URGENT🔴 Financial Reset Wipeout !Move Over US Dollar, It’s Gold’s Time To Shine!

Simon Black: REASON #437 To Own Gold – The Fed Wants NEGATIVE INTEREST RATES Simon goes over the 437th reason to own gold – negative interest rates, which the Fed is now publicly praising and actively considering…And just like that, it seems we’re headed back to quantitative easing… After cutting interest rates to nearly zero following the 2008 crisis, the Federal Reserve starting raising rates near the end of 2015 (from 0.25% to 2.5% today). Following the most recent hike in December 2018, Chairman Powell seemed hell bent on further tightening, saying “some further gradual increases” were in the cards. Then the stock market promptly fell nearly 20%. Investors were in panic mode and calling for the end of the world. The pain was too much… Last month, the Fed left rates unchanged… and Powell removed any language about further hikes. Already Powell is capitulating. The new chief economist for the International Monetary Fund praised the move, saying she sees “considerable and rising risks” to the global economy. And no surprise here, but Paul Krugman also supported the Fed’s policy. He’s also worried about a possible recession… but more worried the Fed won’t be able to cut rates low enough. Central banks tried raising interest rates, but the market wouldn’t take it. Now, the market is putting the likelihood of a rate hike this year at ZERO… and it’s expecting a rate cut next year. Both the European Central Bank and the Bank of Japan were supposed to start tightening policy and raising rates… now, they are both considering cutting interest rates even deeper into negative territory. And after a 20% drop in US stocks, the Fed has taken its foot off the pedal. But the people still want more… The President of the Federal Reserve Bank of St. Louis thinks current interest rates are “too restrictive.” He too wants lower rates. The San Francisco Fed agrees – they were singing the praises of negative interest rates in a recent research paper, saying they would have helped the economy recover even faster after 2008. And SocGen economist Albert Edwards thinks the US will see negative interest rates and helicopter money (meaning central banks will print money and give it directly to the people) during the next recession. When you’ve got Fed banks publicly praising negative interest rates, get ready… because it means they’re considering bringing negative rates to the US. And that’s incredibly bullish for gold. We’re not the only ones who think so… The price of the yellow metal is trading at an eight-month high above $1,300 an ounce. And central banks are buying hand over first. In fact, the folks that control the world’s money supply, are buying gold at the fastest pace since World War II. Oh, and they’re lightening up on Treasurys at the same time (foreign purchases of Treasurys through October of last year were down by 50%). The controllers of the printing press are trading their fiat for gold – and its 5,000 year history as the risk-free asset. I guess people no longer want to lend money to a government that has no chance of ever paying it back. But that’s just one reason (albeit a big one) that we’re bullish on gold today… Another is that we’re not finding any new gold. Gold and gold stocks have been out of favor for years, so mining companies slashed exploration budgets to 11-year lows to tighten their belts. As a result, they’re finding less and less gold. So when demand really starts to heat up, the gold probably won’t be there… Lots of the biggest players in the gold space have been warning about this set up. This lack of new deposits is no doubt partly responsible for the mega gold mergers we’ve recently seen… Just a month ago, Newmont Mining, one of the biggest players in the industry, acquired Goldcorp for $10 billion. And in September of last year, Barrick Gold bought Rangold Resouces for $6 billion. I wouldn’t be surprised to see a lot more deals in the sector (especially if the Fed does cut rates again, making money cheaper). So we may see negative interest rates in the US, meaning you earn more holding gold (nothing) than you do losing money in cash. And some of the biggest players in the gold sector are warning we’ve seen peak gold production. Also, the biggest pools of money on the planet – central banks – are loading up on gold. Dwindling supply met with tons of demand means higher prices. Historically, gold has been a fantastic leading indicator of central bank policy… The metal ran from under $1,200 an ounce to nearly $1,300 an ounce prior to the Fed’s reversal in January. And if it runs higher from here, which we fully expect, it means all hell is about to break loose. I’d recommend adding to your position while you still can. Fundamental Shift In Behavior As Central Bank Gold Demand Spikes Is the global economy in more trouble than we’re being told? What about the US dollar? Because what the “smart money” is doing is significant…There has been a fundamental shift in central banks’ behavior with respect to gold over the past decade. The 2008 financial crisis led central banks to re-evaluate the relevance and importance of gold on their balance sheets. Check out the sudden change in sentiment that occurred in 2009, as central banks shifted from being net sellers to net buyers for the first time in 20 years. While central bank appetite for gold has been strong ever since the financial crisis, it really picked up in 2018. They added 651.5 tonnes to official gold reserves, up 74% versus 2017 to the second highest yearly total on record! Net purchases jumped to their highest level since the end of US dollar convertibility into gold in 1971. Central banks are increasingly looking to diversify their holdings by increasing exposure to gold. This is significant, as central banks