When gold Jumped over $1300 many people were surprised but I wasn’t. You see the fundamentals are there for gold to have an outstanding performance this year. In this post, I will explain the reasons why gold gets over the 1300 mark.
Why Gold Gets Over the 1300 Mark
There is not going to be an interest rate hike in the US probably till the end of the year. All this according to Janet Yellen. On the other side of the Atlantic Mario Draghi, the President of the European Central Bank will continue with his quantitative easing program all the way to the end of 2017.
The Weak Dollar
The weakness of the dollar will continue trading lower for the next few months. In addition, the US debt ceiling will have to rise again and this has to be approved by Congress.
The US Debt
Last time Congress was reluctant to increase the US debt ceiling and it took weeks of negotiations by President Obama to convince its members. If Congress does not increase America’s debt ceiling, then there is a danger for the US government to shut down.
Geopolitical Unrest
The North Korean President continues to cause concern to everyone, his neighbors are concerned, the US is concerned, the world is concerned and finally, the markets are concerned. Nobody knows how all this will end.
All these and more are responsible for gold’s rise above the $1300 mark. If we see effective closes above $1300 then we can be sure the 1350 mark for gold is very close. If the momentum is there and I think it is, then gold will definitely hit the $1350 mark.
Conclusion
The weak dollar has played a role in gold’s performance but it is not one of the primary causes. Both the Federal Reserve and the European Central Bank are willing to continue their monetary stimulus programs and this does not seem to change in the near future. North Korea’s President Kim will not change in the near future either. Full steam ahead for gold.
Gold is just about to challenge the $1300 mark for the third time this year. If the dollar breaks through the $1300 mark, and I believe it will convincingly, then the dollar will continue to weaken. In this article, I will analyze why the gold market will continue to soar.
Reasons for the Weak Dollar
1) The US economy is lethargic, unlike the rest of the world.
2) Asia’s rise is unstoppable and America is excluded
3) The global dominance of the US is falling
4) The mighty US dollar is not going to be the world’s major trading currency
Why the Gold Market Will Continue to Soar?
The Importance of Gold
The collapse of the Bretton Woods agreement and the later failure of the London gold pool saw the decline of the US gold stocks from 74,5% (21,828,25 tonnes) of all central bank reserves and 43,6% of estimated above-ground gold stocks in 1949 to 28,3% (9,069,7 tonnes) of central bank gold and 11,9% of above ground gold stocks in 1971.
As a result, monetary policy switched from the fixed parity arrangements centered on gold through the medium of the dollar to a propaganda effort aimed at removing gold from the monetary system altogether, replacing it with an unbacked dollar as the international reserve standard.
The Consequences
1) The purchasing power of the dollar and other major currencies measured in gold collapsed. In particular, from 1967 to now the dollar’s purchasing power compared to gold declined by 97,3%.
2) The US dollar lost its stability.
3) There has been an expansion of fiat money and bank credit.
4) The dramatic expansion of monetary inflation since the last financial crisis.
In the meantime, gold’s inflation is about 1,9% annually, of above-ground stocks. Considering the different rates of increase between gold stocks and the fiat unbacked state-issued currencies is what ultimately drives the price of gold. A higher gold price at a time of excessive fiat currency will trigger inflation to reaffirm gold’s role as sound money. This is viewed by the major monetary authorities as a potential threat to their currencies’ credibility.
There is no doubt there is a war against gold led by the US monetary authorities and the world’s major central banks. We have actually seen the expansion of unbacked paper gold constituting artificial gold supply in the futures and forward markets.
No matter what, gold remains the global hedge against inflation and the decline of the purchasing power of fiat currencies. We must not forget gold rescued the world’s financial system from collapse nine years ago.
Right now, there are significant GDP growths in China, Japan, the EU, and the UK with large export increases. Unfortunately for two main reasons, the US does not enjoy these benefits.
Nevertheless, in the US, Japan, and Europe the population has experienced a long stable exchange value for their currencies. They’ve been pressured by their governments to use only state-issued currency and as a result, they do not regard gold as money. At the same time, they do not regard it as having any monetary role at all.
This is not the case in China Russia and the other SCO states where their populations regard gold as superior money to fiat currencies. The truth is that their fiat currencies do not have an established record of objective exchange value.
We can clearly see now the world is split in two. The governments of North America and Western Europe do not see gold as having a monetary role to play and the governments of Asia with Russia are on the exact opposite side and they actually accumulate gold.
The US Treasury still owns 8,133 tonnes of gold. They do not regard gold as money. Same as the Bank of England, the Bank of Japan, and the European Central Bank.
President Trump is not going to make America great again. The US economy is getting back on track. Increased trade tariffs against China remain on the agenda which in the end will hurt the American consumer. China leads the world’s economic growth, while America is left out.
Dollar vs Yuan
Right now the Chinese possess $3,08 trillion in foreign reserves most of them in US dollars. China uses its dollars to buy commodities, copper, iron, etc. If the dollar continues to decline, then China will have to abandon the dollar, because the dollar’s purchasing power measured in commodities will continue to decline.
In fact, the time is not far for China to ditch the dollar and replace it with a yuan backed by gold. Since the appointment of the People’s Bank with the role of acquiring gold on behalf of the state back in 1983, the Chinese never stopped buying gold. The gold that comes into China never comes out. The Chinese are still buying gold.
Yuan will be used predominantly for Eurasian trade, with China taking the necessary steps to control the oil market. Already SCO members account for 34.4% of the global oil supply. At the same time, China shows a preference for settling trade and business deals in yuan. The plan for oil suppliers like Iran is to sell their oil for yuan and then exchange their yuan on the Shanghai Futures for gold. Bare in mind that the yuan-gold contract exists and the next step will be the introduction of the yuan-oil contract.
Conclusion
More reasons to support my argument why the gold market will continue to soar.
