decided to risk propelling exuberance to a level beyond irrational. Super-duper-irrational exuberance?

Anyway, Greenspan cut interest rates a few times in late 1998. Technology companies were able to raise $5 million or more with just a sketch on a napkin (“serviette” for those outside the US). Companies at a “later stage”, though without revenues, could raise $30 million. A company called “Webvan” was able to raise nearly a billion dollars without ever becoming profitable.

These companies should not have been able to raise so much capital. At any given point in the development of a company, there are only so many things that need spending. Not to mention can be justified to investors.

It is obvious in retrospect that those particular companies wasted investor money (if not the broader principles), after investors booked the losses, but it was anything but clear at the time. Keith recalls debating the so called hypothesis of efficient markets with some people who believed that all market prices are correct. That all changes in price are random, unpredictable.

We have written a lot about how falling interest rates cause capital consumption. It drives speculation, which is a process of conversion of one speculator’s wealth into another’s income. No one wants to spend his wealth, but people are happy to spend their income.

Continue reading Super-Duper-Irrational Exuberance, Report

Gold – The Next Big Surprise

By Kevin Muir

It’s been a while since I have written about precious metals. To some extent, this has been on purpose. I am a long-term fan of our little yellow friend, but there are definitely periods when I am more bullish than others. Over the past half year, my enthusiasm for precious metals has been tempered by one important chart…

During this period, the yield on the US 5-year TIPS (Treasury Inflation Protected Security) has been steadily rising. It’s not a perfect comparison, but you can think about this as the risk free real yield – the yield you will earn after inflation.

Many market pundits mistakenly believe inflation is the most important determinant of gold’s price level. That’s simply not the case. Although the great bull market of the late 1970’s was accompanied by high inflation, the 2005-2011 rise was in the midst of tame inflation, with CPI even ticking below zero for a period.

Continue reading Gold – The Next Big Surprise

Gold Volatility Declines As Stock & T-Note Vol Increase With Fed Balance Sheet Shrinking

By Anthony B. Sanders

As Jerome Powell and The Federal Reserve continue to raise rates and let Treasury Notes on their $4.4 trillion balance mature, we are seeing financial market disruptions, such as spikes in stock market and 10-year Treasury Note volatility. But the one asset that is seeing a decline in volatility is gold.

(Bloomberg) — While volatility surged across asset classes last week, a gauge tracking the cost of hedging against price swings in gold fell. The CBOE/COMEX Gold Volatility Index dropped for a third straight week, the longest streak of the year, as the biggest exchange-traded fund tracking bullion posted its longest run of inflows since September. With the prospect of higher inflation and U.S. tariffs on metals, investors are turning to havens such as gold.

goldvol

As  The Fed let’s its balance sheet shrink, we have seen a spike in the VIX and TYVIX at th beginning of February after a large block of Treasury Notes matured at the end of January. While VIX and TYVIX subsided, they remaind elevated relative to levels before the end of January.

Continue reading Gold Volatility Declines As Stock & T-Note Vol Increase With Fed Balance Sheet Shrinking

Inflation is Not Under Control

By Keith Weiner

Let’s continue on our topic of capital consumption. It’s an important area of study, as our system of central bank socialism imposes many incentives to consume and destroy capital. As capital is the leverage that increases the productivity of human effort, it is vital that we understand what’s happening. We do not work harder today, than they worked 200 years ago, or in the ancient world. Yet we produce so much more, that obesity is a disease more of the poor than the rich. Destruction of capital will cause us to produce less, and that will mean reverting to a lower quality of life.

Keeping up with Inflation

Let’s start off by addressing how not to look at this destruction. There is a facile belief offered by both Fed propagandists and Fed critics alike. It goes like this. Increased quantity of dollars causes increased prices. Therefore it’s like a tax. And the way to measure your wealth is divide the liquidation value of your portfolio by the consumer price index. This tells you if your stocks, bonds, real estate, and the family farm could trade for more groceries and cars this year. Or less. In this view, you are hoping that somehow your assets keep up with inflation.

We insert the word somehow, because it is a kind of magical thinking. Everyone knows that a central bank cannot print wealth. If it could, Zimbabwe would be the richest country. Yet, if asset prices go up due to central bank policies, most asset owners feel richer. At least if consumer prices do not go up proportionally. One corollary of the fallacy of the Quantity Theory of Money is the fallacy of using consumer prices as the measure of economic value.

Why do we say this is not the method of looking at capital destruction? It’s because over the last 10 years, the Fed and other central banks have overstimulated capital destruction. And yet the above metric of the purchasing power of your estate has gone up. Everyone (at least those who own substantial assets) feels richer, despite economy-wide impoverishment.

If you were a doctor, and your deathly ill patient had a body temperature of 98.6F (37C), you would have to find another measurement tool. Clearly not all diseases cause a fever. Well, monetary doctors need to look past consumer price indices, inflation so called, and purchasing power of your assets.

Our first observation is that the purpose of a capital asset is not for spending. The prudent investor does not think about spending his savings, or selling the family farm. He says “I cannot afford that $300,000 Ferrari” if he has only a million or two in the bank.

Continue reading Inflation is Not Under Control

Gold is a Giant Ouija Board

By Keith Weiner

We have been promising to get back to the topic of capital destruction, which we put on hiatus for the last several weeks to make our case that the interest rate remains in a falling trend. Today, we have a different way of looking at capital destruction.

Socialism is the system of seeking out and destroying capital. Redistribution means taking someone’s capital and handing it over as income to someone else. The rightful owner would steward and compound it, not consume it. But the recipient of unearned free goodies happily and uncaringly eats it up. Socialism is not sustainable. It inherits seed corn from a prior, happier system, and it lasts only as long as the seed corn.

Totalitarian Socialism

There are different flavors of socialism. The 20th century witnessed an aggressive totalitarian form. Both communism and Naziism feature military occupation of domestic territory and conquest of foreign lands. Few people willingly feed whatever they have into the sausage grinder of State sacrificial collectivism. And so totalitarian socialism has armed thugs all over the streets, both open military and secret police. There are frequent killings, of those suspected of disloyalty or holding back small scraps. In their constant fear of uprising, they use disappearances, interrogations, and torture to root out the names of traitors to their bloody revolution.

Continue reading Gold is a Giant Ouija Board