are the ‘smart money’ given their influence on global economics and access to non-public information. It makes one wonder what exactly they know that led to the largest increase in gold purchases in nearly 50 years! Is the global economy is greater trouble than they are disclosing? Will the U.S. dollar decline sharply over the next few years or even lose world reserve status? Has the growing global debt burden finally reached levels too high to manage? Perhaps it is no coincidence that the New York Fed made a stunning admission this week that the U.S. dollar could lose its reserve status: “Nevertheless, recent trends bear watching as history suggests that a currency’s dominant status is not immutable.” Of course, this is nothing new to anyone that has studied monetary history. But it is new for a U.S. central bank to publicly admit (warn?) about the possibility of a dollar crisis. The dollar is facing a number of significant headwinds, as nations around the globe are increasingly finding ways to circumvent the dollar in global trade. Russia, China and other nations are de-dollarizing their assets, dumping dollar-denominated U.S. debt while buying gold at a record pace. The trade war with China and potential for the government shutdown to resume are other near-term factors that are weighing on the dollar. Democrats and Republicans appear unable to find a compromise regarding funds for building a border wall. They have until Friday, February 15th, to come up with an agreement or risk another government shutdown. The spike in gold demand is occurring against the backdrop of static supply, up less than 1% during 2018. Mine production was up just 0.8%, the slowest pace of growth in over decade. This is largely a factor of decreased investment in exploration and fewer new mines being built during times when profit margins are compressed. It is also becoming more difficult and expensive to find major new gold discoveries. Increasing demand and flat supply is a clear recipe for higher gold prices. It is too early to tell if the 2018 jump in central bank demand will be sustained, so we will be watching quarterly demand trends closely in 2019. Overall gold demand increased by 4% in 2018. In addition to the bullish supply and demand factor, the Federal Reserve is helping to lift gold prices via a new ‘patient’ outlook with respect to raising rates or reducing their balance sheet. The price spike over the past few months suggests that investors are becoming increasingly bullish on gold. The gold price is up $150 from the August 2018 lows. It has also broken through key resistance levels on the chart, including the 7-year resistance trend line, psychologically-important $1,300 price level and both the 100-day and 200-day moving averages. The RSI momentum indicator is currently at 58, after retreating from overbought levels with the recent pullback. So far the $1,300 level appears to be holding. This is key, as it helps to confirm the breakout when prior resistance turns into new support. Gold still needs to take out major resistance at $1,365 in order to increase our confidence that a new bull cycle is underway. But the recent move is encouraging and if the Federal Reserve is done (or close to being done) with rate hikes, this could ignite the major rally in precious metals. It is not only gold that is seeing an increase in demand lately. According to the U.S. Mint’s most recent update, Silver Eagle sales jumped 24% during January to 4,017,500 ounces. This comes amidst forecasts for increased industrial demand for silver in 2019 and a multi-year decline in silver supply. These factors could push the silver price back above $20 in 2019. Gold and silver could be at the start of a new bull cycle, as a number of bullish fundamental and technical factors are emerging. Mining stocks have been offering excellent leverage to the move higher in the metals over the past few months and we expect this trend to continue. The biggest gains are often realized at the start of new bull market cycles and several of our mining stock positions have generated double-digit gains so far in 2019. Keith Weiner: We Likely Have A Period Of Strong Dollar And Strong Gold Ahead Of Us “…we likely have a period of strong dollar and strong gold ahead of us. It remains to be seen if silver will be included with gold.” What They Don’t Want You to Know about Prices, Report 10 Feb Last week, in part I of this essay, we discussed why a central planner cannot know the right interest rate. Central planner’s macroeconomic aggregate measures like GDP are blind to the problem of capital consumption, including especially capital consumption caused by the central plan itself. GDP has an intrinsic bias towards consumption, and makes no distinction between consumption of the yield on capital, and consumption of the capital per se. Between selling the golden egg, and cooking the goose that lays golden eggs. One could quibble with this and say that, well, really, the central planners should use a different metric. This is not satisfying. It demands the retort, “if there is a better metric than GDP, then why aren’t they using it now?” GDP is, itself, supposed to be that better metric! Nominal GDP targeting is the darling central plan proposal of the Right, supposedly better than consumer price index and unemployment (as Modern Monetary Theory is the darling of the Left). There is No Way A Central Planner Could Set the Rate Anyways, last week we said we would look at the other premise (from the Surest Way to Overthrow Capitalism): “there is no way a central planner could set the right rate, even if he knew”. It’s one thing to argue that the central planners haven’t got a metric to help them know the right rate. It’s another to argue that no such metric exists. But let’s go beyond that and concede for a moment that