There is no doubt that China’s strategy has been to eventually dumb the dollar and replace it with its own gold-backed yuan. Gold passed the $1300 mark and this is good news for the Chinese. This is also good news for the Russians who undermine the dollar too.
President Trump with the rest of the Western world seems to have no idea what is about to unfold. A gold-backed yuan with the ability to replace the dollar as the world’s trade currency will push the US dollar to weaken even more.
Gold has to rise to a level where the Chinese are prepared to set a conversion rate. China will definitely use its control over physical gold markets to achieve it when the time is right. In my opinion, China is now starting the move toward this objective.
For the investor, this is great news. It means gold will start playing the monetary role it used to. In order to do that there is only one way to unprecedented new heights for the metal.
Ps I hope my, why the gold market will continue to soar? post has been useful to you. If you still have any questions feel free to let me know in the comment section.
What is gold bullion, and what are its characteristics? Bullion is gold bars, silver bars, or other bars, or ingots, of precious metals. The word bullion comes from the French Minister of Finance Claude de Bullion. The value of the bullion is determined by the value of the precious metal content, which is defined by its purity and mass.
What is Gold Bullion-Definition
The specifications of bullion are regulated by market bodies or legislation. In the European Union, the minimum purity for gold bullion which is treated as investment gold with regard to taxation is 99.5% for gold bars and 90% for gold coins.
Gold Bullion Price
The price of gold bullion is influenced, by demand from companies who use gold to make jewelry and other products, and by perceptions of the overall economy. For example, political, or financial instability, affects the price of gold bullion.
With the COTs having cleared in the PMs & goldstocks poised to move higher it looks like it is time for gold to move up & break the 6 year downtrend line & move solidly away from it.
A move up through 1300 will lead to gold putting on a few hundred more ending the year in a strong uptrend with the bear finally well clear & behind us.
This move up in gold will coincide with the global sharemarkets bull run coming to an end & we will see risk averse funds head to gold which will give it more ommph.
2018-2019 should see large rises in the PMs as the financial system gets shaken.
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Lethargic summer markets tend to instil a sense of false security. Stocks and property are near all-time highs, interest rates are at 72 year lows and most investors feel richer than ever. Central banks signal strong economies with indications of higher interest rates and tapering of their balance sheets.
CENTRAL BANK CHIEF BEHEADED
As I discussed last week’s article about the Fed, we must never trust central banks since they are always hopelessly wrong. Sweden is another example of a central bank which has an appalling record in forecasting the economy. And it is not just any bank since I am talking about the oldest central bank in the world – Sweden’s Riksbank which was established in 1668. But age clearly means nothing when it comes to understanding markets and the economy. Below we see the Riksbank’s forecasting record for the Swedish Repo rate. It is just an appalling record which shows that during the last 7 years they have been hopelessly wrong. Several times a year since 2011 they have forecast rate increases of 1-2% and every year since then, rates have gone lower. In all, they have made 25 incorrect forecasts since 2011. Hopefully their record since 1668 has been more accurate.
Not only have they forecast higher rates but they have consistently lowered rates since 2011 and now have negative interest rates since 2015. It is quite amazing that a central bank makes 25 forecasts of higher rates but instead lowers the Repo rate 10 times. Rates have been manipulated lower to make the Swedish currency weaker in order to stimulate exports. These low rates have created a massive housing bubble in Sweden. Swedish consumer borrowing including mortgages are among the highest in Europe and any significant increase in interest rates will create a major problem in the Swedish economy and financial system, much worse than the early 1990s. As I have discussed before, the 35-year interest cycle has turned up and whether central banks like it or not, rates in the next few years will be much higher. Selling of long term bonds by nervous investors is what will drive rates higher. This will also pull the shorter rates up.
In the 17th and 18th centuries the Riksbank ran out of silver due to very high war debts. The bank resorted to paper money which quickly failed. They then again minted copper money which was not trusted by the Swedes with the consequence that the head of the Riksbank was beheaded in 1719. In the last 104 years since the creation of the Fed, most central bank heads have failed massively. So far there has been no beheading of a central bank chief in modern times but when the financial system fails in the next few years, many bankers will feel very vulnerable.
NEW SUBPRIME CRISES LOOMING
Whether a central bank is the oldest in the world or just one hundred years like the Fed, the problem is the same. All central banks make hopelessly inaccurate forecasts. As a result, they interfere with the normal economic cycle which has natural highs and lows of relatively small amplitude. It is this natural cycle which is totally destroyed by central banks’ manipulation. In their total lack of understanding of the laws of supply and demand, central bankers think they have divine powers. They believe that low interest rates and printed money creates economic prosperity whilst the opposite is the case. The only thing that this type of manipulation achieves is massive booms and busts that ruin the fabric of the economy. We have now had one of the longest artificial booms in history, so next is a bust that will totally change the world for a very long period. This time, the financial repression which temporarily delayed the inevitable disaster during the 2006-9 financial crisis will not work. Money printing will create hyperinflation and all attempts to lower the already low rates will fail. Central banks will be totally powerless in stopping the biggest financial crisis in history.
I have often discussed the global debt mountain which has grown exponentially for many years to reach around $2.5 quadrillion including derivatives and unfunded liabilities.
US mortgage debt or subprime debt was the major factor during the last crisis. Well, the Fed or the US government has learnt nothing. The subprime crisis in the US was minutes away from causing a global financial collapse. But US Household Debt has just surpassed the 2008 peak and is now at $12.7 trillion.
As interest rates rise and house prices collapse, the next mortgage debt crisis will be much bigger than the 2006-9 one. Eventually house prices could decline by 75-90% in real terms. The coming crisis will also involve two new subprime crises, namely Student, and Auto loans. Students not finding jobs will not repay their debts and many jobless car buyers will stop paying off their car loans. Collapsing second hand car prices will exacerbate the problem. So now is an excellent time to hold back on a house or car purchase. There will be real bargains in the next few years.
