Mike Gleason: It is my privilege now to be joined by Dr. Chris Martenson of PeakProsperity.com and author of the book, Prosper: How to Prepare for the Future and Create a World Worth Inheriting.
Chris is a commentator on a range of important topics such as global economics, financial markets, governmental policy, precious metals, and the importance of preparedness, among other things. It’s great, as always, to have him with us. Chris, welcome back, and thanks for joining us again.
Chris Martenson: Mike, it’s a real pleasure to be here with you and your listeners.
Mike Gleason: Well it’s been a number of months since we’ve had you on last, far too long by the way, and there has been a ton of things going on in the financial world of late. I’ll get right to it here. For starters, what did you make of the Brexit decision last month? Is this potentially the beginning of some meaningful opposition to the ongoing drive for a world government? Or was this just a one-off event?
Chris Martenson: No, this was not a one-off event, this was a continuation of a pattern that we’ve been talking about at Peak Prosperity for a while. We thought that there were three scenarios for the future. One of them we called fragmentation. I think this is the beginning of it, and fragmentation has its roots in a growing wealth gap. It happens when you have a stagnant to shrinking economic pie that is increasingly seized by the elites who are tone deaf.
And when they do that, people get cranky, and this is the first form of crankiness we’ve seen break out. Austria is next, we are going to see the sweep across Europe, I believe. People have seen that austerity is just a punishment by the bankers upon the average people for the sins of the banker. It feels unfair because it is.
I think Brexit as a political statement is just the beginning, and of course the powers that be are going to do everything they can to paint this as a mistake and punish the wrong people again.
Mike Gleason: What about the banking system, despite some recovery in the past week or two, the European bank stocks have been getting hit hard. We’re seeing that Italian banks need to bailout, and the share price of Deutsche Bank is signaling that the firm is in real trouble. The IMF just named them the riskiest financial institution in the world.
There is a rally here in share prices, Brexit appears largely forgotten, and Wall Street certainly isn’t acting too worried. Is the concern over European banks overdone? Or might we see a firm like Deutsche Bank actually collapse. And what do you see as the ramifications here in the U.S.?
Chris Martenson: The European banks are absolutely in trouble. I think they are insolvent, that is the step that precedes bankruptcy which is a legal action. Insolvency is just when your assets and your liabilities have a big mismatch. We know that’s the case for the European banking shares. It also explains, Mike, why we are seeing this rally, we call it on Wall Street, but it’s global.
We saw two things. First, we saw a big decline, a scary decline in January, and then this miracle, nipple bottom vault back up to the highs that came out of nowhere. To me, that was a liquification event. Somebody put a lot of liquidity into the system. We know that the central banks are coordinating on this because they are scared of the Franken-markets they’ve created. They cannot even tolerate a few percent decline without freaking out. That should freak ordinary people out, because if they are scared, you should be too.
So they re-liquefied like crazy, and then we had just another post Brexit re-liquification. My evidence, stocks at all-time highs, bonds at all-time highs. Listen, you cannot have that unless there is a lot of liquidity coming from somewhere. People cannot be panicking both into negative interest yielding bonds and stocks at the same time for this to make sense through any other lens than the central banks are absolutely pouring money into these markets.
Mike Gleason: Yeah, it’s certainly been a head scratcher to watch these equities markets, the DOW and the S&P making these all-time highs in the wake of what we’ve seen here recently. That’s a good explanation and I don’t see any other potential for why that’s happened. That’s not sustainable forever, they cannot get away with that forever before without the bubble finally bursting, is that fair to say?
Chris Martenson: That is fair to say. And just for your listeners, I just got back from a major wealth conference. These are people, families, institutions that are managing enormous money… they’re all scratching their heads. I watched these poor fund managers and CIOs, that’s investment officers, attempt to explain all of this. They contorted themselves into pretzels. I got up there and just said, “Look, somebody is dumping money in this market.” A lot of heads started nodding. First wealth conference I’ve been to, Mike, in many years where I was no longer the contrarian in the crowd. That makes me nervous.
Mike Gleason: Switching gears here a little bit, what do you make of all of the recent social unrest here in the U.S., Chris? We’ve seen police shootings followed by protests and revenge killings of police officers in a number of cities around the country. Then we’ve got probably the two most polarizing figures ever running for president. The months between now and the November election are sure to be interesting. But there is at least the potential that they could also be very dangerous. What does the recent unrest signal here Chris?
Chris Martenson: I think this is connected to the same factors that I talked about with Brexit. Look, Mike, what’s happening here is that people are getting squeezed. If you believe the inflation numbers go get your head checked or study up on it, because we know we are getting inflation. It’s at least twice as high, maybe three times as high as officially announced. And that’s really hurting people, savers just getting crushed.
We are watching banks get bailed out, we are watching Hillary skate on what are obvious transgressions of the law as it’s written and it’s not a complicated law to understand about mishandling of classified information. She got a pass on that amongst other things. So listen, we’re primates. Fairness and justice are hard wired into us, that’s a thing. People are feeling and seeing the unfairness of this all.
