Why are Precious Metals Falling in Price
What can we expect in the future and timing the moves.
by Mitch – Silver Sufferer
I have received quite a few calls questioning me on the enormous detrimental performance of Silver and Gold these last few months but especially these last 2 years.
Considering the fundamental macro case for these assets is overwhelmingly bullish within our present economic backdrop but also the fact that mining groups are losing money (mine production of metals surpasses actual sale prices) and hence closing down operations in the face of rising overall demand which is actually exacerbating the already Supply / Demand deficits.
How can the prices possibly drop when Central Banks are printing money World wide (debasing Currency value) which is now far over and above what we were seeing in 2011, when metals actually peaked ?
The very simple answer to that question (with heavy reference to Cycle analysis) is everything has its time, when the time is right metals will perform.
But rather denigrate your very valid concerns and questions with such a short response, let me fill in some gaps as far as I see them and also covering the enormous news that has come out these last few weeks and days. But first we have to walk through the present situation as all markets are inexorably linked, I will then end with a conclusion (but please try to follow through the whole piece).
Firstly Gold has had a spectacular performance these last 12 years, which for any asset class to post positive returns year in year out for 12 years is extremely rare.
As you can see in the chart below to score an average of 16.8% per year compound over 12 years is nothing short of astonishing.
The Gold market needed a correction to rid the market of all its froth and shake free all the weak longs. All great bull markets are like wild horses, they tend to buck off as many riders as it possibly can before it truly runs into the hills.
You have to consider why the World Central bankers truly opened the spigots of money printing these last few years (since 2010/11), considering the worst was over from the melt-down of 2008/9 ?
The World’s banking system itself was completely insolvent, but this fact remained out of the limelight by the Financial Accounting Standards Board which abandoned the FAS 157 “mark-to-market” accounting standard on March 16, 2009, in response to Congressional pressure from the House Committee on Financial Services, the FASB removed at a stroke the threat of widespread insolvency by making insolvency opaque. In other words, anyone with anything to hide could now hide it. But this did not solve the problem, just hid it behind the curtain.
The World’s housing markets were still under a great deal of pressure, but simply there was no real signs of any economic growth coming out of the West at all.
So the ‘Powers That Be’ decided to fully engage this problem by firstly buying non-performing Debt holdings from the banks at full face value (Central Bank purchase debt from the banks in exchange for clean newly printed cash). This obviously gives the banks a huge cash reserve to go out and lend thus spurring on the economy (they did not – but that’s another story).
Secondly manipulate the interest rates lower across the whole curve (all the way out to 30 years) with active buying of Government debt in all maturities.
Thirdly to start buying up MBS’s (Mortgage Backed Securities) to drive down mortgage rates and again give cash to mortgage lenders who originally held these securities.
Fourthly to particularly target the stock markets and drive them higher, a great deal higher. Further invigorate the feel good factor that the economy was back on its feet and about to power ahead.
Finally, to fully support the fiscal spending of Governments by purchasing the yearly expansion of Sovereign debt (deficits are the new sexy word). You could not have a surplus of Bond issuance (debt) pushing the Bond markets lower and thereby raising interest rates. Hence all surplus Treasury issued debt would be immediately taken off the market by the Central Banks.
So as an investor why is Gold or Silver presently required ? Who cares Silver is going extinct or Supply / Demand picture was now in permanent deficit. Who cares China (alone) is purchasing / importing 100% of total global production of Gold. Who cares that after (over and above) mining production there is a buying frenzy creating a 3,000 ton deficit which is met by above ground supplies of the West. The story goes on and on…
The stock markets were rallying and that’s where you make your money now, housing stock in London, Hong Kong, Singapore, New York, Vegas, Sydney etc.. were / are all bounding ahead.
Short term cash rates are zero and hence free, the party is back on, yeah baby !!! (Not including Europe of course that continues to slip into an ever worsening Depression).
