Precious Metals

In light of the recent violent down-and-up action in the precious metals, the Hard Assets Alliance (HAA) see three effects in the fallout. For starters, demand is off the charts: "We had four to five times as many buy orders and sell orders, both in number of trades and in volume. Far more significant buying than selling, and it’s continued throughout the week." Second, the demand we're seeing is from existing customers who are returning to buy in bigger volume as they see the precious metals as being "on sale" right now. Third, the surge in physical buying combined with tightening supply is resulting in the premium paid over spot price for physical bullion to march upwards quickly. For all of recent memory, the price of precious metals has been determined in the paper marketplace (e.g., COMEX; LBMA). That may now be changing. Should the availability of physical bullion start setting the price action, the spot price quoted in the paper market for gold or silver will become an anachronistic irrelevance.

We recently asked:"are there really unpredictable market shocks or are investors paid not to care? To us, all signs point towards the next currency reset. We think monetary authorities are compulsively destroying the current global monetary system; they simply have no choice if they are to keep it afloat in the short term." With Bernanke not attending Jackson Hole, we think the choice for next Fed Chair may have profound economic implications, and that it would not require expertise in econometric modeling, credit policy management, and maintaining the public perception of economic stability. We think the next Fed Chairman will oversee a conversion of the global monetary regime. Neither growth nor austerity nor gloom of night will stay these currencies from their appointed devaluations. Bank balance sheets must be preserved; ergo sufficient inflation must be manufactured. We think the dull but persistent economic malaise amid increasingly aggressive monetary intervention policies will soon engender fear among the not-so-great washed – net savers. We think all should question whether we are 100% wrong. If not, then prudence dictates some allocation to properly held precious metals. (Presently, it is less than 1% of all global pensions.)

In the 3-d plot, we see that the current trajectory (near the bottom of the graph) is quite a bit below the trajectory during the crisis of 2008. It may be that the 2008 financial crisis was one of financial institution solvency, whereas our current crisis is starting to look like one of financial system failure. If this is the explanation for the differing trajectories then my projection is that we are going to see something we haven't seen before.  The gold-silver ratio has the potential to rise to heights never before seen. The reason is that major crises encourage hoarding and flight; and it is much easier to flee with a million dollars in gold than a million dollars in silver.

The recent slide in the gold price has generated substantial demand for bullion that will likely bring forward a financial and systemic disaster for both central and bullion banks that has been brewing for a long time. To understand why, we must examine their role and motivations in precious metals markets and assess current ownership of physical gold, while putting investor emotion into its proper context. The time when central banks will be unable to continue to manage bullion markets by intervention has probably been brought closer. They will face having to rescue the bullion banks from the crisis of rising gold and silver prices by other means, if only to maintain confidence in paper currencies. This will likely develop into another financial crisis at the worst possible moment, when central banks are already being forced to flood markets with paper currency to keep interest rates down, banks solvent, and to finance governments’ day-to-day spending. History might judge April 2013 as the month when through precipitate action in bullion markets Western central banks and the banking community finally began to lose control over all financial markets.

Last week's collapse in precious metals prices reminded Santiago Capital's Brent Johnson of Rudyard Kipling's famous poem 'If' - "If you can keep your head when all those about you are losing theirs." This brief but complete summary of why one should hold gold, the theories about the drop, his view of the manipulation - "would it really surprise anyone?", and the ongoing and increasing realization among the mainstream that a rising gold price is the canary in the coalmine of economic distress and currency debasement is well worth the price of admission. His message is clear, buy physical gold - rather than futures - don't use margin and store it somewhere safe. The last three minutes of "Ifs" are a succinct list of the questions everyone should ask themselves about the status quo.

For the fifth week in a row, US Macro data deteriorated markedly (not helped at all by today's GDP miss). The Q1 earnings picture is dismal, with beats far less than average and revenues hugely disappointing. But, in light of all that reality, where-ever you look, screens are green. Despite some softness today (oil, S&P, and Nasdaq down) the week showed impressive gains for equities amid the lowest volume week in three months (mostly driven by the epic short squeeze on Tuesday), modest gains for Treasuries (yields lower by 2-4bps), significant outperformance by precious metals (up over 3-4% on the week - having given some back in a post-Europe smackdown today), and WTI crude up over 5% on the week.  Perhaps the most notable fact about the week (apart from equity's inexorable bid in the face of nothing positive at all) was the surge in JPY. In an Abenomics-shattering print, last night's deflation data helped USDJPY rally its most in 11 months for the week. While all asunder will be celebrating another green week, it is perhaps worth noting that while the Russell gained 1.3% from Monday's close, the 'most-shorted' names of that index more than tripled that performance - gaining 4.4% on the week... squeeeeze.

Gold has surged 4.9% in dollar terms so far this week and is headed for its biggest weekly gain in one-and-a-half years. Gold has recovered in all currencies and is up by 4.8% in euro terms and 3.7% in sterling terms. 

Therefore, gold has recovered nearly half of its recent sharp decline and is now just 7% below its price ($1,560/oz) prior to the futures induced sell off on April 12th and 15th.

