Golden Catalysts

Tyler Durden's picture

Authored by James Rickards via The Daily Reckoning,

The physical fundamentals are stronger than ever for gold.

Russia and China continue to be huge buyers. China bans export of its 450 tons per year of physical production.

Gold refiners are working around the clock and cannot meet demand.

Gold refiners are also having difficulty finding gold to refine as mining output, official bullion sales and scrap inflows all remain weak.

Private bullion continues to migrate from bank vaults at UBS and Credit Suisse into nonbank vaults at Brinks and Loomis, thus reducing the floating supply available for bank unallocated gold sales.

In other words, the physical supply situation has been tight as a drum.

The problem, of course, is unlimited selling in “paper” gold markets such as the Comex gold futures and similar instruments.

One of the flash crashes this year was precipitated by the instantaneous sale of gold futures contracts equal in underlying amount to 60 tons of physical gold. The largest bullion banks in the world could not source 60 tons of physical gold if they had months to do it.

There’s just not that much gold available. But in the paper gold market, there’s no limit on size, so anything goes.

There’s no sense complaining about this situation. It is what it is, and it won’t be broken up anytime soon. The main source of comfort is knowing that fundamentals always win in the long run even if there are temporary reversals. What you need to do is be patient, stay the course and buy strategically when the drawdowns emerge.

Where do we go from here?

There are many compelling reasons why gold should outperform over the coming months.

Deteriorating relations between the U.S. and Russia will only accelerate Russia’s efforts to diversify its reserves away from dollar assets (which can be frozen by the U.S. on a moment’s notice) to gold assets, which are immune to asset freezes and seizures.

The countdown to war with North Korea is underway, as I’ve explained repeatedly in these pages. A U.S. attack on the North Korean nuclear and missile weapons programs is likely by mid-2018.

Finally, we have to deal with our friends at the Fed. Good jobs numbers have given life to the view that the Fed will raise interest rates next month. The standard answer is that rate hikes make the dollar stronger and are a head wind for the dollar price of gold.

But I remain skeptical about a December hike. As I explained above, the market is looking in the wrong places for clues to Fed policy. Jobs reports are irrelevant; that was “mission accomplished” for the Fed years ago.

The key data are disinflation numbers. That’s what has the Fed concerned, and that’s why the Fed might pause again in December as it did last September.

We’ll have a better idea when PCE core inflation comes out Nov. 30.

Of course, the Fed’s main inflation metric has been moving in the wrong direction since January. The readings on the core PCE deflator year over year (the Fed’s preferred metric) were:

January 1.9%

February 1.9%

March 1.6%

April 1.6%

May 1.5%

June 1.5%

July 2017: 1.4%

August 2017: 1.3%

September 2017: 1.3%

Again, the October data will not be available until Nov. 30.

The Fed’s target rate for this metric is 2%. It will take a sustained increase over several months for the Fed to conclude that inflation is back on track to meet the Fed’s goal.

There’s obviously no chance of this happening before the Fed’s December meeting.

A weak dollar is the Fed’s only chance for more inflation. The way to get a weak dollar is to delay rate hikes indefinitely, and that’s what I believe the Fed will do.

And a weak dollar means a higher dollar price for gold.

Current levels look like the last stop before $1,300 per ounce. After that, a price surge is likely as buyers jump on the bandwagon, and then it’s up, up and away.

Why do I say that?

There’s an old saying that “a picture is worth a thousand words.” This chart is a good example of why that’s true:

Gold Breakout Chart

Gold analyst Eddie Van Der Walt produced this 10-year chart for the dollar price of gold showing that gold prices have been converging into a narrow tunnel between two price trends - one trending higher and one lower - for the past six years.

This pattern has been especially pronounced since 2015. You can see gold has traded up and down in a range between $1,050 and $1,380 per ounce. The upper trend line and the lower trend line converge into a funnel.

Since gold will not remain in that funnel much longer (because it converges to a fixed price) gold will likely “break out” to the upside or downside, typically with a huge move that disrupts the pattern.

At the extreme, this could imply a gold price on its way to $1,800 or $800 per ounce. Which will it be?

The evidence overwhelmingly supports the thesis that gold will break out to the upside. Central banks are determined to get more inflation and will flip to easing policies if that’s what it takes.