Now have a careful look at this Economic Confidence Model by Armstrong…
As you can see according to his model, Economic Confidence in the system was about to reach its most pessimistic outlook (in this particular part of the cycle) in late June 2011, well funnily enough that culminated in the historic high of Gold in early September 2011 (which his cycles actually called for).
Gold is not an inflation Hedge (if that was the case why did Gold stagnate and actually fall in price between 1980 to 1999), Gold has always been the money that supports the Currency system and a go-to asset class during times of turbulence and fear that the monetary system itself is in danger of collapse - a crisis asset class.
This model is calling for Economic Confidence to peak into late 2015 and collapse into 2017 then 2020. Gold highs into 2017, higher high into 2020 ?
How does this Confidence Model line up with the present situation as of now – today?
Well low and behold, Corporate Earnings as measured against GDP is at all time record highs since records began in the 1940’s (ominous ??) and are very much reported to be turning down now.
Then you have our present Economic Expansion since the crisis (officially ended in June of 2009), which is coming into its 54th month.
The current expansion is 54 months old (as of December 2013), which still puts it below the post-war average of all expansions. The average expansion since 1857 lasted 42 months; in the postwar era this number jumps to 59 months. Notably, the economic expansion that followed the 1974 bear market (which many argue is the best historical corollary to today’s expansion) lasted 58 months, implying that the current expansion could have another 4 months to go before trouble hits. That would put the next recession sometime in 2014 !!!
(Let me put this into its proper perspective, if the economy does not turn negative until June 2014 that would be a 60 month expansion (for example), the 6th longest expansion out of 34 expansion periods in over 160 years, this with record amounts of debt, massive unemployment and bubbles in asset markets appearing everywhere)
This chart below as of early March 2012 and hence not showing the full expansion as of December 2013.
Which is very much in line with a great deal of economic data coming out, what I mean to say is our current economic expansion is falling over / running on fumes / last 2 miles of a marathon / about to turn down…..
Stock markets are massively overvalued with the Russell 2000 (2,000 companies small cap index in the USA and the most common benchmark for mutual funds in the small cap arena – small cap being an average company market value of 594 Million US$) trading on a ‘Trailing Earnings’ P/E ratio of 75.6. The median PE ratio of this index since 1995 has been 29.9, last year it was 29.4.
So either corporate earnings have to expand dramatically to bring this ratio back down to below 30 (remember the ominous chart above of corporate earnings – expansion not a chance) or you are looking at very healthy 50 % drop in the index itself (stock market collapse).
Shiller (CAPE) Cyclically Adjusted PE ratio for the S&P 500 is now 25.4, a level only exceeded 3 times in history. Just prior to 1929 was 30 (before the great crash) , 2000 achieved 44.2 (prior to the great crash) , 2007 rallied to 27 (prior to the great crash).
Obviously this is a very simple analysis of the stock markets, but it gives you a very quick look on how massively overvalued these markets are driven by money printing and zero % interest rates.
If you wish to have a full anatomical look at the overvaluation of stocks then I seriously suggest you look at Hussman’s Open Letter to the FOMC
Then we have this wonderful chart below, courtesy of Zerohedge.
This chart demonstrates that sentiment has never been more bullish for stocks in the last 30 years. This is not positive !!
Caveat – I am not stating here that everyone should be running out to sell the Stock Market or to actually put on Short positions. As John Maynard Keynes stated “The market can stay irrational longer than you can stay solvent.”
This bubble in the Stock Market is being forced higher in particular by Pension Funds who are massively overweight Government Debt and the need to sell this asset class and pour funds into the Equities simply because they require yield and capital appreciation, this action re-enforced by the fact that Governments / Central Banks will continue to QE (money print for the foreseeable future).
Now let me get this straight,
- Corporate earnings are at all time historical highs and are turning down.
- Economic Expansion since 2009 is pretty much exhausted now.
- Stock Markets are historically very overvalued indeed.
- Stock Market sentiment is at all time historical highs.
Yep that has nightmare written all over it, in fact this is actually more of a precarious situation than 2008 by multiples !!
Then we had the enormously important statement by China on the 21st November.