What it comes down to, really, for me, Mike at this stage, is they ran these really interesting experiments back in the 40’s and 50’s. Where they would take a rat and put it in the cage, make it so there is nothing in the cage so it cannot escape, and they shock the floor. The rat hates it but ultimately they figure out how to tolerate it. They curl up in a ball, they’re miserable.
If you put two rats in the cage, what happens is that all of a sudden they are both getting shocked, they are both hated, it’s painful, but now they have somebody to look at and go, “Oh, it’s you.” And they fight. And if they leave them in there long enough, they fight to the death.
What that experiment shows us is that when people – and rats and people are the same this way – if you don’t know where the shocks are coming from, you go to the blame game. That’s what we are starting to see. I believe that police and the people they are policing are actually on the same side of the story, but they don’t know it, so they are looking at each other, they are blaming the wrong parties in the state. The pie is no longer expanding. In fact, the piece of the pie that used to belong to even the upper middle class on down is being rapidly vacuumed out.
All that oxygen is being sucked out of the room by a financial system, not just bankers but a complete financial system that just doesn’t know how to say enough. And it’s vacuuming more and more for itself at ever increasing rates. That’s leaving less and less for everybody else. Guess what? Along comes polarizing figures. One who is representing the status quo, and allows people to default into the denial of saying, “Well, if we just get back to pretending that everything is okay and we shoot for the middle zone and don’t see anything too troubling, things will be okay.” Spoiler alert, they won’t.
And then another guy that’s saying, “Hey, I got an answer for this, and this is troubling and we need to start getting angry about this.” So he’s tapped into the anger side, and I think both of them are missing the mark on this, which is that we have to have a more fundamental substantive discussion about what’s really happening in this country, which is that we have some systems that are run amok and they are going to take us into a really dark territory if we don’t stop them now.
Mike Gleason: For the people who live in these urban areas where there is maybe a little bit more danger in being in an environment where there is a lot of animosity towards police officers. I know you’ve organized your affairs, so you are no longer living in a major metropolitan area, do you have advice for people to maybe consider that type of move given the fact that there could be some real instability in some of these major city centers with all of this violence?
Chris Martenson: Short answer, move. Longer answer, be prepared to move. I do work with people who live in urban areas that they are there for a variety of reasons, they’re not ready to make the move, but they are increasingly having plans for how they would get out of there. Listen, the difficulty of this Mike is this idea of shifting baselines, where if you are a person and you took a person today from my town and you dropped them into Oakland, California they would leave so quickly because it would be like dropping a frog in boiling water. They would jump right out of that.
But for people living there, it’s a little bit violent, but it’s four blocks away, and somebody got shot six blocks away. A month later, it’s two blocks away, but that’s okay, the police responded quickly. Over time, people lose their sense of perspective over what’s happening. So my invitation to people is to really look around and actually see what’s happening, ask yourself if the trend is getting better or worse.
And regardless of whether it’s getting better or worse, is that really where you want to live? A lot of people say the answer is no, but they don’t know what to do next. My invitation is, well, start figuring out what that plan is because there really is no time like the present to begin figuring these things out. It takes time, it just takes time.
Mike Gleason: Changing gears again here. I want to get your thoughts on the Fed. The FMOC meets again next week, they have been punching on interest rate increases. We’ve had mixed economic data, growth below expectations and central bankers everywhere are ramping up stimulus. Janet Yellen and company are finding it exceedingly difficult to tighten. Throw into that that this is an election year. What do you see the FMOC doing between now and the election? Could we see some kind of surprise to the dovish side to help boost the markets and keep the status quo going this November? What are your thoughts there?
Chris Martenson: Yeah, that’s the 85% probability. I’m on record as saying that I thought it was more likely that they were going to lower rates instead of raise rates on their next move, whenever that comes. I said that back in December after that first tiny little wiggle hike. And the reason I said that is because look, you can’t have the United States raising rates while the rest of the world’s rates are going down. That just doesn’t make sense from a variety of logical standpoints. But let’s be clear, the Fed follow, it doesn’t lead.
This is not an aggressive, assertive organization ever since Paul Volcker left. These are not people who have the moxie to run against what the markets want. They’re totally captive to the markets, the markets are clearly saying rates are going down. I don’t think this fed has it in them to do anything other than follow the markets. So since the markets are going down, the best the Fed can do is hold pat. But at some point, honestly, I would put a little bit more money on the wager that said the next surprise would be to the downside not the upside. Especially in an election year.
Mike Gleason: Speaking of following and not leading, I don’t know if you have been following Alan Greenspan and his comments, but now all of a sudden late in life after leaving his Fed chairman post, he is now advocating for a gold standard. It’s quite amazing to hear that come out of that man’s mouth after all these years. Maybe it just goes to the fact that when you are in that position, you’re just following and you’re not making any real leading decisions. What have you made of what Alan Greenspan has had to say in these recent days?