Whilst there is still euphoria in investment markets, investors have very little fear and very little understanding that the asset bubbles which have been created in the last few decades have nothing to do with real prosperity but are only based on debt, printed money and artificially low rates.
THE MOST LETHAL CONCOCTION OF DEBT
Incredibly, most investors see no danger in stocks, bonds, property and debt being at historcal highs. This is the most lethal concoction of bubbles that has ever existed in history. Of course, bubbles can expand further before they implode. But who wants to be in a bubble that bursts, resulting in losses between 75% and 100% in real terms. Because this is what will happen to stocks, bonds and property in most countries. I am well aware that 99.99% of investors consider these kind of projections as scaremongering doom and gloom nonsense. But even if history doesn’t repeat itself, it certainly rhymes and we know that bullishness is at a peak just before the cycle turns.
Since there is very little fear amongst investors in the West, very few are buying the cheapest and best form of insurance available as protection. Even more importantly, most people don’t realise that this investment has outperformed virtually every asset class this century. I am of course talking about gold. Since 1999, the Dow for example is down 60% against gold. Gold had a massive rise from $250 in 1999 to $1,920 in 2011. Since then gold has been recharging for the next leg up. Between 2013 and 2017, gold has traded in a $290 range which is very small compared to the $1,670 rise from $250 to $1,920 between 1999 and 2011.
THE GOLD PRICE IS FAKE NEWS
Looking at the chart above, there seems to be very little interest in buying and holding gold. Gold currently looks very sluggish with a tendency to drift down easily. What most investors don’t’ understand is that the gold price as depicted by the chart above has nothing to do with the real price of gold. As with most financial markets today, the chart above is fake news. The gold chart shows the effect of covert financial manipulation at the very highest government and central bank level. And this manipulation takes place in the paper gold market which is many 100 times bigger than the physical gold market. The real players behind this dark, clandestine paper market are never revealed. All investigations are stopped at the source. At best some insignificant junior bank trader is fined. Virtually every trade that is executed to depress the gold price is done when most gold markets are closed and there are no buyers. The amounts of paper gold traded are also massive. No commercial seller would ever trade in such a blatantly idiotic fashion. Who would ever sell gold in huge quantities when there are no buyers and no market?
If this was a real market backed by physical gold, this type of trading would be impossible. With a seller dumping several months’ production in a few seconds, there is of course not a single ounce of physical behind. If the buyer demanded delivery, the seller would either default or pay $100s or even $1,000s above the market price to acquire the physical. But the truth is that the physical doesn’t exist to fulfil the trade.
THERE IS ONLY ONE REAL GOLD MARKET
The real gold market is the physical and in this market all gold produced has already been presold. In the real gold market, long term contracts absorb all the gold mined and refined. But the West doesn’t understand this market. Because the West trades false markets based on false values. Most trading in the world financial markets is in the form of derivatives with no delivery of the underlying assets.
This is why most of the people trading gold in the West have no concern about ever getting delivery. They see physical gold impractical and expensive to trade. Why hold physical when all you need is an electronic entry saying: x oz of GOLD. Virtually nobody realises that these electronic entries at some point will not even be worth the electricity that has been used to create them.
Whilst very few in the West understand the value of real money and insurance in the form of gold, most people in the East take the opposite view. Because both individuals and governments in the East continue to accumulate gold at ever increasing levels.
Just look at gold buying of the most significant Silk Road countries in the chart below. Since 1995, India, China, Russia and Turkey have bought 34,000 tonnes of gold. The buying has accelerated since the Financial Crisis in 2007. From 2007 to May 2017 these four countries have bought 26,000 tonnes of physical gold. This means that they have absorbed more than the mine production in the last 10 years. It is very likely that these figures greatly underestimate the buying of both China and India. The Indian figures don’t include the smuggling of gold which at times can reach very big quantities. And the Chinese authorities prefer not to reveal the real level of Chinese gold buying. Just in May, these countries bought 400 tonnes of gold. That is an annual rate of 4,800 tonnes, 60% above the annual global mine production of gold.
If we look at the cumulative Silk Road demand after 5 months of 2017, it is the second highest since 2013 at 1,552 tonnes.
These charts and figures from the East clearly illustrate that the physical gold market is extremely strong with demand at a record levels. The weak gold price is an illusion based on a false and manipulated gold paper market. Like all false markets, it is only a matter of time before the truth will be revealed. And the truth will be very painful to anyone who holds paper gold or other paper assets.
GOLD PRICE WILL JUMP FASTER THAN CRYPTOCURRENCIES
Gold at currently $1,220 is a false price in a false market set by paper gold manipulators. At some point in the not too distant future, the gold price will be set in the physical market as no one will trust the paper market. The availability of physical gold is extremely limited at current prices. The rush to cover the shorts, combined with a massive increase in demand due to higher gold prices will create a virtuos gold price cycle. The result will be gold jumping $100s and even $1,000s in a very short period of time. Once this move starts, we are likely to see percentage rises which are much greater than we have seen in cryptocurrencies lately.
For anyone who doesn’t hold sufficient insurance in the form of gold, the current price is a real gift. And for the people who already own physical gold, they can sleep well knowing that they hold the ultimate wealth preservation asset that in the next few years will reach levels which are hard to imagine today.
The inevitable rise of gold and silver is close and thus, the end of the world’s present monetary system is already taking place. The clearest symptom is the frantic bellicosity of the US, propelled by the perception on the part of those who run the US, that the US is losing influence in the world, and that their deep-seated objective for control of the whole world is slipping out of their hands. The end of the dollar as the basis of the international monetary system means the end of the US as we have known it.
We shall not bother to discuss the future of the American dollar as the world’s currency. We take it as a fact, that the American monetary unit is nearing the end of its time-line, at least in terms of being the world’s money, if not as a money limited in use to the territory of the US.
