Precious Metals

     

 

 

Known and Unknown Anomalies

Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals sector as well.  Today I am going to introduce one of those to you.

 

As Donald Rumsfeld, former secretary of defense knew, there are things we know we know, things we know we don’t know, and things we don’t know we don’t know (unfortunately he neglected to consider that there are also things we think we know that just ain’t so, such as “Saddam has WMDs” – but let’s not digress). Anyway, Seasonax knows them all! [PT]

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New Chief Monetary Bureaucrat Goes from Good to Bad for Silver

The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.

 

Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor of Nevada before the bar dropped (based on his sanguine facial expression). [PT]

 

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Net Present Value

Warren Buffet famously proposed the analogy of a machine that produces one dollar per year in perpetuity. He asks how much would you pay for this machine? Clearly it is worth something more than $1.00. And it’s equally clear that it’s not worth $1,000. The value is somewhere in between. But where?

 

We are not sure why Warren Buffett invoked a money printing machine of all things – another interesting way of looking at the concept is by e.g. considering land. Why does land have a finite value? After all, a piece of land that can be used to grow wheat can conceivably do so in perpetuity (even if it is merely valued as standing room, such as a plot of land on 5th Avenue in NYC, it can render that service forever. The only important attribute is that the land in question be capable of generating rents, or is at least expected to become capable of doing so in the future). Why then isn’t it worth an infinite amount? Land values are appraised the same way the values of other factors of production are appraised, namely (to paraphrase Mises) according to the services they will render at various future time periods, with time preference taken into account (if society-wide time preference is high, the natural interest rate will be high as well and land values will be affected negatively; conversely, land values will tend to increase amid declining time preference and falling interest rates). By applying a discount to a series of consecutive future time periods, one will arrive at a sequence of values converging to zero, hence the price of land is finite (sub-marginal land that cannot conceivably yield any rents will have no value at all, or at best a speculative value). This is just considering the basic ceteris paribus (or equilibrium) framework, as in the ever-changing real economy numerous other factors will also influence the appraisal of land values; still, it is fair to say that the quality of the land concerned (how much output it is expected to produce per input of labor and capital) and time preference (which determines the height of the interest rate used in the discounting procedure) are the most important factors (and it is important to recognize that they are distinct factors, completely independent of each other. Originary interest is not a function of productivity). Other factors can of course overwhelm these basic considerations – these concern mainly various types of government intervention in the economy (such taxes levied directly on land or on land rents, the security of property rights, etc.), or other developments that impact expectations (for instance, if a major volcano outbreak is expected to be imminent, the value of land in the vicinity will probably decline quite a bit). As Keith explains below, time preference is a fundamental pillar of all human action. We are mortal and in our perception of time, there is always a “sooner” and a “later”. Therefore time preference will always exist and be positive. It cannot be any other way, as all provisioning for the future would otherwise cease. Thinking of time preference declining to zero or becoming negative is akin to attempting division by zero, i.e., it simply makes no sense whatsoever. If it actually were to happen, we would consume all existing capital and slowly die of hunger thereafter. [PT]

Photo credit: Bob Embleton

 

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Rumors Driving Short Term Price Swings

The prices of the metals dropped a bit more this week, -$7 and -$0.16. We all know the dollar is going down, that it is the stated policy of the Federal Reserve to make it go down. We all know that gold has been valued for thousands of years. So why do we measure the timeless metal in terms of paper currency?

 

Money – sound and unsound [PT]

 

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Amassing Unproductive Debt

Last week, we discussed the marginal productivity of debt. This is how much each newly-borrowed dollar adds to GDP. And ever since the interest rate began its falling trend in 1981, marginal productivity of debt has tightly correlated with interest. The lower the interest rate, the less productive additional borrowing has in fact become.

 

Left: the first IKEA store located in Älmhult in Sweden, near the residence of the company’s founder (nowadays the store is a museum); right: a Task Rabbit car. Given the valuations at which TaskRabbit was able to raise funds recently, it is a good bet IKEA paid a small fortune to take it over (waiting for the QE-induced bubble to burst may have been cheaper). [PT]

 

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Chart Patterns

The prices of the metals dropped $20 and $0.39, a downhill slide interrupted on Thursday by speculation fueled by some economic data (as we covered in our special report), and which resumed on Friday.

 

Gold over the past two years. The blue rectangle outlines the pattern discussed below. It doesn’t really work well as a head and shoulders (H&S) pattern in gold, since the neckline would be beyond skewed. We should also mention that this pattern is really not what seems to be commonly believed nowadays. In its original meaning, an H&S pattern can only occur at the end of an extended trend, with the “head” marking a major price peak. The recent “head” would be below the peak seen last year, so it is disqualified based on this definition. Similarly, an inverse H&S pattern occurs only at a major low, not somewhere in the middle of a trend. Gold has moved sidewaysin a series of overlapping waves since rallying from late 2015 to mid-2016. In other words, this some sort of (complex) corrective formation is being built. Given that it has been two years since the price low (in non-dollar currencies the low was made 3 to 5 years ago), it seems highly unlikely that this is a corrective wave in a primary bear market. It is not impossible, but it isn’t likely. In USD terms gold trades 23% above its 2015 low – and it does so despite a fundamental macro backdrop that is at best neutral with a bearish tilt. All of this points to a beginning cyclical bull market. [PT] – click to enlarge.