Geopolitical risks are piling up from North Korea, to Saudi Arabia, to the South China Sea and beyond.

The failure of the Trump agenda has put the stock market on edge and a substantial market correction may be in the cards. Acute shortages of physical gold have also set the stage for a delivery failure or a short squeeze.

Any one of these developments is enough to send gold soaring in response to a panic or as part of a flight to quality. The only force that could take gold lower is deflation, and that is the one thing central banks will never allow. The above chart is one of the most powerful bullish indicators I’ve ever seen.

Get ready for an explosion to the ups ide in the dollar price of gold. Make sure you have your physical gold and gold mining shares before the breakout begins.

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Raffie's picture

Nothing to see here, the powers that be will keep a gold in the 1260-1290 range.

SunRise's picture

"in the 1260- 12900 range"  fixed it.

RockRiver's picture

If the physical were really that tight would not the spread between phys and paper widen?

BandGap's picture

Not if no one is looking for delivery.

French Bloke's picture

Well, we've heard all this for years. But the geopolitical situation is definitely hotting up so maybe this article has some credence...

RAT005's picture

Is there any reason to believe TPTB have lost their ability to manipulate gold/silver prices?  So that means gold will drop out of the penant.  They are waiting to print the chart just the same as the author hopes the manipulation is over.  Definitely not yet, there will be some mini crisis before the big crisis and then there will have to be some legislation that prevents Traitors and Hoarders from accessing gold/silver.  Sometime after that drop there wil be a day when they loose control, no sign of that yet.  BTFD and stack on.....

Stuck on Zero's picture

I could draw a dozen reasonable lines on that gold price chart that would look just as reasonable as the lines Rickards drew ... but all pointing downward.

ReturnOfDaMac's picture

The answer to your question is "no".  Therefore precious will not do much more than it has done before.  Sorry but as long as they can short ad infinitum with no metal, absolutely nothing changes.  So enjoy the cheap prices, stack up.  I'm going long bank stawks, defense contractors and thinking about prisons ...

philipat's picture

There are indications that the BIS/CB/ESF/BB Complex (a/k/a "The Cartel") is having problems containing the upside momentum, especially with Silver where a genuine supply/demand imbalance has prevailed for many years. The Cartel has also become increasingly blatant with its manipulation in a deliberate attempt to telegraph its intentions and to discourage investors from buying PM's. BUT that doesn't necessarily mean that a "breakout" to the upside is imminent. To believe the usual suspects, the physical markets would already have displaced the paper markets in setting the spot price yet futures open interest is at or near record levels, which suggests otherwise. I believe that it will only change when either a financial collapse occurs OR when the Chinese have acquired what they see as adequate Gold reserves OR when they can no longer acquire physical metal in the West; at which point they will crush the futures markets by standing for massive deliveries. Until then, best to quietly stack but also use the Cartel's wash and rinse cycles to make some money by trading with them not against them. The trading ranges in these cycles tend to be at least $100 which is enough to achieve good returns; using the proceeds to buy more physical metal.

acetinker's picture

Like Carlin said, "It's all bullshit and it's all bad for ya'."  Fuck it.  Fuck it all.  Just be.

holdbuysell's picture

You'll have to read some of the blog below, which has gone on in various forms for many years. Very very chewy reads. In short, any 'player' wanting to buy physical gold in size is and has been paying much much higher prices. The market you are seeing is for the 'scrap amounts' that only the ants see through a volatile dysfunctional unattractive market, by design. However, if the ants collectively figure out the (paper) scam, they'd overrun the grasshoppers by buying every physical ounce in sight and freegold (as FOFOA would say) would be realized.

https://fofoa.blogspot.com/

Montana Cowboy's picture

These claims that large physical sales occur at premiums over spot are totally false. Use your logic. Why would anyone pay over spot when Comex contracts nearing delivery sell at spot (plus perhaps 10 cents time value) and they never had a default yet. Any buyer could just purchase Comex contracts and call for delivery.

philipat's picture

If you want to buy 10 Tonnes of physical Gold it is only available at a premium.

Montana Cowboy's picture

Bullshit. Where is your evidence?

gunzeon's picture

get off the bitcoin chart and back to the gold chart pal !