Chris Martenson: Yet another extremely disappointing CYA retirement circuit lap. We’ve seen this a lot, Senators who finally on their retirement day say, “Oh, by the way, Washington is really broken, here is all the ways they are.” Eisenhower on the way out, “Hey, watch out for this military industrial complex.” Yeah thank you, would love to have had those insights while you still could have made some decisions that would have shown that you had the personal fortitude and internal authenticity to have stood up and done what was right.
So for Alan to come out afterwards, I agree with a lot of what he is saying, it’s too little, it’s too late. It doesn’t do anything to resurrect or buff his reputation in my eyes. I think he was the architect that will ultimately end so badly, that his name will be mud if you follow the historical reference, for a long time coming.
Mike Gleason: What is your best guess for what to expect in the markets between now and the election… particularly for the metals? We’ve had an excellent first half of the year in gold and silver, although they have struggled a bit here in the last week or two. So do you see this as maybe a short term pause before the next leg higher? Basically can the metals match the performance in the second half of the year that they had in the first half?
Chris Martenson: Well I still think metals of course, particularly gold given the monetary shenanigans, that’s something that has to be in everybody’s portfolio. It’s your insurance policy, get it there. I really thought that Grant Williams about a year ago had just to me the quintessential, best gold exposition where his summary was, “nobody cares”.
And his thought was that the west is perfectly happy to sell gold, we’re perfectly happy to sell our paper gold on the COMEX. We’re perfectly happy to see about 1,000 to 1,500 tons a year leave western vaults just for Shanghai alone. So we were okay with that because nobody cared. The Treasury didn’t care. He was talking with fed officials, like, “Yeah, if we lose gold, it’s fine.”
The west is starting to care. This hearkens back again to this wealth conference I was at, big money people, of course I’m always testing the gold waters with them. And more and more people are saying, “Yeah, I’m thinking about gold now.” So we’re starting to see this really show up on the western radars. I think that if I was going to mend Grant’s title, it moves from “nobody cares”, to “some are starting to care.” And that’s a very constructive environment for gold, just from that standpoint.
And the other part, of course, has to be how can gold not be constructive in a negative interest rate environment? People used to always say, “Chris, gold doesn’t yield anything.” And now I get to say, “Well at least it doesn’t yield negative something.” So this is a really positive environment for gold. It’s clear somebody has an interest in not allowing gold to go up. We saw that on Friday late night post Brexit. Somebody put 50,000 new open interest contracts to contain gold at the $1,360 mark. And we don’t know who that was, but we can all guess.
Mike Gleason: At some point you have to think that more and more people will recognize it as a safe haven. You talk about the wealth conference you just went to, about how maybe more and more people are starting to wake up to the idea of owning precious metals as a way to hedge against what may come. Obviously, and I’m talking about physical bullion now, there is not a tremendous amount of it. There’s been so much of it going to the east, and the west does not have a whole lot of precious metal left at this point.
If we did see an increase from say 1% of the general public and going to 3% or 5% of the general public, I have to think there is going to be a difficulty getting your hands on the metal if you wait too long. Is that fair to say?
Chris Martenson: That is fair to say, particularly at the retail level. I think the people who have the big, big money, they have access to vaults that you and I don’t normally have access to. There’s a very different structure for the big 400 ounce and 1,000 ounce bars for gold and silver respectively. But for people who want to buy coins, we saw this in ’08, we saw it in 2011 again when there were big price moves, particularly to the down side in silver where people started to want to get into that market.
And those were almost exclusively people who had already bought silver. This wasn’t new people coming into the market, just people looking for better deals. That alone swamped the retail supply chain, the refineries were maxed out, the mints were maxed out, supplies were tight, and the wait times ballooned out to six and eight weeks in some cases.
So that’s our learning which is that when the metals really do begin to move, your chance as a retail investor to get into that are going to be very, very limited if you wait or the percentages move from whatever it happens to be, 1% or 2%, to 3% or 5%. I think that that will swamp the retail availability for quite a while.
And then, you know what, people are going to be stuck with, and they’re going to say, “Oh there’s a six week wait.” When six weeks comes by, they discover that the price has moved a lot at that point in time. So either you put a lot of money on the line in the hopes of being in line somewhere, or you wait and discover that both the prices and availability have scurried away from you in the meantime. It’ll be hard I think psychologically if not practically for people to acquire what they want. So my motto always is I’d rather be a year early than a day late.
Mike Gleason: Very good advice. In terms of gold versus silver, obviously gold is really just monetary demand that drives that market, but silver is both pushed and pulled from both the industrial demand and the monetary demand. Generally speaking, when we see the metals rising, we’ll see silver outperform, but if we have an economic slowdown, perhaps that could hold silver back a little bit as it gets maybe lumped in with copper and oil and other industrial types of commodities. What are your thoughts there on the potential for silver versus gold going forward?