 

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Claim-Less Delirium

Yesterday, the Department of Labor announced that initial jobless claims dropped. Quite a lot. So naturally, markets reacted. The stock market began to rise. The euro rose, at least for a while.

 

Initial weekly unenjoyment claims over the past 20 years. Can you say “contrary indicator”? The most recent palpitations in this measure were driven by assorted named hurricanes making landfall – a very similar effect could be observed in 2005 when Katrina devastated New Orleans. What is most remarkable though is that in the QE-distorted bubble economy initial claims have actually been driven way below the levels of early 2000, which were long considered modern-day extremes. In fact, comparable numbers were last seen shortly after Nixon’s “temporary” gold default – nearly 50 years ago. Anyone holding or planning to buy stocks should ponder the correlation of this indicator with stock prices – its history suggests that right now is probably one of the worst times ever to buy stocks. The same conditions tend to midwife long term upward trends in gold. Don’t let the current boom-driven distortions fool you into believing everything is fine. Consider this example: from 1920 until late 1922 Germany’s unemployment rate stood at less than 2%, as the Reichsbank ran the printing presses at full throttle day and night. One year later it had surged to 25%. We obviously don’t want to insinuate that a replay of Weimar is underway; we only want to make the point that economic conditions created by massive money printing are an illusion invariably fated to be shattered. [PT] – click to enlarge.

 

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A Big Reference Chart Collection

Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn’t get around to reading all of it (and selective reading is always possible, aided by the table of contents at the beginning).

 

The performance of major asset classes since gold bottomed in July of 1999. Despite the stock market outperforming gold handily since 2011, it is still lagging behind quite a bit over the past two decades. So it is clear what one should rather have owned. As far as we are concerned, for a variety of reasons we do not believe that gold’s secular bull market is over just yet, despite the steep correction from 2011 – 2015 (or 2013 in terms of most non-dollar currencies). The beginning of the new uptrend (gold is already up about 25% from its low) is in many ways reminiscent of the beginning of the bull market, as it is a halting affair with many short term setbacks, accompanied by great skepticism. The current year is particularly remarkable, because gold had every reason to decline, but up until recently had actually outperformed every other major asset class (the stock market only managed to catch up with it very recently). Gold has begun to strengthen ever since the Fed’s rate hike campaign began – regular readers may recall that we expected this to happen and asked them to “bring it on”. This is counter-intuitive and the consensus certainly expected the exact opposite outcome. In reality it is both logical and telling. As an aside: if we had added the CRB to this chart, you would see that it has actually lost 3.2% since July of 1999. We refrained from adding it because the CRB does not properly depict the price performance of commodities. Its performance includes the futures roll-over effect, which leads to huge distortions over time. A spot price index looks completely different and would show a respectable gain in commodity prices since 1999 (and it should be obvious that with crude oil trading at $50 instead of $10 and copper nearly at $3 instead of 40 cents, etc., that commodities are generally definitely not cheaper than in 1999/2000). Unfortunately we couldn’t find such an index at stockcharts, so we decided to rather leave commodities out – click to enlarge.

 

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Fundamental Developments

The prices of the metals shot up last week, by $28 and $0.57.

 

Heavy metals became pricier last week, but we should point out that the stocks of gold and silver miners barely responded to this rally in the metals, which very often (not always, but a very large percentage of the time) is a sign that the rally is unlikely to continue or hold in the short term. [PT]

 

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Where the Good Things Go

Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?

 

Since putting in a secular low at the turn of the millennium, gold is still the by far best performing major asset class, despite suffering a big correction from its 2011 peak. There is good reason to expect that the secular bull market isn’t over yet, regardless of the fact that the market is testing the patience of bulls. This is probably a case of “it will go wherever it needs to go, just not when you think it should”. [PT] – click to enlarge.

 

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Too Big to Fail?

 

Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:

 

“Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”

 

Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a fairly well-timed case, as silver eventually rose from a low of around $4 in 2000/2001 to a high of almost $50 in 2011, but we neither bought into the “shortage” story (note: one of the reasons why gold and silver are monetary metals is precisely that their above-ground stock is so large that shortages are extremely unlikely to ever develop), nor the idea that nefarious forces kept prices from rising. This is not to say that nefarious forces as such don’t exist, only that they probably have better (and more profitable) things to do. Also, since silver was the best-performing commodity from 2000-2011, they would have to be considered pretty inept. [PT]

 

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Fat-Boy Waves

The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.

 

Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet “Transitory” Yellen, Mario “Smaug” Draghi, and last but not least, the healthiest leader in history, Jong-un “Fat-Boy” Kim, as always positively radiating good vibes. [PT] – click to enlarge.

 

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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

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