China and Russia are accumulating important quantities of gold. China is the world’s largest producer of gold, and it does not sell one gram of its production on the world markets: it hoards it all, because China understands that the world’s present monetary system is on its way out.
The burial of the present monetary system may begin in slow stages, as Russia and China together begin to sell their products to the world, in exchange for gold. At this time, we don’t know how the transition to gold as the world’s money is going to take place. Perhaps it will begin when the Euroasian Bloc attributes a much higher price to gold, as compared with its present price; or perhaps it will begin with gold denominated in terms of its present price. But whatever technique is used, the price of gold will have to register a dramatic rise, towards a figure at least ten times its present price, and possibly much higher. Actually –and this is rather hard to imagine at this time– it will not be so much a case of a rising dollar price of gold, since these two powers will have discarded the dollar, but rather that the quantity of gold that Russia and China will demand in exchange for their exports will be falling to small fractions of what they would demand today. Expressed in a different fashion, closer to reality, it will be the purchasing power of gold that will rise to a much higher level than it enjoys at present.
The stabilization of the purchasing power of gold will take place as trade imbalances around the world are eliminated: both trade deficits and trade surpluses will shrink to merely transitory phases among the nations of the world.
Thus, the return to a world that recovers commercial balance between nations will not be the work of the Pax Americana, that imposes it’s fiat currency, but rather the work of the Pax Euroasiatica, that will offer, free of impositions, the spontaneous adhesion of the world to gold as its money, as it has been throughout History.
Gold, because of its quality (and not because of its scarce quantity) has always been the King of Metals. There is little understanding about why it has occupied its supreme place as money, followed in second place by silver. Gold has notably been the money that has been used in large transactions, while silver has been the favorite metal for the great number of smaller transactions carried out by popular masses. Why has this been so?
This is the reason: among all known substances, gold has been the substance that loses value to a lesser degree –in fact, almost imperceptibly– as the quantity of gold offered, increases in commercial transactions. Its fall in marginal utility is almost imperceptible, regardless of volume. Said in other words that are perhaps more understandable, gold retains its value whether we are dealing with an operation that requires the payment of one ounce of gold, or whether we are dealing with an operation that requires the payment of 100,000 ounces. The last ounce –the marginal ounce– of the 99,999 ounces delivered, is worth just as much as the first ounce.
Gold is the only substance whose loss of marginal utility is practically nil. This is why it is the King of Metals, and why it has been the world’s money for countless centuries. Just as for measuring distances we use multiples of the metallic meter carefully stored at a controlled temperature in Paris, France, so gold, because of its quality of enjoying a practically invariable marginal utility, is the ideal measure with which to express prices of everything whose value can be quantified; in other words, gold is the world’s natural “numeraire”.
Silver does not behave in the same way. It is not adequate for large transactions, because as the quantity of silver offered increases, its marginal utility decreases to a small extent. As an example: whoever wishes to purchase gold by tendering silver in exchange, will find that the price in terms of silver will increase as the quantity of gold to be purchased increases; this will not be because the price of gold rises, but rather because the units of silver offered in quantity lose a small part of their value.
China has hoarded a great quantity of gold in recent years, much more than it is willing to state, that is only a fraction, according to careful research, of the total that they are thought to hold. The price of gold in Shanghai is invariably higher than the dollar price of gold in London. Thus, the world’s gold is flowing in only one direction, from London to Shanghai, and it will probably never return to London.
In the meantime, practically all Mexican gold and silver production flows out of Mexico at ridiculously low prices; these prices are suppressed by covert operations in the US and London, in order to protect the prestige of the dollar and to seduce investors with attractive profits that can be obtained by investing in speculative papers denominated in dollars and other currencies.
The national flag flutters atop the Bank of Mexico building in downtown Mexico City January 23, 2015. REUTERS/Edgard Garrido
Mexico’s Central Bank, the Bank of Mexico (Banxico), says it owns about 100 tons of gold, but only a small quantity of this gold has been identified in location and with numbers on its bars of gold; the larger part of Banxico’s gold reserves are part of aggregates of unallocated gold shared by various institutions, and it is possible that this gold may already have been hypothecated one or more times by the institutions that are supposed to be its guardians.
In 2016, Mexico produced 3.3 million ounces of gold, that is to say, 102.76 tons, and we may speculate that its gold production in the coming years will hover close to 100 tons a year. As with the case of silver, gold production would increase strongly with a rise in its price by making lower grades of gold available for exploitation.
The world production of gold that originates in Mexico is a small percentage of the total. If Banxico should adopt the policy of China and retain all the gold produced in Mexico, the subtraction of Mexican gold from the world markets would be of no consequence, and besides, the advantage for Banxico in taking such a measure would be only as foresight regarding the future of gold and the collapse of the dollar, without any present benefit. An uninteresting proposition.
But let us consider silver.
In the not-distant future, Mexico’s production of gold and silver will be a key factor that will make possible the continuance of Mexico’s development, and allow it to survive the inevitable havoc that will accompany the death of the present monetary system, centered on the American dollar.
In 2015, Mexican mines produced almost 190 million Troy ounces of silver.
At present, mining analysts believe that the world’s production of silver will begin to slow down in the coming years; however, their calculations are based on the premise that the financial world will continue to function without great changes, and do not take into account a future significant increase in the price of silver. Such an increase in price would promote greater production of silver, as it would allow miners to make further investments in mining. Extensive silver-bearing lodes whose silver content does not make them exploitable at present price would come into production.
For the time being, we can project a silver production on the part of Mexico at 160 million ounces a year, in order to take into account the present trend, which is in decline.