Chris Martenson: They’re very different words to me. A lot of people say, “Gold and silver” like it’s one word. They are two words to me. Gold is my monetary metal, love it, I have it because I think a monetary crisis is happening. If you have a short term horizon, I like gold better because I think we are having a monetary crisis first before we have a big industrial resurgence.
Silver, primarily Mike I love it as the industrial metal, as something who’s known ore grades are vanishing and deposits are depleting, and we know that it’s being used increasingly for more and more industrial applications. Silver is my Rip Van Winkle metal. I love it. If somebody said, “I need to pick one of these two, 20 years I want to be happy when I wake up.” Silver’s it. It’s a volatile metal that goes up and down, I think it could have a run down if we hit a capital “R” recession or depression across the world… if China blows up or something like that. But barring that, I love silver because of its actual supply and demand characteristics going forward. I think it’s heavily underpriced here.
Mike Gleason: Well as we begin to close here, Chris, what would you say are maybe the top three or four actions that people could be taking right now to become more self-reliant and generally more insulated from the chaos that’s on the horizon?
Chris Martenson: Well if I could just plug my own book here for a minute that I wrote with Adam Taggart called Prosper. What we do there is we specifically talk about steps people can take so that they will be more resilient given certain futures that might arrive. But every one of these steps we advise will make your life better today. So there’s really no way to lose in this story.
What we do is we have eight forms of capital that we like people to focus on. Financial capital, which commonly everybody focuses on only. But what we’ve found, and there’s a great quote, it says, “None are so poor as those who only have money.” If you only have financial capital you are not resilient. So there’s seven other forms of capital we talk about. I’ll just go through a couple.
One is social capital. Not just how many people you know, but how well you know them. Have you had experiences with them? Have you seen them operate under a variety of scenarios so you know really who they are at core? Building that social capital is going to be one of the most important things you can do to build you resilience. And guess what? You’ll know more people and connections are proven to make us happier, more fulfilled people.
Emotional capital, also in the mix. This is very important. It doesn’t do any good to be rich in all sorts of other areas if when a crisis comes you basically fold up your mental shop and shut down. Not good. We already see people doing this with increased rates of suicide, drinking, video game playing, other forms of numbing out because the reality is just not appealing. We think there’s lots of ways to rotate your thinking so that you can be positioned to not just be on the wave of change that’s coming, but the surf it.
There’s great opportunities coming here, but not for people who are going to be feeling the loss of the changes instead of the opportunities in the change. So those are just a couple of examples. Living capital is an example, knowledge capital, time (capital). Things like that. And so this book is our collection of stories and personal experiences with each of these forms of capital, from having worked with thousands of people in our seminars, at our website, Peak Prosperity. For people who are consciously and prudently as adults saying, “Hmm, different future coming, how can I be prepared? More importantly, how can I be resilient so I can increase my quality of life today and be more prepared for tomorrow?”
Mike Gleason: Yeah, it’s truly fantastic stuff. Obviously it was years in the making. You and Adam did a fantastic job, so many practical things in there. Now as we begin to close here Chris, why don’t you talk a little bit about the Peak Prosperity site and then also let people know how they can get their hands on that book if they haven’t already done that.
Chris Martenson: Thanks Mike. Yeah, the site is PeakProsperity.com. And we have a lot of free content there, we have a subscription newsletter for people who like to go a little deeper and maybe have more information. Our site is dedicated to two big things. One is educating, we want people to understand the context of what’s happening so they are not one of those rats getting shocked without an understanding of what the shocks are.
Once you know what the shocks are, then you have information that’s really important, that can help you move when other people are paralyzed or confused. So that’s half the site, the other half is about how we can become more prepared, more resilient… (there’s a) wonderful community of people there. They are very thoughtful. If I could identify us with one word, I would say we are all curious.
This is a life to be lived, it isn’t a dress rehearsal, we are not here hunkering down saying, “Woe is us, bad times coming.” We’re saying, “Big changes coming, now what do we do about it?” So it’s very positive while realistic, if I can put those two words together. And Prosper, the book, available on Amazon. You can come to the website and get that. It’s available pretty much everywhere.
Mike Gleason: Well again, excellent stuff. Thanks so much Chris, and I hope you have a great weekend, enjoy the rest of your summer, and we’ll catch up again soon.
Chris Martenson: Thanks Mike. You too, and to all your listeners, have a great weekend and summer.
Mike Gleason: Well that will do it for this week, thanks again to Dr. Chris Martenson of PeakProsperity.com and author of the book, Prosper: How to Prepare for the Future and Create a World Worth Inheriting. For more information, just go to PeakProsperity.com, check out the extensive site there and the great online community. Or check out the book, which is also available on Amazon. You definitely will not be disappointed.
Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.