The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the Yuan’s appreciation.
“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the Yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting.
This statement was huge and effectively means that further purchases / expansion of Foreign Currency Debt (i.e. US Treasuries, European EuroBonds, UK Gilts etc..) will cease. They presently hold US$ 3.66 Trillion US$ equivalent of foreign currencies and this will be the new cap.
According to USA TIC (Treasury International Capital) data, China has purchased on average 186 Billion US$ of US Treasuries a year between 2006 to 2011 and has since actually been a net seller. Japan took up the slack by purchasing 217 Billion US$ in 2012 (June to June) alone and a total of 285 Billion US$ since 2006, however this really is an unsustainable position going forward.
So with the elephant in the room removed, who exactly is going to be purchasing US Debt in any sustainable and substantial sizes ?
(Note re chart immediately below : US Government CBO forecasts have been regularly underestimated of the true figure by at least 40% since before Year 2000)
Never mind that practically all Industrial economies are deficit spending like drunken sailors on shore duty (issuing new Sovereign Bonds).
UK Deficit forecast spending chart below …
Basically we have interest rates at 320-year lows and the Great 33 Year Bond Super Cycle has ended. Bonds are a massive sell going forward.
Property markets in the prime centers around the World (London, Sydney, NY, Vegas, Singapore, Hong Kong, Shanghai etc.) are now dealing on massive multiples of income (Greater London is trading on multiples never recorded before).
UK Household Debt touched a new record high in October of 2013 of Stg 1.43 Trillion, nothing to worry about there then.
The immediate take-away from the chart above is the fact that Australian Banks are massively leveraged into the real estate sector, once this bubble bursts this situation compounds on itself simply because the local banks will not only be completely unwilling to lend to the housing sector itself – but also they will have to unwind its leverage it has built to this sector of the market.
Example : The Spanish property market has not seen any rebound in prices, not necessarily linked to affordability (any longer) but because the Banks themselves are unwilling / insolvent to be able to lend. This compounds the residential sectors problems, with no end in sight.
Or the latest Pending Home Sale in the USA, a huge collapse.
The Bitcoin phenomenon
I started examining the Bitcoin story around 18 months ago when it was trading at just 5 to 7 US$ (and no I did not invest, what a shame). But I am extremely happy to see what is happening with the Bitcoin and the madness of crowds in a frenzy.
So before I explain why I get a warm glow about Bitcoin (even though I am not invested), let me explain what Bitcoin is…
Bitcoin is just a number associated with a Bitcoin Address held on a server.
It is created by an algorithm, which generates new Bitcoin by a process called “Mining”. I will not go through the specifics but the issuances of new credits are controlled.10,500,000 bitcoins were created in the first 4 (approx.) years from January 2009 to November 2012. Every four years thereafter this amount halves, so it will be 5,250,000 over years 4-8, 2,625,000 over years 8-12, and so on. Thus the total number of bitcoins in existence will never exceed 21,000,000.
Bitcoin was developed as an alternative Currency to trade goods and services solely on the net. Rather than pay for the likes of “Paypal” or Credit card costs or other forms of payments over various different FIAT Currencies with FX risk involved.
What has occurred is a frenzy of investment interest due to the fact that it is independent of National Governments, Banks and payment systems but also Tax Authorities. You can also move large amounts of cash across National borders undetected. But the main issue is the fact that the issuance of Bitcoin is limited and controlled. An alternative Currency flourishing to escape the debasement of National Currencies which are being massively debased on a near daily basis.
At the end of the day Bitcoin could be subjected (I expect to happen) to massive intervention by National Governments who close down the servers holding the Bitcoin addresses, the excuse most likely used “closing down criminal and money launderning activity”.
But this enormous buying frenzy is exactly what I expect in Silver coinage, which fulfils many of the attributes of Bitcoin.
1. Escape the debasement of National Fiat Currencies
2. To be used in a new alternative Currency (barter) running along side our present and future possible systems.
3. Restricted supply of Silver coinage simply due to the fact that its supply is limited to mine production and becoming much more expensive and difficult to produce.