Mexico is the world’s largest producer of silver. What would happen if Mexico, following the example of China, should decide to purchase all the silver it produces, for the Reserves of Banxico? Or if not all, half? Or a quarter of Mexican silver production? If Mr. Trump, or the Fed, would take very badly the purchase of significant quantities of silver by Banxico, the US would be hardly likely to punish Mexico if it initiated a modest program to accumulate silver for the Reserves of Banxico, especially taking into account that the private mega-bank JP Morgan of New York possesses – according to the conclusions of careful observers of its activities in New York – amounts of physical silver that are calculated to be between 100 and 200 millions of ounces of silver, and possibly more: a quantity similar to the annual production of silver on the part of Mexico.
Mexico is the world’s largest producer of silver. The subtraction from the world’s production of silver, not of 100% of Mexico’s production, but by only a small amount of it, would lead to a considerable jump in its price, for two reasons: First, because when a Central Bank adopts such a measure, the markets attribute great importance to the fact, and Second, because any subtraction of silver bars from the markets will have disproportionate repercussions upon its price: the price of silver in NY is controlled through enormous sales and purchase transactions, but these result in a practically negligible delivery of physical silver. The movement of physical silver into investment, compared with the volume of sales and purchases, is minimal, not to say microscopic (See note 1). Therefore, the subtraction of a relatively small quantity of physical silver could easily cause a doubling in its price – not only the price of the silver sold by Mexico in foreign markets, but also in the value of the silver Reserves held by Banxico, which would be of total liquidity.
Mexico has every right to defend the price of its silver –a non-renewable asset– for the benefit of the country’s mining industry, against the manipulation exerted by the US, that aims at maintaining the depressed price of silver.
Banxico would purchase silver from the Mexican miners, and would pay them in Mexican pesos, for the equivalent of the dollar price of the purchased silver. Since the miners require dollars to fulfill contractual requirements and to purchase with dollars equipment and other supplies which are imported, the resulting effect upon the dollar Reserves of Banxico would be a charge, a reduction in dollar Reserves. Banxico would in effect be exchanging a portion of its dollar Reserves, for Reserves in silver.
The dollar Reserves of Mexico have been suffering a contraction in value because of the falling value of the dollar on international markets. Supposing the value of the dollar to rise once again, the silver in Reserves might double in value, but the dollar certainly would not double.
Here we insert a brief anecdote about the way in which China entered world commerce in the XVIth Century.
In the XVIth Century, China was an enormously productive power of all sorts of goods, much more advanced in productive power than the Europeans who arrived in China from the West, seeking trade opportunities. The response of the Chinese emperor to those wishes, was to say that China had all it needed, and that the Europeans had nothing of interest to offer China. There was no reason, therefore, for China to consider any commercial interchange.
In 1564, the Spaniard Andres de Urdaneta made a voyage to Philippines from Barra de Navidad, a port in northwest Mexico, and discovered the way to return to Acapulco, by sailing from Philippines to the Northeast, where the ocean current carried him to America; he made landfall at Cape Mendocino, which he baptized in the name of the Viceroy of Mexico, Antonio de Mendoza.
From then on, the galleons that left for Philppines, first from Barra de Navidad, and later from Acapulco, carried with them something that was of great interest to the Chinese merchants in Philippines: Mexican silver! In exchange for silver they willingly supplied every sort of merchandise desired by the Spanish for their return voyage to New Spain, as what is now Mexico was then called.
Thus began the participation of China in world commerce, thanks to Mexican silver – coined, in fact, by the Mexican Mint of Mexico City, into the famous “Pieces of Eight” which years later, became the basis of the American dollar with 371.25 grains of pure silver. If I am not mistaken, the first American dollars were minted by the Mexican Mint in the early years of the American Republic, when it did not as yet possess a mint. The Mexican silver peso enjoyed the status of legal tender in the American West until 1857. And Mexican silver circulated in China until 1935!
Thanks to silver, and to the commerce with China which it made possible, Mexico City became, during the years of Spanish Colonial rule, one of the richest cities of the world.
I think that silver minted by our historic Mexican Mint, now under the control of Banxico, has a promising future in the world of tomorrow: both in China, as well as in many other countries that would eagerly wish to own these coins, and whose exporters would be well disposed to receive them in payment for their exports to Mexico, especially because when the decease of the monetary system based on the dollar takes place, our Ounces will acquire a monetary value that will be multiples of its present value.
The present monetary system of the world, based on the dollar, is on its death-bed. A fiat currency –such as the dollar– cannot be replaced by another fiat currency. Therefore, the world will necessarily have to take up gold as the world’s money; silver will doubtless complement gold as the world’s money, because it has always done so throughout History. It is likely that the Euroasian Bloc will initiate the monetary transformation of the world, in due course.
We cannot know what configuration the adoption of gold as the world’s money will take, but it may mean that the various currencies of the world will once again be simple representatives of various quantities of gold. Silver will always have a value with respect to gold, that will necessarily be a fluctuating value, but doubtless, the value of silver will be much higher than it is at present. The fluctuation of the value of silver with regard to gold can be reduced, but it is impossible to eliminate it: to ignore this fact has been the rock upon which all bimetallic standards have hitherto foundered.
Given these considerations, it is clear that Banxico would not be mistaken in purchasing silver for its Reserves: by doing so, it strengthens itself against the collapse of the dollar as world currency, and at the same time, it powerfully encourages Mexican mining industry, for the benefit of the national economy.
If besides purchasing silver for its Reserves, Banxico proceeds to monetize silver, by giving the silver coin a monetary value superior to its intrinsic value, adjustable for increases in the price of silver, but leaving intact the monetary quote in the case of falls in the price of silver, it will have applied a measure of transcendent importance that will encourage and protect the savings of Mexican families, and which at the same time will produce something of inestimable value: the full confidence of Mexicans in the great future of their country. A Mexican silver coin, monetized according to our program, would enjoy great demand on the part of American savers, and indeed, among savers around the world. Savers would hold these coins in their savings indefinitely, precluding their return to Mexico in exchange for fiat money. Thus, Banxico’s monetization of a silver coin would create an important export product for Mexico.