Below are today’s likely price locations of buy and sell stop orders for the active Comex gold and silver futures markets. The asterisks (**) denote the most critical stop order placement level of the day (or likely where the heaviest concentration of stop orders are placed on this day).
See below a detailed explanation of stop orders and why knowing, beforehand, where they are likely located can be beneficial to a trader.
Stop Orders Defined
Stop orders in trading markets can be used for three purposes: One: To minimize a loss on a long or short position (protective stop). Two: To protect a profit on an existing long or short position (protective stop). Three: To initiate a new long or short position. A buy stop order is placed above the market and a sell stop order is placed below the market. Once the stop price is touched, the order is treated like a “market order” and will be filled at the best possible price.
Most stop orders are located and placed based upon key technical support or resistance levels on the daily chart, which if breached, would significantly change the near-term technical posture of that market.
|August Gold||Buy Stops||Sell Stops|
|September Silver||Buy Stops||Sell Stops|
Having a good idea, beforehand, where the buy and sell stops are located can give an active trader a better idea regarding at what price level buying or selling pressure will become intensified in that market.
The major advantage of using protective stops is that, before a trade is initiated, you have a pretty good idea of where you will be getting out of the trade if it’s a loser. If the trade becomes a winner and profits begin to accrue, you may want to employ “trailing stops,” whereby protective stops are adjusted to help lock in a profit should the market turn against your position.
Gold Up, But Down From Daily High, Post-FOMC
Thursday July 28, 2016 13:12
(Kitco News) – Gold prices ended the U.S. day session modestly higher but down from the session high after hitting a two-week high overnight. Silver prices have also seen solid gains the past 24 hours and are now trading not far below the multi-year high scored in early July. A perceived dovish FOMC statement Wednesday afternoon and a lower U.S. dollar index worked to lift the precious metals markets. August Comex gold was last up $5.50 an ounce at $1,332.20. September Comex silver was last up $0.225 at $20.22 an ounce.
Traders and investors worldwide were still digesting Wednesday afternoon’s statement from the U.S. Federal Reserve’s Open Market Committee (FOMC). There was no change in U.S. monetary policy announced. However, the statement was deemed a bit dovish and seemed to reduce the likelihood of an interest rate increase occurring in September.
With the FOMC meeting out of the way, attention turns to the Bank of Japan meeting that began Thursday and ends Friday. It is expected the BOJ will announce some sort of a new monetary policy stimulus package. This risk now appears to be a package that will disappoint Asian markets—due to high expectations for such an aggressive monetary stimulus package already in the marketplace.
The other key “outside market” on Thursday saw Nymex crude oil prices lower, hitting a three-month low and hovering just above $41.00 a barrel. The down-trending crude oil market has been a bearish weight on the gold market recently. If crude continues to trend lower, it will be tough for gold and silver bulls to make a lot of upside headway.
(Note: Follow me on Twitter–@jimwyckoff–for breaking market news.)
Live 24 hours gold chart [Kitco Inc.]
Technically, August gold futures prices closed nearer the session low after hitting a two-week high early on today. The gold bulls have the overall near-term technical advantage and have regained some upside momentum. A three-week-old downtrend has been negated. Gold bulls’ next upside near-term price breakout objective is to produce a close above solid technical resistance at $1,350.00. Bears’ next near-term downside price breakout objective is pushing prices below solid technical support at $1,300.00. First resistance is seen at today’s high of $1,344.30 and then at $1,350.00. First support is seen at $1,330.00 and then at $1,325.00. Wyckoff’s Market Rating: 6.5
Live 24 hours silver chart [ Kitco Inc. ]
September silver futures prices hit a two-week high today. The silver market bulls have the firm overall near-term technical advantage and have regained upside momentum. Silver bulls’ next upside price breakout objective is closing prices above solid technical resistance at the July high of $21.225 an ounce. The next downside price breakout objective for the bears is closing prices below solid support at $19.00. First resistance is seen at today’s high of $20.585 and then at $20.76 Next support is seen at $20.00 and then at $19.75. Wyckoff’s Market Rating: 7.0.
September N.Y. copper closed up 240 points at 220.95 cents today. Prices closed near mid-range and saw short covering. The copper bulls and bears are on a level overall near-term technical playing field. Copper bulls’ next upside breakout objective is pushing and closing prices above solid technical resistance at the July high of 227.75 cents. The next downside price breakout objective for the bears is closing prices below solid technical support at the July low of 211.65 cents. First resistance is seen at today’s high of 222.50 cents and then at 223.45 cents. First support is seen at this week’s low of 218.15 cents and then at 216.00 cents. Wyckoff’s Market Rating: 5.0.
The macro picture is aligned perfectly behind gold. Things have calmed because it is summer, but use this time to prepare for what will be a frenzied fall full of the kind of opportunities that only exist in the early days of a new gold bull market.
Things are not terrible in the global economy. Growth is slow but exists. Unemployment is too high in some places but is generally improving. Inflation is not an issue in most countries.