the central planner somehow does know the right rate. How is he supposed to set it? One problem in setting the right rate is that the very question presumes that the right rate is static. Or at least that it does not move in realtime. But of course, in a real market prices are moving constantly. Here is a graph of the Federal Funds Rate, which is dictated directly by our central planners. There is one glitch, because this graph shows the effective rate (which may sometimes deviate from the number dictated by the Fed), but this square stair-step pattern looks nothing like any real market price. Another flaw in the very idea of centrally planning interest, is to think of the economy in low-resolution terms. For example, many might say that, “inflation is moderate, unemployment is low, and GDP is growing.” At best, this is like looking at a duck gliding in the water. Above the surface, the duck appears calm. Below the waterline, the bird is paddling like mad. Let’s put this view into explicit words. We realize that few would do this (clear and explicit statements are practically taboo in certain topics). But here goes: “There are only a few variables. And each variable can be described in the language you see on paintbrushes at the home improvement store: good, better, best.” This view oversimplifies the economy, the way a low-resolution FAX (remember FAX machines?) of a picture of the Grand Canyon oversimplifies the experience of hiking down to the bottom, camping there, and then rafting down the river. This view may be sufficient for the evening news, but you will never get anywhere in understanding economics by looking at GDP, CPI, and unemployment in paintbrush terms. Suppose someone proposes raising the tax on the rich, and not just taxing their income but also taxing their wealth. And you say it won’t be good. That person retorts that we had higher taxes in the 1950’s, and GDP was growing faster. How would you answer that? Not with the paintbrush model of macroeconomic metrics! Change Occurs at the Margin If Carl Menger taught us anything, it’s that change occurs at the margin. If you hike the minimum wage by one penny, someone is laid off. The marginal worker. The very definition of marginal worker is the one who will lose his job if the profit earned by his employer declines. It is not only oversimplifying, but it misses the point entirely, if you say that “the economy is fine” after raising the minimum wage. The resolution of GDP may be too low to see it (like the FAX of the Grand Canyon picture), but someone lost his job when the new law took effect. A business somewhere was put under. Every change in the economy ripples through countless variables. The central planner does not even know what those variables are. As the person looking at the FAX can’t tell the color of your raft. And the planner wouldn’t know what to do with all those changes to all those margins, even if the data was pouring into his computer system. The price of latte rose 10 cents in Portland, the price of espresso dropped a penny in Portland, the price of cement went up $5 in Phoenix, the wage in Boston (median or mean?) fell 25 cents, the price of roofing shingles went down $10 in Phoenix, the price of sand fell 13 cents in New Orleans, the price of 2X4 lumber went up $1 in Baton Rouge, the price of … You get the idea. Each of the sellers and buyers involved in all of those markets cares a great deal about those price changes. And each has some power to alter the price. For example, the marginal coffee consumer in Portland can switch from latte to espresso. The marginal driveway paver in Phoenix can switch from concrete to asphalt. And the marginal sawmill can send more lumber to Louisiana. This brings us to a theory of prices based on the individual economic actor. There is not one right price of cement. Not even one right price of cement in Phoenix. Each producer has a price, below which he will not produce. This is based partly on cost, of course (including cost of capital). And also his minimum acceptable profit. Which may, in turn, depend on what other things he could produce and sell and what profits he could make doing those things. At the same time, each buyer of concrete also has a price above which he finds a substitute or walks away. He may substitute asphalt for concrete. Or he may walk away, because he can make more money doing something else altogether. A Simple Market You can think of three concrete producers, one with a walkaway point of $80, one at $75, and one at $70. And four concrete consumers, whose walkaway points are $65, $64, $62.50, and $61. Mr. 65 could sell it in Tucson for $70, but it will cost him $2 to truck it down, and he’s not willing to work for less than $3. The 64 guy can sell concrete pavers, but it’s not worth the effort at any price above $64. The 62.5 bid comes from a maker of concrete curbing. And so on. $70 is the marginal offer price, or just simply “the offer”. $65 is the marginal bid price, or simply “the bid”. If this is a snapshot of our market at 9:01am Monday morning, then there is no purchase or sale of concrete. Then at 10:04am, a building contractor comes to the market. He has a contract to build a million-dollar home. He is not so sensitive to the price of concrete; he needs concrete to deliver the house he is obligated to deliver. So he goes to the $70 producer and orders 50 cubic yards. This contractor takes the offer price. It’s a busy day, as another contractor orders some concrete. And another. Now the $70 producer has sold his full production capacity for the week. So he withdraws his offer to sell. We say that “the marginal offer has been lifted”, or simply the offer has been pushed up. The last concrete order for the day is at $75, $5 higher than the day before. In our example, we have three potential producers who