4. Tax Authorities have no way of realizing tax against Capital appreciation of Silver if you own the physical (no paper trail).
5. Massive accumulation by Asia, Middle east and emerging markets.
6. Enormous expansion of middle classes World wide. Presently China has a middle class of over 300 Billion people (the total population of America) and expected to expand to over 1 Billion people by 2050 (by the IMF and World Bank), China alone…
I could go on…
Bitcoin a virtual currency of exchange held digitally on a server with nothing more than the “greater fool” mentality supporting the price is worth more than Gold ???
A nice update on Bitcoin can be found on the BBC website.
Our present situation Worldwide is massively unsustainable using simple mathematics. We have expanded debt levels far beyond what we were carrying in 2007 and as I stated in one of my previous articles
Speaking to many individuals over the last few years, they really do not appreciate the situation we find ourselves in looking at the bigger picture and taking into consideration historical precedents. When asked what caused this crisis they always state the housing crisis of the USA (CDS’s, MBS etc..). That is not strictly true ! The housing crisis was only a symptom of the disease and simply the first domino to fall; the disease itself is our Debt Insolvency and that is ongoing.
So along with Corporate earnings that are at all time historical highs and are turning down. An Economic Expansion ongoing since 2009, which is, pretty much exhausted now. Stock Markets are historically very overvalued indeed and Stock Market sentiment is at all time historical highs. Sovereign Debt markets have become precarious to say the least with continued massive issuance of Sovereign Debt, the market only supported by enormous money printing (out of thin air) which they use to purchase their own debt.
Now China has said it will no longer purchase Foreign Debt or Currency.
Not forgetting the enormous Dinosaur in the room – Interest rates are at 320 Year lows and basically Zero. With people like Summers making speeches in front of the IMF calling for a new totally 100% digital currency system so the authorities can force interest rates into negative territory (these guys are truly insane !).
I am ignoring in this article for the moment issues like the Shadow Banking System, Re-hypothecation issues to really attempt to keep this article short (un-successfully I am afraid), but attempting to paint the picture of what we are facing, as everything is inter-linked and feeds off each other.
In 2008/9 the only way the World (temporarily) avoided going over the cliff in a complete collapse of the banking System which would have eventually taken down the Monetary System and Debt markets was that our Worlds Sovereign Balance sheets were loaded up with Debt (which has effectively made them completely insolvent), Central Banks loaded up with non-performing assets direct from the Banks and Sovereign Debt purchases. Interest rates lowered incredibly to 320 lows to near zero %. And finally our system forced to grow by re-expanding a credit-fueled system to new historical levels of debt and re-inflating housing and Stock market bubbles – never mind the giant Debt bubble.
When this turns down again (bubbles burst, Economic growth turns negative and hence Deficits explode to new highs) who or what is going to bail us out this time ???
All the bullets have been spent, the barrel is empty.
So let me envision this for you, Debt markets are starting to lose their foundations and break lower (under intense weight of debt) – Interest Rates Rise.
While the Stock Markets have effectively run out of buyers and the only thing left are sellers, along with that are record historical overvaluations – The Stock market collapses.
Housing market burdened with unprecedented amounts of debt leverage at all time historical low mortgage interest rates which are now going up. Housing Debt servicing rises substantially forcing the housing market into a free fall.
Central Banks and Governments panic and further increases the money printing spigots to flood the system with cash to buy up the Debt markets to attempt to hold Interest rates at Historical lows which forces up prices in real goods (energy, food, commodities).
Which in turn forces disposable income much lower (higher interest rates and higher costs for everything humans require to survive)
I am not even going to talk about Government tax rates being forced higher to help cover the massive increase in Deficit spending.
You are looking at a massive collapse of our system and a complete loss of confidence in our FIAT Currency System.
This is when Gold and Silver really start to make their move higher, what else do you invest in to protect your wealth against wholesale destruction ?? Remember not only are Gold and Silver massively undervalued against the expansion of Currency aggregates (devaluation of Currency through money printing and credit expansion) these last few years (not to mention mine production costs). Precious metals are a crisis asset class !!!!