The problem, however, is that we are just managing to maintain mediocre despite years of ultra-low, zero, or even negative interest rates. Those rates were supposed to fuel a bigger fire. Instead, we have stubbornly low productivity growth and incredibly high debt levels.
Low interest rates are not only problematic because they limit central banks’ abilities to accommodate future negative pressures; they are also highly problematic in and of themselves. Low rates encourage debt. Debt is future consumption brought forward. Once that happens, consumption that might have happened down the road will not happen.
If the consumption is productive – a new tool or factory – then the theories about cheap debt helping to stimulate the economy make some sense. If the debt is just consumption – paying fixed costs – then it doesn’t generate any growth at all and it limits future growth.
That clearly is no good, but cheap debt has become such a mainstay that companies are using it for plain old costs, or for financial engineering (share buybacks), or to increase market share without actually improving their business case. For example, cheap debt encourages companies to buy up their competitors rather than researching and designing a better product. The end result is zero or negative net gain for the economy.
And it’s everywhere. As a result, there just are no really safe places – no economies with great strength, no currencies strong based on fundamentals (as opposed to relative security), no governments that have avoided accruing massive debts, no political spheres not facing serious challenges. This insecurity, broad and deep, kicks out one focal point of worry after another.
Remember all the angst about Greece? Then all the endless talk about a hard landing in China? And now the anxiety over Europe? Each new cause of concern creates a market mess – Greece’s stock market has still not recovered from the hammering it got, China rebounded but only after the government intervened in numerous ways to limit the damage, and now European markets and currencies are getting ground down.
The overall result: uncertain and volatile equity markets, ultra-low interest rates, wide credit spreads, and a strong dollar.
All of those are good for gold. Well, a strong dollar doesn’t specifically help gold, but amidst all those other forces it doesn’t matter. Because what other options do investors have?
Government bonds that literally yield nothing and whose value will deteriorate with inflation? Even in global economic leader America, yields are at an all-time low. For real: in the country’s 240-year history, 30-year Treasuries have never yielded this little.
The yield on 10-year US Treasuries is also at an all-time low of 1.37%. And yields on British, German, and Japanese 10-year bonds are sitting at 0.7%, -0.2%, and -1.1%, all record lows. Looking ahead, the Japanese government bond yield curve is now negative out 20 years!
The other option is stocks, but they are hot-damn expensive in America and riskily volatile elsewhere.
So gold. Precious metals are the only option for security and value in our world of ultra-low or negative real interest rates, currency market volatility, and impotent central banks.
More and more investors are reaching this conclusion. That’s why gold is already up almost 30% this year – but it is also why I expect to keep inching up all summer and into the fall.
The gold chart supports my contention. It is developing a clear pattern of higher highs and higher lows. And the price is getting very close to conquering its downtrend line from the 2011 high.
It is roughed in on this chart, but the crosspoint is US$1,377 per oz. A bit of a step up from here and a momentous achievement it would be, but I’m betting it happens before the end of summer.
Also significant: if anything were to have pushed gold down, it would have been a strong US jobs report. And that is precisely what we got a few weeks ago: payrolls in America increased by 287,000 jobs in June, the largest gain since October. Gold did drop on the news…for 5 minutes. It fell from US$1,360 to US$1,335 per oz. in a matter of minutes – and then rebounded completely before settling into the US$1,350-per-oz. range for the day.
The takeaway: for gold, flat is the new down. And that is the mark of a true bull market.
The price has moved steeply enough that another consolidation phase is likely, including pullbacks of a few percent. But remember: while reactions to individual news events – a Fed announcement, a stimulus move from the UK, or whatever – will move the gold price on a daily basis, the lack of other options for yield or returns is the real driving force behind gold’s ascent – and that is here to stay for some time.
Because of all this, I am now of the mentality that gold will end the year between US$1,400 and US$1,500 per oz.
So, sticking to the hypothesis that gold will inch up through the summer (in fits and starts, obviously), it’s time to make a portfolio plan. Here it is, in short:
If a stock does well, because of news flow or promotion efforts or straight leverage to a run in gold, take money off the table. Sell Some of your holdings into strength to reduce your risk while retaining exposure.
If you want to own more of certain stocks in your portfolio or want to enter stocks that you feel you missed buying before they went on a run, watch for weakness. Down days provide opportunity, as do stock-specific events. If you believe in the story and in gold overall, you will appreciate in several months that you took advantage of buying opportunities this summer.
Free trading dates are important. Many companies raised money, starting in March and continuing through today. Stock issued in financings is subject to a four-month hold. A stock usually trades at its highest about a month before a free trade date and falls to its lowest in the two weeks following a free trade date, because financing participants sell to lock in gains (and to ride the warrant if warrants were issued).