ask $80, $75, and $70. We have four potential consumers, who bid $65, $64, $62.50, and $61. And we have three building contractors who take the best offer of $70. Which of these is the right price? Now the problem is not merely that macro statistics are low resolution, like that FAX of the picture of the Grand Canyon tour. It is that we cannot even agree whether we mean 1000 feet into the Bright Angel Trail looking down, or whether we mean base camp looking up, or whether we’re rafting on the Colorado River looking at the rapids ahead. In high resolution, we can see that each participant has his own right price, and is not willing to move above or below it, respectively. And each participant who takes the offer or bid does so, because it’s right for him at that time. The low-res monochrome FAX simply indicates that the price of concrete went up $5, as we started our discussion above. Concrete is simple. Whereas interest is the most complex phenomenon of all the phenomena in the markets. There are many more participants in the market, as every wage earner is a saver (or would be, if we didn’t have central banking and Ponzi retirement schemes). And every business is a potential borrower. The price of every productive capital asset, including stocks and real estate, depends on the interest rate. Even the simple concrete market scenario, of 9 participants one morning in Phoenix shows that there is not one right price, and the closing price tells us nothing about them or their needs or the drivers of those needs. It should be clear that the right price of concrete cannot be described. And if that’s so, then the same applies a thousandfold to the right price of interest (as we are demonstrating for investors). Interest Is Not a Simple Market Only a free market can know the right interest rate, and there is there is no way a central planner could set the right rate, even if he knew. In the end, these statements are saying the same thing. That’s because the mechanism for setting the right price is the same mechanism as for knowing the right price in the first place. Even to arrive at the low-resolution answer that concrete goes from $70 yesterday to $75 today, those 9 market participants have to do business. Or refrain from doing business, respectively. So price incentivizes some of them to act, and some of them not to act. And their action or inaction, in turn, affects prices. How could you separate these two phenomena? How could you dictate the price of $75? To whom would you dictate it? The makers of pavers and curbing won’t accept even $70, much less $75. Will you also dictate what their customers are willing to pay for pavers and curbs? Will you dictate to their customer’s customers, in turn, landscapers and commercial property owners, what pavers and curbing ought to be worth to them? This would never work. You either have to dictate to everyone what they will get, and in what quantities. Or else you let them pursue their interests. The middle of the road, the idea that the central planner can dictate one price, leaving the rest to the free market, is unstable and unsustainable. It offers some participants a too-low price, so they demand more and more of the good. And others a too-high price, so they go under. If the price they’re fixing is interest, then you get wholesale capital destruction. Which we write a lot about. Supply and Demand Fundamentals The prices of the metals fell slightly. We are continually amazed at how many commentators, both mainstream and alternative are invested (literally, and figuratively) in the everything-is-cured story. Mainstreamers are comfortable that the Fed is listening, the Fed is responsive, etc. And of course, the spread between junk and Treasury bonds has been narrowing a bit since the start of the year. Well, at least the first half of January. And oil has been rallying, as one would expect in a case of robust demand. Well, it looks to be rolling over in February. And the alternative finance people point to the technicals of copper, which has been rallying since January (though not last week). Though this is not a sign of everything being fixed, but of the inflation-is-coming story. Both mistake the (temporary) rise of other currencies as a drop in the dollar. But think about it. This is what is supposed to happen, if the economy is good. Everyone worldwide borrows more dollars (it’s the reserve currency) which they use to finance everything from commodities to bonds in other currencies. This is not dollar repudiation, but when the system is working as intended. As we write this Sunday evening, we see red in most currencies, including the yuan. Watch this carefully. As Keith discussed with Brent Johnson and Zach Abraham on Know Your Risk Radio, we likely have a period of strong dollar and strong gold ahead of us. It remains to be seen if silver will be included with gold. If currencies are to begin falling again, and if the junk bond spread keeps widening, watch out. Let’s look at the only true picture of the supply and demand fundamentals of gold and silver. But, first, here is the chart of the prices of gold and silver. Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). It was flat this week. Here is the gold graph showing gold basis, cobasis and the price of the dollar in terms of gold price. Gold appears slightly scarcer, at least in the near contract. Not really in the gold continuous basis. The Monetary Metals Gold Fundamental Price was unchanged this week, still $1,391. Now let’s look at silver. The scarcity of silver (i.e. cobasis, the red line) rose, but keep in mind this is the March contract which is rapidly moving towards First Notice Day, and hence under selling pressure (which pushes down the basis, and pushes up the cobasis—key to our response to Ted Butler). The silver continuous basis fell a bit.