Justin Case's picture

The standard answer is that rate hikes make the dollar stronger and are a head wind for the dollar price of gold.

Gold rose from $35 to $197.50 between 1970 and the end of 1974, an increase of more than four times. During that period, the Bank of England’s base rate rose from 5% to 13%. The Fed’s discount rate was 4.5% in 1972 and rose to 8% in August 1974. So, a rising gold price was accompanied by a rising interest rate, contradicting the conventional wisdom of today. Gold went on to hit a peak price of $850 at the afternoon fix of 21 January 1980, when the Fed’s discount rate was at an elevated 12%.

The current belief that rising interest rates are bad for gold was disproved by those events. The reason gold rose had little to do with interest rates, and everything to do with accelerating price inflation. The only way a rising gold price could be halted was to raise interest rates high enough and sharply enough to collapse economic activity, which is what Paul Volcker did in 1980-81. In other words, until the Fed abandons all pretentions to supporting economic growth, people will continue to increase their preferences for owning goods over holding dollars, thereby continuingly reducing its purchasing power.

With all of the manipulation, how in the world did gold rally almost 8x in 13 years. These manipulators are obviously the most incompetent ones ever. If the so-called manipulation is true, then the old master manipulators like the great Jesse Livermore, would be totally mocking these modern day bumbling losers. They are apparently a bunch of Inspector Clouseaus. Why won’t one of the gold permabulls (sanely) explain to me how gold had that massive rally even with all of the manipulation.

philipat's picture

Because they are fighting Economics 1.01 a/k/a "Supply and Demand"?

Newager23's picture

I don't really want to make a comment on a Rickards article, someone who has been constantly calling for a breakout in gold for what seems like the entire year. However, for those who poo-poo gold and think it is a terrible investment, the evidence points to gold going much higher. Sure, gold has been in a 6+ year bear market, after reaching an all-time high in August 2011. But that doesn't negate the fact that gold is rare and is one of the few hedges for economic risk. 

Gold makes sense for one simple fact: The global bond market has never before been at risk to the degree it is today. Gold will benefit in a big way from a bond crisis that occurs in any country. Why? Because if investors sell bonds, a portion of that money will make its way to gold. Bonds are considered a safe investment, and if that turns out to be false, then gold will be the go-to safe investment for many investors.

So there you have it. I like gold for one reason: the risk in the bond market. And if you can't see risk in the global bond market, then you are not paying attention. 

Turin Turambar's picture

LOL, no way.  Central bank monkey hammer via unlimited fraudelent fiat and paper futures slamdowns FTW.

Raffie's picture

The Central Bankers talked this over with the IMF and they all agreed there is no issue with it.

Justin Case's picture

Sovereignman

In today’s podcast, I tackle the subject of Initial Coin Offerings (ICOs).

Regular readers know I’m skeptical of cryptocurrencies. And I think many ICOs are outright frauds.

We’ve seen celebrities like Paris Hilton, Jamie Fox and Floyd Mayweather all endorse ICOs. A friend of mine who’s raising money in an ICO even told me these things are a bubble.

Still, we see more and more companies raising capital from a rabid public.

But regulators are already sniffing around. And there are two things that could cause this bubble to crash… quickly.

You can listen here.
https://www.sovereignman.com/podcast/the-two-things-that-can-pop-the-ico...

ljag's picture

Quit thinking like "we" matter in the gold world. China, Russia and India set the rules......u.s.grand canyon reserves notwithstanding.

Montana Cowboy's picture

Don't believe any of this metal shortage bullshit unless there are actual delivery defaults. These same guys have been professing the same bullshit for 15 years or more. Use your logic. It doesn't make sense that the paper markets could down-rig the price of metals to fire-sale prices while the physical market can't seem to ever get depleted. If you don't run out of physical when its on sale for 20 years, then there is a glut.

BandGap's picture

Many contracts are written such that if you don't get delivery you get your cash back.

Conscious Reviver's picture

Yes, like Comex for example. There are delivery defaults all the time, but they just pay with paper.