Relative appreciation potential is key. Assess your portfolio. If you still believe in a story, consider its potential for gains relative to new opportunities. For stocks that are already up considerably, the odds of another 300% gain are less than they are for a new story just entering the fray or a laggard stock that has now dealt with its baggage. Keeping your money in a well-performing stock that might double over the next two years is ok, but selling that stock to lock in your gain to date and re-deploying into a new story that hasn’t moved much yet – that’s playing the Relative Appreciation Potential game.
We are still in the early days of this gold bull market. Things have slowed a bit because it’s summer – people literally are on vacation – but come September news flow will be furious and new opportunities will arise all over the place.
It is essential that you assess your portfolio – and make sure you have cash ready to deploy. If a stock is up big, it’s potential for further multiples is less than it is for a new story that hasn’t run yet. Don’t fall in love with stocks; fall in love with making money.
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Today Thomson Reuters publishes the GFMS Gold Survey : Q2 2016 Review and Outlook. First published in 1967, the GFMS Gold Survey analyses the independent supply and demand data for the gold industry. We have published the brief below.
The first half of 2016 had seen a dramatic change in the rhythm and flows of the gold industry, even long before Brexit. Encapsulating this, we estimate that for the second quarter in a row physical demand was down by more than a fifth year-on-year, to a seven-year low, with Asian offtake being exceptionally weak.
Demand for gold ETFs, in stark contrast, has set a new record half yearly total in the first six months of 2016 at 568 tonnes, with interest centred on North America and London .
Overall the market is in a small surplus for the first half of the year, as the dramatic drop in physical demand is largely offset by the stellar western demand for ETFs. As a result, the upturn in scrap flows ensured that total supply rose, despite a contraction in mine production, and ensured a surplus at the net balance level.
We have revised our 2016 average gold price forecast to $1,279 /oz from $1,184 /oz forecast in April. The revision is a mark to market of the impressive gains that gold has posted so far this year, and reflecting the changed sentiment stemming from increased uncertainty from economic and political outlooks. These include Brexit, reduced expectations of a rate rise from the Fed, a wobbly Italian banking sector and the U.S. Presidential race.
China : ” China’s total gold demand remained in free fall in the second quarter of 2016, declining across the board. Jewellery offtake, which has constituted over 60 per cent of the country’s total physical demand in the past, fell 31 per cent year-on-year. This represents the industry’s worst second quarter performance since 2009. Economic pressures remain central to the weakness as consumers have tightened purse strings and limited discretionary spending. The absence of positive price expectation has also been a factor with investors looking elsewhere for capital growth. After three consecutive quarters of increases, gold demand from the retail investment segment (bars and coins) stalled in the second quarter of 2016, recording a 12 per cent decline.
India : “Jewellery consumption in India declined by 56 per cent year-on-year to 69 tonnes in Q2 2016, making it the second consecutive quarter of hefty year-on-year declines. The second quarter, which is normally a period of seasonally strong demand, started with a weak sentiment, as a result of continued nationwide strike, which stocked negative publicity for the industry, leaving consumers divided on the purchasing decisions. More importantly, consumers, who are otherwise well informed of the retail price, were left guessing, as the price varied significantly from what was available in the media. Added to that the demand from rural areas continued to be muted, a result of a poor monsoon in 2015. The day of Akshaya Tritiya, which has traditionally made a major positive contribution to jewellery retailers’ sales in the second quarter, was uneventful this year, as consumer have turned to lower weight pieces and in some cases one gramme coins. Higher gold prices in local terms also weighed on jewellery demand, the Q2 average was up 10 per cent year-on-year, and from the start of the year the price had surged by 25 per cent, to its highest since October 2013 .
“Following net-disinvestment in Q1 2016, net investment returned in the second quarter, although it was still down 40 per cent from last year, as some investors continued to take advantage of higher prices by selling their stocks.
Supply: “World gold mine supply increased by less than two tonnes year-on-year, totalling 744 tonnes in the first quarter of 2016. We expect that mine supply will contract in the second quarter, with the total estimated at 770 tonnes, a two per cent year-on-year decrease, with losses expected in China , Mexico and Mongolia . More broadly, there are relatively few new projects and expansions expected to begin producing this year, and those in the near-term pipeline are generally fairly modest in scale, hence our view that global mine supply is set to begin a multi-year downtrend in 2016. Supply from scrap was up nine per cent year-on-year for the second quarter, aided both by the stronger dollar price and in many cases depreciating local currencies.
Market balance: “Overall, the market is in a small surplus for the first half of the year, as the dramatic drop in physical demand is largely offset by the stellar western demand for ETFs. The uptick in scrap supply ensured that total supply rose, despite a contraction in mine production, and ensured a surplus at the net balance.
Investor Sentiment: “Investor sentiment towards gold had rebounded in the first half of the year, triggered by heightened concerns about the slowdown in emerging markets and the impact on the global economy, as well as reduced expectations of the interest rate increase from the Fed. The Brexit shock following the UK referendum on 23rd June had sent shock waves across global markets and sparked demand for safe-haven gold. This translated into a rebound in interest from speculative investors and impressive inflows into gold ETFs.