I have nothing more to add, than to reiterate my belief, that silver is linked to the great future of Mexico.
Note (1): “By multiplying the 159 billion ounces of paper silver traded in 2016 by the average spot price of $17.14, we arrive at a staggering $2.27 Trillion of notional paper silver traded versus $4.4 billion actual silver investment. Thus, the paper notional silver trading ratio to physical silver investment was a whopping 517 to 1….” (Source: www.srsroccoreport.com).
The US dollar continues to show us signs of a significant long-term reversal lower in the making. As first proposed in January 2017, the dollar has now hit our initial lower target of 95.5 on the dollar index:
This target was derived from a measurement of the amplitude (4) of the false breakout above the 99.5 resistance zone (black lines) subtracted from this same level following the breakdown. It represents a liquidation of long contracts by those who purchased the US dollar on the assumption that Trump’s policies would overshadow any money printing by the Federal Reserve after the election.
We were on alert for the US dollar reversal starting in January 2017, as the currency continued to make lower lows after a major multi-year breakout. This was a warning sign – such immediate weakness should not occur in a strong breakout scenario.
Again, as of this week, the dollar has now hit our first target lower, at 95.5 on the dollar index.
What now?
First, please note that initial targets are just that: the first stopping point based on a technical measurement. We must use other forms of analysis to gauge the probability for subsequent movements.
Prepare For Dollar Bulls To Show Up
Dollar bulls are going to begin buying in the currency markets near 95.5. They are going to try to paint this decline as simply a higher-low in a series of such higher-lows that have formed over the past nine years. They are going to try to buy the dollar up above the recent false breakout at 103.5.
We suspect they will fail, as sellers are clearly present above 99.5 on the index. False breakouts at multi-decade highs tend to represent long-term reversal patterns.
While the price action for the US dollar has been weak over the past 3-4 months, the dollar has begun accelerating in downward momentum over the past week. There is no sign of an imminent bottom on the dollar chart, even though our initial target has been met.
Based on the deterioration in momentum, it is likely that the dollar is headed for its 2.5-year support zone between 92-93 as a next stopping point before any meaningful rally.
Visualizing a further drop into the support zone on the long-term chart:
Although a significant bounce should be expected to occur as the 92-93 support is reached, even a test of this region is a bearish long-term signal, as it opens the door to a possible massive head and shoulders top on any bounce, illustrated by the green arrows above.
Our best assessment is that the dollar will fail to hold the lower range of the support zone at 92 after a meaningful bounce. At this point, there will be little in the way of support for the dollar aside from the long-term rising trendline (magenta color), which comes in at 88. The target on a failure of support at 92 will become 80.5, equal to the amplitude of the failed advance (11.5) above the support zone, subtracted from the same support zone.
US Dollar/Gold Declining Simultaneously
Unfortunately for gold, we are living through one of those anomalous time periods in which the US dollar and precious metals are positively correlated – but to the downside.
Throughout history, gold tends to have its strongest moves when the US dollar is losing value, as gold receives bids from those looking to protect their savings against a decline in the world’s reserve currency.
However, as we can see at right, especially since the Federal Reserve meeting in mid-June, both the US dollar and gold have moved in the same direction: lower.
This is largely a market psychology phenomenon. Presently, the Fed has the markets fully convinced that it is engaging in just the right amount of money-printing to keep inflation modest but to keep economic growth strong. As a result, investors are choosing to protect themselves from inflation through the rising stock market, but are seeing little need for “safe- havens”, i.e. gold and the US dollar.
Respecting The Market
This is where our outlook may be different from most analysts in the precious metals community.
We of course know that gold and the US dollar are not both equal as per safe-havens. One is a historic store of wealth that has lasted for over 5,000 years, while the other is a fiat currency which has already lost 97% of its value in the past 100 years.
However – we also respect that market reactions are primarily determined by the psychology of its participants at a given time.
We agree that the market – in viewing both gold and the dollar as safe havens to be sold simultaneously – is acting irrationally.
However, the market can stay irrational longer than many expect.
We have no desire to be right on certain fundamentals, but to get “trampled” by the market moving opposite to us.
To do so would be akin to simply ignoring an irrational mob of people as it approaches. Perhaps the people have no logical reason for their behavior – but if we ignore them as they rush toward us, we will get hurt nonetheless.
Large market players can sell gold simply because they trust that the Fed has everything under control.
Something must change in the market psychology to alter this belief.
Gold Not Acting As Safe-Haven?
The last two days were especially noticeable in that gold failed to receive a bid, even despite weakness in both the US dollar and the broad stock market. At right we plot gold, the dollar, and the S&P 500 since Thursday:
There is an old investment adage which says: “If a market fails to move higher when it should, it is showing internal weakness.” (The implication is that absolute price weakness should be the next to manifest.)
This is the only way we can interpret the price action for gold recently. It is failing to attract buying on either US dollar weakness or stock market weakness.
If gold cannot move higher when traditionally-inverse markets are showing weakness, then when will it?
This is the question gold investors must ask themselves.
Short-Term vs. Long-Term
We are not bearish over the long-term. Irrational behavior can reverse just as quickly as it began.
But something must change as per market psychology to shake the precious metals out of their malaise. A trigger must present itself. We cannot say what that trigger will be yet – but we will absolutely see it on the charts when it occurs.
For now, subscribers continue to hold puts as protection in case of a more serious decline in the metals during the second half of the year.
SPX Long-term trend: Uptrend continues with a serious loss of upside momentum in weekly indicators.
SPX Intermediate trend: An ending-pattern appears to be forming.
Analysis of the short-term trend is done on a daily-basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which discuss longer market trends.
Market Overview
Since SPX touched 2440 in early June, it has been trading sideways in a 30-point range which very much looks like distribution. On the Point & Figure chart, we can count over 250 one-point reversals during that time span. That does not mean that if we start a correction on Monday, the index will have a decline of 250+ points. The one-point chart is very good for estimating the extent of minor moves, but the 10-point chart is much better for estimating moves of intermediate duration. The pattern which is being made by that chart does not look complete and will probably need more time before we can draw some meaningful conclusions about the extent of any correction.
