crash

Since WW2 economic theorists have posited that demand in the economy could be stimulated by a combination of deficit spending by the government and by suppressing interest rates.
The separation of demand from production was promoted by Keynes and interest rate management of the economy by monetarists, though there is considerable overlap between the two. Yet no progress in economic management has been achieved: instead we appear to be on the brink of a major economic dislocation.
Far from banishing the business cycle, it has become worse. To understand why it’s worth looking at the reason the concept is failing.

falling-bear

The outlook for gold is now more positive than it has been for some time. After a prolonged period of low volatility as funds invested in ever-greater risk, markets have snapped and volatility has jumped.
In short, we are swinging very suddenly from complacency to reality.

end badly

Recent evidence points increasingly towards global economic contraction.
Parts of the Eurozone are in great difficulty, and only last weekend S&P the rating agency warned that Greece will default on its debts “at some point in the next fifteen months”.   Japan is collapsing under the wealth-destruction of Abenomics. China is juggling with a debt bubble that threatens to implode. The US tells us through government statistics that their outlook is promising, but the reality is very different with one-third of employable adults not working; furthermore the GDP deflator is significantly greater than officially admitted. And the UK is financially over-geared and over-dependent on a failing Eurozone.
It seems likely that a change in trend for the gold price in western capital markets will be a component part of a wider reset for all financial markets, because it will signal a change in perceptions of risk for bonds and currencies.
With a growing realisation that the great welfare economies are all sliding into a slump, the moment for this reset has moved an important step closer.

crash

In the US, while much is made of an improving jobs scene, the fact remains that in relation to the size of the workforce there is a greater percentage of working-age people not employed since the 50’s era of the male dominated workplace.
This is creating a two-way pull for gold and silver.
Declining commodity prices coupled with a strong dollar have hit both precious metals hard since mid-August with gold falling $130 at worst, and silver having been in continual decline since mid-July.
However, both metals have become oversold and as a result have bounced firmly off support at $1180 and $16.75 respectively. The chart below is of gold from its all-time high and its 200-day moving average.

economic dollar collapse

Iceland’s currency collapse is not an isolated event.  The purchasing power of a fiat currency varies constantly, even to the point of losing it altogether. The truth of the matter is the utility of a fiat currency is entirely dependent on the subjective opinions of individuals expressed through markets, and has nothing to do with a mechanical quantity relationship.
In this respect, merely the potential for unlimited currency issuance or a change in perceptions of the issuer’s financial stability, as Iceland discovered, can be enough to destabilize it.

silver smash

Precious metals have faced adverse weather as evidence mounts that major economies may be sliding into recession.
Silver in particular has been badly mauled, slipping to new lows below $17.
It now stands at one third of the brief high of nearly $50 achieved in April 2011.  
Silver is also very oversold as evidenced in the chart below.  
The managed money category is now so short that they are even net short of silver after their longs are taken into account!

gold

We already have monetary hyperinflation, defined as an accelerating debasement of the dollar.   And so for that matter all other currencies that are referenced to it are on a similar course, a condition which is unlikely to be halted except by a final systemic and currency crisis.
Attempts to stabilize the purchasing power of currencies by raising interest rates will very quickly develop into financial and economic chaos.
The insurance cost of owning gold is anomalously low, being considerably less than at the time of the Lehman crisis, which was the first inkling of systemic risk for many people.
We are being regularly advised by analysts working at investment banks to sell gold.   But bear in mind that the investment industry is driven by trend-chasing recommendations, because that is what investors demand.
Expecting analysts to value gold properly is as unlikely as farmers telling turkeys the truth about Thanksgiving.

Caption Contest 1

Last week saw gold rally $15 to $1233 on Tuesday before sliding to $1207 yesterday morning, then rallying in the afternoon. Silver’s moves tracked gold’s, bottoming out at $17.30 Thursday at the London opening.
Friday morning precious metals were firmer in pre-LBMA trade, reflecting some short-covering ahead of the weekend.
The action, as has often been the case recently, is in paper markets with hedge funds shorting gold and silver against a strong dollar.   This can be readily seen in the following chart of Managed Money shorts on Comex, which is back in record oversold territory.  The chart of silver is similar:

end badly

Thanks to the Fed’s monetary policies, which have encouraged an increase in demand for US Treasuries, the Federal government no longer has a problem funding its deficit. QE is therefore redundant, and has been since tapering was first mooted.  This does not mean that QE is going to be abandoned forever:  its re-introduction will depend on the relationship between the government’s borrowing needs and market demand for its debt.
This analysis is confirmed by Japan’s current situation. There, QE coincides with an economy that is deteriorating by the day. One cannot argue that QE has been good for the Japanese economy. The reality behind “abenomics” is that Japan’s government is funding a massive deficit at the same time as savers are drawing down capital to cover their day-to-day living requirements. In short, the funding gap is being covered by printing money.   And now the collapsing yen, which is the inevitable consequence of monetary inflation, threatens to expose this folly.

JP Morgan
Play

With silver smashed to a new bear low breaking long term support at $18/oz Friday, Alasdair Macleod joined the show to break down the trading action in precious metals, discussing: 

  • Friday’s silver slaughter- is the bottom finally in, or are we looking at a silver bloodbath on the Globex open Sunday night and a drop to $15? 
  • SGE international gold trading platform goes live- Alasdair discusses the long term implications, stating that the Gold market is being wrested from the West
  • September COMEX silver futures set to break new all-time volume record, shattering May 2013′s previous record- Alasdair’s explanation for record volumes in Sept COMEX silver may surprise you
  • Physical silver demand EXPLODES as SDBullion records highest single day sales total ever Friday, & physical silver shortages return to US wholesale & retail markets- is a silver premium spike next? (Industry contacts warn the answer is YES)
  • A classic example of Madness of the Crowds: Alibaba US IPO overtakes Walmart market cap- legendary gold trader Jim Sinclair on why Friday “is a day that should be memorized

The SD Weekly Metals & Markets With The Doc, Eric Dubin, & Alasdair Macleod is below:

silver precipice

Gold and silver drifted lower over the course of the week, with a challenge to the $1200 level for gold becoming a distinct possibility.  On Friday, silver plunged below support at $18.
History shows us that the most successful investors are value investors, and those experienced in precious metal markets are currently happy to buy the dips. Meanwhile, with the majority of momentum traders being short of physical gold and silver, it is hardly surprising they talk these metals down.

dollar

The gearing of total world money and credit on today’s monetary base is forty times, but this is after a rapid expansion of the Fed’s balance sheet in recent years. Compared with the Fed’s monetary base before the Lehman crisis, world money is now nearly 180 times geared, which leaves very little room for continuing stability.
It may be too early to say this inverse pyramid is toppling over, because it is not yet fully confirmed by money flows between bond markets. However in the last few days Eurozone government bond yields have started rising. So far it can be argued that they have been over-valued and a correction is overdue.
But if this new trend is fuelled by international banks liquidating non-US bond positions, we will certainly have a problem.

images

The current strength in the dollar has brought a new dose of uncertainty to precious metal prices. For the moment, it has been more a case of weakness in major currencies, particularly the euro yen and pound, rather than dollar strength. If signs develop of bigger shifts in favour of the dollar, markets could be signalling a greater degree of currency instability, leading the Fed to contemplate how to counteract the deflationary effect on domestic US prices.   This should generally be positive for gold after the current period of uncertainty.
Silver’s open interest is growing strongly as the bears increase their shorts. The preliminary figures for yesterday take open interest to a new record level:

Bernanke-Dimon-Fed-Tunnel

Why does it matter if the gold price is rigged?
It behoves those of us who argue the economics of sound money to try to make the answer as intelligible as possible without sounding like a committed capitalist and a conspiracy theorist to boot, so here goes…

gold bottom

Gold and silver had a bad week, with gold falling $25 to a low of $1262 by the Comex close Thursday, and silver by $0.50.  Friday morning UK-time prices opened a little better on overnight physical demand, no doubt stimulated by those lower prices. The background to this poor performance was dollar strength relative to weak currencies, with the yen, euro and pound all declining sharply.
It feels like the market is drained of all positive sentiment, which is reflected in the very low level of open interest in the futures market.   These conditions are more consistent with a market that is bottoming out than one that is about to fall sharply.   Meanwhile retail demand seems to be stabilising, with growing interest for coins in the west, and weekly physical deliveries in Shanghai have quietly doubled over the last two months.
Demand for physical gold has the stealthy effect of increasing the gearing of the shorts in the paper markets.