“CFTC data on managed money positions in gold futures and options shows that net long speculative positions surged to an all-time high at the beginning of July, while short positions have remained substantially below their previous highs. Demand for gold ETFs, meanwhile, has set a new record half yearly total in the first six months of 2016, at 568 tonnes, with interest centred on North America and London .
Price Outlook: “We expect the gold price to average $1,279 /oz in 2016, an upward revision from $1,184 /oz forecast in April. The is a reflection of the impressive gains that gold has posted so far this year and a shift in investor sentiment towards the yellow metal in light of increased uncertainty from economic and political outlooks, including Brexit, reduced expectations of a rate rise from the Fed, a wobbly Italian banking sector and the U.S. Presidential race.”
It is ironic that Germany, having learned from the horrors of racism, is now leading the EU down the extreme opposite path that enabled racism and Nazism to begin with.- Soren K.
Update: Priest Killed by likely ISIS attackers
Two men claiming allegiance to Islamic State killed an 84 yr old priest and gravely injured another person Tuesday during morning Mass at a church in a northern French town, authorities said, the latest in a string of attacks that have shocked Western Europe over the last two weeks.
It seems 2 knife wielding attackers entered a French church during mass and killed a priest. The attackers also took 5 hostages wounding one to critical condition. The men were shot and killed by police as they exited the church. Europe has undergone a series of consecutive attacks in the last 2 weeks. The weapons used have varied. In some, guns were the preferred tool. In others, knives; and in yet others, explosives. It all started with a truck barreling over people in Nice, France on Bastille day.
Terror Kills Economies
The style of these attacks are extremely similar to the knife attacks in Israel last year. Seemingly random in timing, disruptive of commerce and tourism, and during celebratory times when convenient. The long term effect is detrimental to local economies. Tourism will fade, children will be kept home from school, and productivity in business will slip as workers are distracted and corporations spend more money on security measures. While the immediate effects of these attacks are tragic from a human perspective, the economic effects will be felt from the behavioral changes people make to accommodate their fear of attack. Imagine Europe as a whole slipping into a fight or flight mentality. In addition to the mass influx of refugees who need financial assistance, a portion of them are hell-bent on the destruction of the hosting country. This is dangerous and could precipitate a quicker dissolution of the EU. This was the root reason for the Brexit vote: a fear of illegal or forced immigration quotas and terrorist attacks. Nationality and religion have nothing to do with it economically. This is bad news for the EU in business terms. It is ironic that Germany, having learned its lesson from the horrors of racism is now leading the EU down the overly tolerant path that enables the mentality that created Nazism- A full recount of the last 2 weeks terror attacks in Europe later
Effects of Terrorism Short and long term
The immediate effect is a chilling loss of human life. The chronic effects of terrorism will be paralysis of economies. If survival replaces prosperity as the driving force behind behavior, then productivity shrinks. Acute terrorist attacks are recoverable, like 9/11. But chronic terrorist action is a cancer on mood, tourism, and domestic business. We feel it may also spur a “white-flight” out of the western EU to nations not encumbered by forced immigration quotas. LIKE THE UK IF THEY SECEDE
GRI agrees: “There are other less obvious economic costs that are difficult to measure. Terrorist attacks can result in greater spending on unproductive activities such as heightened counterterrorism measures, expanding military and police forces, and stricter border controls. The money diverted to extra surveillance and policing rather than investment and trade balancing may eventually pose a drag on growth.
Overtime this friction in the economic system can have visible effects. In Israel, a nation that is constantly threatened by the fear of violence, experts say that the country’s per-capita GDP would have been 8.6% higher between 1994 and 2003 had there been no violence. Likewise, the Paris attacks could inspire more complex economic challenges for the European Union, particularly if border controls in the Schengen area become more strict. Tougher laws and regulations cross-borders could affect the cost of trade and operations of manufacturing industries.
Overall, while the physical and emotional impact of terrorism is evident, the longer-term economic costs of terrorist attacks on national economies are more obscure. A growing complex security environment, however, is likely to have negative effects on national economies moving forward, hindering substantial economic growth as unproductive costs are endured.
1960’s USA as template
What do you think will happen if the UK secedes from the EU? Illegal or forced immigration will stop. That will be an enticement for other EU nationals to move to the UK. To what extent we do not know. But in the long term, irrational fear was enough to spur white migration to the suburbs in the USA, and it destroyed cities in its wake. Rational fear for one’s life would be a far more potent reason to relocate than racial bias would it not? As urban decay spread in 1960’s USA, so also may the EU economy decay from this terror borne cancer unless it is stopped. As products of the inner city, we witnessed first hand the decay of neglected cities. As witness to 9/11, two of us moved out of NYC within 6 months. And that was a 1 time event …so far.
Philly circa1975 or Paris 2022?