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

Incomplete Silver CoT Analysis, Revisited

By Steve Saville

In a blog post a week ago I discussed why silver’s Commitments of Traders (COT) situation was nowhere near as bullish as it had been portrayed in numerous articles over the preceding two months. This prompted some criticism that involves a misunderstanding of how I use the COT data. Before I address the criticism, a brief recap is in order.

As stated in last week’s post, the enthusiastically-bullish interpretation of silver’s COT situation fixated on the positioning of large speculators (“NonCommercials”) in Comex silver futures. It was based on the fact that over the past two months the large specs had reduced their collective net-long silver exposure to its lowest level in a very long time, indicating that these traders had become more pessimistic about silver’s prospects than they had been in a very long time. This was clearly a bullish development given the contrary nature of speculative sentiment.

I then explained that two components of silver’s overall COT situation cast doubt on the validity of the bullish interpretation.

The first was that near important bottoms in the silver price the open interest (OI) in silver futures tends to be low, but in early-April of this year the OI hit an all-time high.

Continue reading Incomplete Silver CoT Analysis, Revisited

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

Incomplete Silver CoT Analysis

By Steve Saville

During March and April a number of articles appeared at precious-metals-focused web sites describing the silver market’s Commitments of Traders (COT) situation as extremely bullish. However, this unequivocally bullish interpretation overlooked aspects of the COT data that were bearish for silver. Taking all aspects of the data into consideration, my interpretation at the time (as presented in TSI commentaries) was that silver’s COT situation was neutral and that the setup for a large rally was not yet in place.

The enthusiastically-bullish interpretation of silver’s COT situation fixated on the positioning of large speculators in Comex silver futures. As illustrated by the following chart, over the past two months the large specs (called “NonCommercials” on the chart) first went ‘flat’ and then went net-short. This suggested that large specs had become more pessimistic about silver’s prospects than they had been in a very long time, which was clearly a bullish development given the contrary nature of speculative sentiment.

silverCOT_largespec_140518
Chart source: http://www.goldchartsrus.com/

Continue reading Incomplete Silver CoT Analysis

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

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

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

Liquidating Civilization, Report 22 Apr 2018

By Keith Weiner

Further to our ongoing theme of capital destruction, let’s look at a topic which is currently out of favor in the present market correction. Keynes called for pushing the interest rate down near to zero, as a way of killing the savers, whom be believed are functionless parasites. The interest rate has been falling since 1981.

It did not merely fall near to zero. Nor even to zero. It has gone beyond zero, into negativeland. This alone ought to wipe out the mainstream notions of how interest rates are set in our very model of a modern monetary system. You know, the rubbish about bond vigilantes, inflation expectations, real interest rates, risk, etc. Might as well add unicorns, dragons, and leprechauns!

Instead of this rubbish, the world needs a non-linear theory of interest and prices in irredeemable currency.

In recent years, rates have plunged below zero in Switzerland, Germany, Japan, and other countries. Despite the current global uptick in rates, all Swiss government bonds out to 8-year maturity have a negative yield. Hey, at least that’s a recovery from when the 20-year had a negative yield. In Germany, bunds out to 5 years are negative, as they are in Japan.

This is pathological (in fact, due to negative long bond yields in Switzerland, Keith wrote a paper arguing that the Swiss franc will collapse).

As an aside, we note that when people hear our arguments, they go through a process akin to the well-known stages of grief. These include denial, anger, bargaining, and then finally acceptance and hope. It is much easier to think about rising quantity of dollars, and the presumed linear effect of rising consumer prices. And more pleasant, too.

Continue reading Liquidating Civilization, Report 22 Apr 2018

Re-Post: Keith Neumeyer is Plain Wrong About the Future of the Price of Silver

By Otto Rock

This post from August 2016 continues to be one of the most popular of the blog back catalogue and with silver now making a move and, of course, Keith Neumeyer coming out with a new round of “Gold to $8,000 and silver to $130” nonsense, it’s worthy of a repeat showing. It’s long and if you want to skip some of the minor matters that’s cool too, the most important point comes at the end about the way in which the supply of silver has changed since the advent of large copper porphyry/skarn mines and the large amount of very cheaply produced silver that comes with them.

And a fact: Since this analysis was first published, nearly two years ago in IKN369 dated June 5th 2016, we have had several other times when Keith Neumeyer and other silverbugs have come out and predicted massive numbers for silver in the near future. Meanwhile, the model as laid out in this post has been a more accurate scenario by far of the market in silver, which has not blasted to $20 then $25 then $30 per ounce and beyond. The gold/silver ratio has not dropped, in fact it’s moved up to over 80X (and it’s good that it’s recently dropped under that line, but don’t confuse that with a victory). More large scale silver stream and royalty deals have been inked. Silverbugs, when reality doesn’t fit your model…

Read on.

Continue reading Re-Post: Keith Neumeyer is Plain Wrong About the Future of the Price of Silver

Silver Outperforms Gold For a Change

By Rob Bruggeman

[biiwii comment: our disclaimer is that one of the linked sources below has been bullish, nearly non-stop, for years; so caveat emptor]

There seems to have been increased talk about silver over the past few weeks.  Rather than rehashing the reasons why, here are a couple of good articles about how it may be silver’s turn to shine:

The Assay – Indicators Point to a Silver Rally
Silver Seek – New Silver Bull Coming

I’d also previously indicated on this blog that a gold-silver ratio of 80 has historically marked the bottoms for silver.

Interestingly, silver moved up 2.5% yesterday while gold was only up 0.2%.  Could this be the start of a mean-reversion trend that sees silver move back towards its more typical range of 1-to-65 versus gold?  That would imply that silver should be trading at $20.75/oz, based on the a gold price of $1,349.  I hope so, given the significant silver exposure in my portfolio.  However, I have a hard time believing that silver can have a significant rally without gold’s participation.  If gold can break out of its range and trade above $1,370, then I think silver will do very well.

Continue reading Silver Outperforms Gold For a Change

Gettin’ High on Bubbles

By Keith Weiner

Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD). We will no doubt generate some hate mail for saying this, but we don’t believe that anyone ever attained that goal. The perfect drug-induced high does not exist. Even if it seems fun while it lasts, the problem is that the consequences spill over into the real world.

Today, drunk on falling interest rates, people look for the perfect speculation. Good speculations generally begin with a story. For example dollar-collapse. And then an asset gets bid up to infinity and beyond (to quote Buzz Lightyear, who is not so close a friend as our buddy Aragorn). It happened in silver in 2010-2011. It happened more recently in bitcoin.

Most speculators don’t care about the economic causes and effects of bubbles. They just want to buy an asset as the bubble begins inflating, and sell just before it pops. But bitcoin and many gold proponents are different. They promise that their favorite asset will cure many social ills, fix many intractable problems, and increase liberty. Oh yeah and get-rich-quick.

Continue reading Gettin’ High on Bubbles