This is exactly what cycle analysis is pointing too and can be seen clearly in Armstrong’s Economic Confidence Model (see above) starting in mid to late 2015. A complete collapse of Confidence in the System itself, which will ultimately lead to the end of our present Monetary System.
My view….. I expect or should I say I have discounted the event of Gold trading down to US$ 1,050 and maybe sub US$ 1,000 over the 1st Quarter of 2014, then a quick move higher to US$ 1,500 / 1,600 level thereafter simply because mine productions costs are now so high that production of Gold is already under intense pressure due to mine shutdowns (uneconomical to produce Gold at today’s levels).
By late 2014 into 2015 I expect a re-test of the 2011 highs of US$ 1,900, which I expect to initially fail and test back down to US$ 1,500/1600 again.
Come mid 2015 a re-test of the highs and a break of these levels will ultimately lead into a very aggressive move into 2017 of US$ 5,000 at least.
I will not go further at this time with my ultimate destination of Precious Metals or the makeup and structure of our New Monetary System.
But lets take a quick look at what happened between 1970 to 1980 (the last Great Gold Bull market). Firstly the Dow chart below..
As you can see the market peaked in 1973 (just after Greenspan informed us he was bullish – Back to today, Greenspan just informed us that the Stock market is not in a bubble and he is actually bullish. Gulp !)
(Using Gold stars I have indicated manually over this chart the highs and lows of Gold as they worked inversely to the Dow, these points are over-layed at the exact correct dates. I have scaled it on the left hand side in Gold lettering. The actual real Gold chart is further down for your information.)
The peak of the Dow in Jan 1973 actually saw the Gold price base at US$ 63 and rally to a high of US$ 198 by December 1974. Gold peaked at the very high in late December as the Dow (stock markets) based in December. As FED attempted to engineer a recovery with very loose money aggregates to engender a recovery in the Stock markets (not nearly as aggressive as QE policies now).
The Dow nearly doubled in price while the Gold price fell by ½ in value from 198 to 103. When the Stock finally peaked in 1976 and the realization the recovery was built on a foundation of sand, Gold found a base in September. It began its last stage of the bull market for a move of 750% in 3 years.
Gold chart below from 1972 to 1979 (1970 low was US$ 35 to 1980 of US$ 850).
This again is a demonstration of Gold’s role as a crisis asset class.
Now would you suggest the present World economic situation is defective by many multiples of the 1970’s ? Would you also suggest that the 1970′s was very much a Western centric affair between Europe and NY in Gold , but now the whole World with their enormous emerging middle classes are involved this time around ?
Least to say for me this a trade of a generation, which will ultimately protect my family in the future ahead. We are living through a very important time in the history of our Monetary System and the way we govern ourselves and will be written about heavily for many hundreds of years.
Silver remains a spectacular trade for a myriad of reasons.
The chart below demonstrates that the US Mints have sold up to the beginning of November more Silver 1oz coins than the whole of 2011 (when Silver peaked at US$49)
And the Canadian Maple Leaf coins into the 3rd Quarter of 2013 have also beaten all record yearly sales before that.
The chart below courtesy of SRSrocco latest piece.
I have not even covered the Peak Energy situation in this report or the Ore-grade degradation and the effect this will have on mining. I suggest you read SRSrocco site for more information.
Why has demand for Silver coins powered ahead beating all time records, when the price keeps dropping and also who is buying (Asian’s and Emerging markets).
Industrial demand for Silver is reported to be increasing ever year and by 2015 will have matched the 2012 total World mine production of Silver.
Stockpiles are at all time historical lows. The mania you have seen in Bitcoin is only a forecast of what will occur in physical Silver coin prices – in my opinion (but then all do is examine every aspect of this trade from every different direction possible).
You have to make up you own mind where you want to be and how to protect yourself. Examine all the evidence and educate yourself, time is running short.