Structurally, there isn’t much doubt that SPX is forming an ending pattern which may have completed at 2353 last Monday. Yes, we discussed the potential for 2500 but it would be a miracle if the index could reach that level before correcting, first. So, next week should tell us a little more about what the market wants to do. After the tech bust of a couple of weeks ago, we suggested that SPX could make a new high at 2455 and perhaps even higher. We’ve reached 2453 and turned down, building a little congestion area between 2431 and 2441. If we can get past 2441 next week, we could get up to 2458-60, but that would probably be the extent of the rally. If, instead, we trade below 2431, we are looking to retest the 2416-20 level, at a minimum.
Analysis: (These Charts and subsequent ones courtesy of QCharts.com)
Daily chart
Ever since late March, SPX has continued to trade within the second quartile of the blue channel which starts at 1810. After the correction from 2400, two patterns have formed within that trading range. The first one is included between the two red vertical lines which appears to be reproduced by the next pattern as part of a fractal. All the latter needs to become a duplicate, is a minor decline. If that is the only correction we get, there is a good chance that we would go on to form one more similar pattern that could then extend to about 2500 (which was the original count) before we start a larger correction. This would also satisfy the structure expected by some EWT analysts, and fit within the cycle rhythm which anticipates a 20-wk low in mid-August that would complete the third pattern.
I know that this is expecting the market to behave in a specific manner over the next couple of months; whereby it could deviate from it in a dozen different ways. But there is some logic to this supposition which deserves consideration. Since we don’t have to be attached to it, let’s just watch if this is the way things unfold and make adjustments to the suggestion if/when necessary.
As for the short-term, there is a much greater chance that we are about to duplicate the first pattern. Besides the similarity of the two structures, we also have warnings from the oscillators that a decline is about to start. This daily SRSI has already given a sell signal and the CCI (above) is in a position from which it could easily follow. The behavior of the A/Ds may be a fly in the ointment. They have been strong throughout the consolidation of the the past two days, and closed strong on Friday. This could suggest that another move to about 2458-60 may be needed before we can get our minor correction.
Hourly chart
On this chart, the dashed blue lines represent the second quartile of the large blue channel shown above. The top, greenish line is the extension of the bottom line of a short-term channel drawn from 2084. It has added itself to the top dashed blue line to form resistance which the index could not get above. You will also note that there is an even shorter orange channel which has been broken to the downside; but that has not sent the index into a steep correction. This means that, despite the obvious price deceleration, there is still plenty of strength left in this move and it would not be surprising to see one more rally to the dashed blue line at the top before we dip down to the 2416-20 level.
The hourly oscillators could accommodate either scenario, perhaps favoring the first. As I mentioned earlier, the A/Ds have remained strong, and the momentum oscillators were still on neutral at Friday’s close.
An overview of some important indexes (daily charts)
There is not much to say about the charts we have assembled to help us gauge future market direction. The top tier remains in an uptrend and the bottom one in a sideways move. But the two top left charts (DJIA and NYA) have been going up by small weekly increments since their last lows, and that is a sign of deceleration and loss of upside mojo.
UUP (dollar ETF)
UUP has followed a deceleration pattern (upon reaching the bottom of the correction channel) with a bounce which does not look capable of making it to the top of the channel, yet. This may require more preparation in the form of base-building — perhaps even with a slightly lower low, since there is a potential count down to 24.50.
GDX (Gold Miners ETF)
GDX had a good bounce after its 25-day and 90-day cycles bottomed, simultaneously. If it can get past the trend lines and MAs which stopped its advance on Friday, it could extend its rally, but it should eventually pull back into the 9-10wk cycle before moving higher. If it can get to 23.50 and then pull-back into the cycle low while remaining at 22.50, it will have built an important base capable of supporting an intermediate uptrend.
Note: GDX is now updated for subscribers throughout the day, along with SPX.
USO (U.S. Oil Fund)
USO has returned to the low of its base — about a point above the major low made during 2/16. Not only is that level strong support, but USO is also near filling a count generated by the above distribution pattern marked on the chart. Furthermore, it is at the bottom of an intermediate channel, and the oscillators are making favorable patterns for a low. Things often come in threes or fives in the stock market, and you could not get a better five-wave pattern to the downside if you drew it yourself. USO could be near an important reversal, though not necessarily ready for an extended move to the upside.
Summary
Structure suggests that SPX is near a correction, but could still make a slightly higher high if it can get past 2442. A move below 2430 should lead to a re-test of the 2416-20 support, at a minimum.
After nearly a year of surprising political developments, odds-on-favorite Emmanuel Macron’s victory in France last month was a welcome change and a relief for many. As the the United Kingdom general election took place last week and with negotiations with the EU expected to begin later this month, the issue of whether Brexit will be of the “soft” or “hard” variety remains in the foreground. The Eurozone project has long had its fair share of detractors, and for many Eurosceptics the Brexit referendum last year further reinforced the view that the eurozone is destined to fail.
To be sure, there’s nothing really new about this. Back when the European Currency Unit (“ecu”) was officially replaced by the euro in January 1999, I was in my first year of university in the UK. In those days, Labour was in power and Prime Minister Tony Blair’s europhilia was juxtaposed with the “five economic tests” set by then-Chancellor Gordon Brown, who was far less enthusiastic about the eurozone’s prospects. The issue of British euro membership has long been a fairly divisive one, and the key question of sovereignty remains a central concern with regards to deepening the Union as a whole until this day. Traditionally, uncertainty has tended to be positive for gold.
