SD Midweek Update: Gold & Silver were hit hard on Monday. However, this could be all be about to change because there is one thing the Fed has absolutely no control over and no way to sugar coat…
Silver was hit on Friday, and price was under constant attack on Monday:
Silver is a dollar off the highs from just last week. For now, however, it looks like any ammunition the cartel has left has been set aside for a Fed Offensive just before 2:00 p.m. EST today.
Notice that since bottoming on Monday, silver has been in a slow grind higher. It should also be noted that the rise in silver occurred before the news of the Mexico City earthquake hit the tape. Silver spent the night unscathed, so we shall see if there is any pressure to be brought pre-market on Wednesday.
As for this afternoon, it is important to understand that knee jerk reactions just before and right after the release of the FOMC statement is normal and expected, so if silver spikes or falls dramatically right around 2:00 p.m, the direction of the move might be the knee-jerk.
Once the press conference gets underway and Yellen speaks all academic but says nothing, there can be additional movements in the markets just based off the way she answers a question, so unless the day ends in dominant move one way or another for the silver, this FOMC meeting really is “historic” because gold & silver are on the cusps of a move up or down, and we all know that sooner or later the upside move in price will be explosive, but we also know the downside is painfully drawn-out.
We have been highlighting how Mexico is crucial to the world when it comes to silver. This cannot be understated: Mexico just had their version of Hurricane Harvey and they had a Hurricane Katrina. Central Mexico and southern Mexico both had massive earthquakes just this month. If the destruction above the ground is vast and extensive, what does that mean for all those silver mines in the number one silver exporting country of the world?
The implications are a silver supply shortage that could be developing on the quick if mines shut down until damage assessment can be complete. Right now we don’t even know if any collapsed. For example, First Majestic has a mine located just 80 miles south of Mexico City, and that one silver mine has two main areas of underground operations:
Silver production is already in decline and projected to decline further, and if we add significant declines in production because of collapsed, damaged, and halted mines in Mexico, the laws of supply and demand could come back to haunt the cartel for years to come. Paper silver is unlimited, but actual physical silver is something we call precious, meaning it is very valuable and in very short supply already.
And they are at least a week away from any kind of true assessment of damages because right now it is a race against the clock and an all-out effort in search and rescue. We wish Mexico the best in their search and rescue, so if you are a praying kind of guy or gal, a couple extra for the survival of our neighbors is important right about now.
Gold is signaling the same:
The move off the lows in gold started long before over 40 buildings collapsed in central Mexico. Even though it has only been a couple of days, the move in price seems painfully slow to watch. Interestingly, we have not seen price power surges to the upside in gold this year like we did last year. So if gold catches a bid and rides it out through the week we could certainly be striking $1350 again in no time.
Sooner or later, the gold market will catch on to the fact that it is not just “Rocket Man” threatening nuclear annihilation, but President Trump himself is warning the entire world that that the United States may bring war to “totally destroy” North Korea. The markets are all brushing this off for now, but as we have seen over the last couple of months, when disaster strikes, we can have a few days warning to absolutely no warning at all.
President Trump has said that it is not smart to give advanced warning of the US military plans for striking (especially when he was in the debates and Mosul was the hot military topic at the time), military action against North Korea or even some other country not even on the radar could come just like the Mexican earthquake – no advanced notice.
As many have said, when the gold train leaves the station, it will be nearly impossible to run up to it and jump aboard before it picks up speed. And with today’s high-speed rail systems, there is no chance for that at all.
Yet still, I guess the MSM is just going to pretend that everything is awesome because the Fed is “all-in” on this market.
Just look at this joke we call the stock market:
We didn’t even cover the absurdity of the market with a chart on Monday, and today, we can sum it up like this: The Fed’s Last Stand
The dollar still looks to be rolling over, but between President Trump and his warmongering, this has somehow caused a temporary pause in the decline:
The signs are clear, however, and as USD/JPY catches down to the dollar, gold and silver prices could catch a bid, but either way, as the dollar weakens, it will be harder and harder to keep the downward price pressure on the precious metals.
The yield on the 10-year has continued to have a massive move to the upside:
Looking at treasury yield in terms of fear, however, VIX has had an equally impressive move to the downside.
The bond market in general will get signals from all over the place in the coming months, and they start just this afternoon. From Fed “balance sheet normalization” to the world moving on to the post-dollar era, to massive federal emergency disaster spending, debt ceiling suspensions, and tax cuts, the bond market is also at the cusps of history much like gold and silver are. But at this point, gold and silver have been smashed down for so long, no matter what happens in the short term (falling rates) or the long term (massive Volcker type rates), it’s all bullish for gold & silver.
Coming full circle back to the concept of disaster.
Zooming out and looking back three years, it is hard to imagine the dollar will strengthen against the Mexican Peso:
Mexico is about to be spending huge amounts of currency to rebuild. If the dollar strengthens against the peso, retail spending in the United States will suffer an even further blow.
Why? Because dollars sent to family back in Mexico will be needed more than ever as rebuilding costs are high, and insurance is non-existent in the vast majority of households. Commercial property is one thing, but damages to household property is another, and if the dollar strengthens just as Mexico is rebuilding, families here will step-up to support families there.
Currency that could have otherwise been spent here will simply not. Further supporting this thesis is the fact of three years of dollar strength taking their toll, culminating in the 2017 “gasolinazo” back in January (20% national gasoline price hike), and the continued weak oil prices wreaking havoc on the finances of Pemex, and by extension, the Mexican government.
The hurricanes and earthquakes could have massive effects on the prices of everything moving forward. Maybe not by the end of the week, but as the rebuilding begins the effects will be felt. Texas, Florida, Puerto Rico, and other parts of the country and territories need to rebuild. Southern and now central Mexico needs to rebuild. The Caribbean needs to rebuild.
There is so much demand for raw materials and commodities right now – iron, steel, copper, wood, concrete, rebar, diesel – and there is only so much to go around. Crops (Florida Oranges) and livestock (Texas cattle) have suffered, and that’s just the tip of the iceberg, so food costs will go up. It will also be more difficult, time consuming, and more costly to get food and water to the places where it is urgently needed.
There is nothing economically “good” about rebuilding something after it has been destroyed.
More and more, just like we asked if the black swan was not a financial animal but Mother Nature herself, it is looking more and more like this is the case.
We may not be witnessing an instant collapse of the markets, but rather, a slow waking up to reality. It doesn’t look like the economy is a morning person either. I guess we’ll just take it day by day and get through this week…