When it comes to true demand for the "unfondleable" barbaric relic, one can look at spot prices (or listen to CNBC, at least when gold is correcting when it is being commented on every 5 minutes; when it has soared by $150 in 10 days, one hardly hears a peep), or one can continue looking at the absolute frenzy in the physical markets, now all over the world, where those who refuse to take their eyes off the ball, or the G-7 printers as the case may be, understand very well how this story ends. They also understand that the recent gold correction has simply been a buying opportunity, and the further the price fell, the more gold was bought until finally mints, refineries, and brokerages have run out of physical in inventory.  Bloomberg reports on the ground from India, the world's biggest importer of gold, where gold consumers "thronged jewelry stores across the country for a second week on speculation that bullion may extend a rally after the biggest plunge in three decades." “Demand has been extraordinary in the past 15 days and sales this April have been much better than last year,” Kamal Gupta, chairman of P.P. Jewellers Ltd., said by phone from Delhi. “We waited for sometime to see if prices will fall more but when we saw them moving up again, we decided it’s time,” said Sripal Jain, a 77-year-old silver dealer who came with his younger brother, daughter and daughter-in-law to buy gold necklaces at Mumbai’s Zaveri Bazaar. “We don’t have any wedding or occasion coming up. The rates fell, so we decided to buy"

There are growing supply issues and a range of gold and silver coins and bars are in short supply internationally and premiums are rising globally. Many smaller dealers have been cleared out of their bullion inventories.

Gold prices are expected to recover in the coming weeks and months according to the Reuters Precious Metals Poll of analysts.

Most of the 29 banking and brokerage analysts and consultants polled expected prices to find support and stay above the $1,400 mark. The majority of analysts, 20 out of 29, expect gold to end 2013 above $1,450 per ounce and 6 analysts, including GoldCore, saw gold above $1,650/oz by the end of 2013.

Interestingly, the majority are bullish at these price levels with average price forecasts for the year of 2013 much higher than today's prices - at a mean of $1596/oz and a median of $1627/oz.  

After recovering 50% of its record plunge last night, gold continues to rise this morning, topping $1450. Silver is even more exuberant this morning testing up to post-crash-low highs around $23.90. What is more interesting is that for three days in a row, instead of the seemingly ubiquitous morning smackdown of precious metals, we have seen a sudden desperate demand for silver and gold in the US morning.

Things in the US have gotten so bad, not only are most online dealers backlogged weeks and months in advance for most PMs (as the CEO of Texas Precious Metals explained in detail), but respected bullion vaults are also now on the verge of running out of inventory. As Reuters described, "Michael Kramer, president of Manfra, Tordella & Brookes (MTB), a major U.S. coin dealer in New York, has been inundated by orders from existing and new wholesale and retail customers. "It's panic. This is one of the busiest times in quite a while. People think gold's at the lows and they want to take advantage." It was only a matter of time before the last bastion of paper money, London, also succumbed to the soaring demand for physical, and sure enough moments ago Bloomberg reported that the "Britain’s Royal Mint, established in the 13th century, sold more than three times more gold coins this month than a year earlier as prices declined." Sales are more than 150 percent higher than last month, according to Shane Bissett, director of bullion and commemorative coin at the Royal Mint.

As we have discussed numerous times over the past year, there is a quiet movement among the world's central banks to diversify their reserves away from the pejorative USD. Whether it is direct trade linkages, hording physical precious metals, or simply buying foreign sovereign debt, there is a trend emerging. The latest defection, as BusinessWeek reports, is Australia's plan to invest about 5% of foreign currency reserves in China. The decision "represents the first time that the RBA will have invested directly in a sovereign bond market of an Asian country other than Japan," the country's deputy governor noted, adding that this step was an "important milestone" to "stronger financial linkages" leaving Australia "better positioned to benefit from the shift in global economic growth towards Asia." Of course, palling up to its closest trade partner is a big driver, but in a somewhat barbed comment on the strength of the AUD, Lowe noted, "quantitative easing that has taken place in a number of countries is having a significant effect on exchange rates of freely floating currencies... which is clearly making for difficult conditions in certain parts of the Australian economy."

The paper price of gold crashed to $1,325 in the wake of this huge trade. It is now hovering around $1,400. Our first reaction is to suggest that this is only an aberration, and that the fundamentals of the depreciating value of paper currencies will eventually take the price of gold much higher, making it a buying opportunity. But what we can't predict is whether big players might again deliver short-term downturns to the market. The momentum in the futures market can make swings surprisingly larger than the fundamentals of currency valuation would suggest; but the fundamentals will drive the long-term market more than these short-term events. The fight between pricing from the physical market for bullion and that from the "paper market" of futures is showing signs of discrimination and disagreement, as the physical market is booming, while prices set by futures are seemingly pressured to go nowhere. In short, we think this is a strong buying opportunity.

Pity the wise money manager these days. Our juiced-up financial markets, force-fed liquidity by the Fed the other major world central banks, are pushing asset prices far beyond what the fundamentals merit. If you see this reckless central planning behavior for what it is - a deluded attempt to avoid reality for as long as possible - your options are limited if you take your fiduciary duty to your clients seriously. Bill Fleckenstein of Fleckenstein Capital has a difficult time seeing other assets to own besides the precious metals. There are confidence bubbles in stocks, bonds and the fiat currencies that will break - not may, but will -  and when they do, he sees no safe harbor for investment capital save gold.

If the FBI can track down two homicidal Chechen nobodies inside of forty-eight hours from their Boston bombing caper, you kind of wonder how come the Bureau can’t detect the odor of racketeering, insider trading, and wire fraud in this month’s orchestrated smackdown of the gold futures markets, including the parts played by the Federal reserve, one or more too-big-to-fail banks, self-interested big money players such as George Soros, slumbering regulators at the Commodities Futures Trading Commission, and tractable editors at The Wall Street Journal and The New York Times... Because the smackdown organizers pulled off their operation in a panic, they probably ignored the potential further negative consequences of their stratagem, namely a worsening loss of confidence in banks generally and in the trade of abstract financial instruments in particular