GOLD PERFORMANCE IN EUR TERMS
Since the inception of the single currency, being long gold has been a good proposition for eurozone investors, with better risk-adjusted returns than those on main equity indices such as the DAX, CAC, and Eurostoxx 50. In fact, since January 1999, when LBMA prices traded at 250.90 in euros, gold has seen a compound annual growth rate of some 8.7% compared to 5.4% for the DAX, 1.5% for the CAC 40 and around 0.15% on the Eurostoxx 50, using monthly data and closing prices from May 31.
Over a 10-year holding period, gold in EUR terms had annualized monthly returns of 11.6% with a standard deviation of 2.1%. Meanwhile, the DAX returned an average of 4.9% with a standard deviation of 4.3%, while both the CAC and the Eurostoxx 50 lost money. The French index recorded a loss of nearly -1.1% with a volatility of 2.6%, while the European benchmark performed even worse with -1.9% and standard deviation of 2.7%. In contrast to stocks, since the euro became legal tender gold has not experienced negative returns over a 10-yr horizon. In other words, the precious metal has performed better than equities, with lower volatility to boot.
In addition to quantitative easing, in recent years the eurozone began to experiment with something that was considered impossible before the global financial crisis of 2008: a negative nominal interest rates policy, or NIRP. An oft-cited argument against gold, namely that the metal does not provide a yield, simply does not work in a NIRP environment. Since the ECB instituted a negative deposit facility interest rate in June 2014 gold has appreciated over 21% in EUR terms, and since 3-month Euribor rates turned negative in May 2015 the metal has rallied some 7% in EUR terms.
“HARD” BREXIT AND WEAKER GBP LIKELY BULLISH FOR GOLD
Although it’ll be years before the impact can be fully assessed, one of the most evident adverse consequences of Brexit for now has been the broad depreciation of the sterling. Interestingly, gold has also historically performed well on the back of a weaker pound. In real effective terms, current levels of GBP already suggest a higher price for gold in USD terms.
Furthermore, over the past two decades a stronger EUR/GBP has likewise been generally associated with higher gold prices, in USD terms as well as in EUR and GBP, which may be particularly significant in the event of a “hard” Brexit. This relationship may yet change going forward of course, but for now it remains statistically significant.
HEDGING CURRENCY DEPRECIATION AND TAIL RISK
Concerns about continued divergence between core and peripheral eurozone countries and the Union’s long-term survivability are unlikely to wane anytime soon. Greece, once again in recession, has debt repayments of some 7.3 billion euros due in July and is clearly in need of debt relief, while the Italian banking sector is teetering on the brink of disaster and is soon likely to test the Bank Recovery and Resolution Directive and its new bail-in mechanisms. While the wave of populism seems to have receded somewhat recently in “core” Europe, a resurgence cannot be ruled out. In Italy for instance, the growing popularity of the eurosceptic Five-Star Movement looms large. A victory for the party in the next election would most likely be seen as negative for peripheral bonds, eurozone equities and the euro itself.
Delving into detail of the myriad of concerns and challenges facing the eurozone is well beyond the scope of this piece. Suffice it to say that, however improbable, a breakup of the monetary union will remain a tail risk for the foreseeable future and gold will remain relevant in terms of asset allocation as a potential hedge. Thus far, the precious metal has done well for eurozone investors, holding up its reputation as an effective tool for wealth preservation.
The London Bullion Market Association, LBMA Launches Code Of Conduct For Precious Metal Markets launching a code of conduct aimed at boosting confidence in the $5 trillion a year London gold market, it said on Thursday, following years of heightened regulatory scrutiny of the city’s financial sector.
The guidelines set out best practices in ethics, governance, compliance and risk management, information sharing, and business conduct, the bullion market’s trade association said in a statement.
“The code is an important step forward to build greater trust, consistency, and transparency throughout the market,” LBMA chairman Paul Fisher said in the release.
The LBMA said its more than 140 members – which include banks, refiners, traders, and fabricators – will be required to sign a statement of commitment to the code, which will be mandatory from June 2018.
“Members will have a 12-month period to demonstrate compliance with the code. Failure to do so could potentially result in their membership either being suspended or withdrawn,” a spokesman for the LBMA said.
The code is one of three developed as a result of the Fair and Effective Markets Review (FEMR) of the fixed income, forex, and commodities markets which was commissioned by the UK government three years ago after British banks were fined billions of pounds for trying to rig benchmark interest rate Libor and manipulate foreign exchange reference rates.
The FEMR found that informal codes of practice across these markets had often been misunderstood or disregarded, especially in bilateral over-the-counter (OTC) markets like gold. A lack of internal controls and personal accountability had meanwhile contributed to what it called “ethical drift”.
The review recommended that firms working within these markets should take greater collective responsibility for “developing and adhering to clear, widely understood and practical standards of practice”.
In the wake of the Libor scandal, London’s precious metals price benchmarks, or fixes, were reconfigured, while the LBMA overhauled its management structure last year and announced moves toward trade reporting.
Rising concerns over regulation and a resulting push toward greater transparency have fueled speculation that more of London’s OTC gold trading could move onto exchanges.
Intercontinental Exchange (ICE) launched new precious metals contracts earlier this year, and the London Metal Exchange (LME) plans to launch its LMEprecious suite of contracts in July.
The inevitable rise of gold and silver is close and thus, the end of the world’s present monetary system is already taking place. The clearest symptom is the frantic bellicosity of the US, propelled by the perception on the part of those who run the US, that the US is losing influence in the world, and that their deep-seated objective for control of the whole world is slipping out of their hands. The end of the dollar as the basis of the international monetary system means the end of the US as we have known it.
Silver does not behave in the same way. It is not adequate for large transactions, because as the quantity of silver offered increases, its marginal utility decreases to a small extent. As an example: whoever wishes to purchase gold by tendering silver in exchange, will find that the price in terms of silver will increase as the quantity of gold to be purchased increases; this will not be because the price of gold rises, but rather because the units of silver offered in quantity lose a small part of their value.