Montana Cowboy's picture

Myth. The longs are too cash broke to call for delivery. They are in on margin. Comex has never had a single delivery default. All those stories about secret cash settlements come from that fantastic story-teller Rob Kirby. He was backed into a corner after years of predicting metal shortages and defaults. He made up hilarious stories to explain why he was really correct. He claimed that longs that called for delivery on the Comex were secretly paid off to forgo their delivery demand. He also claimed that large quantity physical gold transactions were secretly occurring at about 200% of the Comex price. It all turned out to be BULLSHIT. Not a single case ever occurred. He claimed to know all this because, according to him, he is a large-quantity gold dealer. Nobody has ever seen any evidence the Kirby ever dealt so much as a Krugerrand.

Justin Case's picture

Comex is a U.S. Government Protected Exchange

Assume a trader or group of traders “stand for delivery” that can’t be met and they are not satisfied by a higher cash payment and Comex fails to invoke Rule 413 in order to eject such traders to prevent the best interests of Comex from being harmed, certainly wouldn’t it be “game over” for Comex?

Probably not. Enter the plunge protection team.

The President’s Working Group on Financial Markets

Montana Cowboy's picture

You are really focused on the Rule 413. But your fear of how 413 is deployed has obviously been influenced by coin dealers. Rule 413 is obviously not to prevent large blocks of contracts from being traded in an instant. If so, we would have seen it deployed in these multi-billion dollar gold events. 413 is not to prevent calling for delivery because it only prevents a trader from trading. Calling for delivery is not a trade. It is an execution of a previous trade.

So what is rule 413 used for? It was put in place to prevent and halt spoofing by traders. Spoofing is the practice of placing massive orders to move markets, then withdrawing those orders before they become trades. That is the only thing 413 has ever been used for. It isn't even practical for interfering with delivery demands. But your certainty is a testament to the effectiveness of the bullshit preached by the Church of Gold and Silver (coin dealers and miners).

Montana Cowboy's picture

Myth. No such language ever existed in any Comex contract.

Justin Case's picture

In the contract the exchange has it written, that they have the right to settle any contract with cash if they choose to do so.

RAT005's picture

This is correct.  And in the GLD contract you have to be qualified to take delivery which starts with $100K minimum for delivery and there might be more provisions like scheduling, proof of delivery insurance, approved delivery contractor etc.

There is a reason jewlers don't take delivery from these outfits.

Justin Case's picture

Almost but no cigar.

 

In order for a shareholder to take delivery of the actual physical gold, he or she must be an authorized participant and deal in 100,000 share blocks. In addition, one looking to take delivery must make arrangements with their broker. That being said, a 100,000 share block at current prices equals a monetary value of approximately $12,572,000. Needless to say, this may be out of the reach of the vast majority of investors. The bottom line is that while taking delivery is possible for some, for most it is out of reach financially and also involves a process. In terms of SLV, a similar issue is presented. In order to try to redeem baskets of shares in SLV, one must be an authorized participant and deal in 50,000 share blocks. Once again, the large amount of shares required to take delivery may make it prohibitive for most investors.

litemine's picture

Hey Cowboy

When there is a delivery Default, the market will have collapsed, again the old saying " If you don't hold it, you don't own it."

Montana Cowboy's picture

I believed that for a long time. But then I began to ask some difficult questions. Why is there never a shortage or a delivery default? Certainly a shortage should occur if the paper markets have really down-rigged the price for 20 years. After all, how you not not run out of something that is under-priced for 20 years? As for delivery defaults in the paper markets, I have concluded that it is IMPOSSIBLE. These metal gurus always blame the shorts for selling metal they don't have. But most of those shorts are bullion banks that could produce the metal if they had to. But the longs are mostly in those contracts on margin only. The longs don't have the cash to call for delivery. So who is really rigging the market? And in which direction is the market being rigged? I realized I could make a much better case that the longs with no cash were up-rigging the market than that the shorts with no gold were down-rigging it.If every contract at the Comex suddenly required performance by both parties, the shorts would mostly be able to produced the metal while the longs would mostly need to file bankruptcy. Like so many other things in the real world, metal market facts are the opposite of what you are being told. The miners and coin dealers speak bullshit. They get away with it because there is nobody with a financial interest in bringing you the other side of the story.

Every month we get another metal guru that confesses and changes sides. Jim Rogers now says sell your gold. Clif High says there is just too damn much gold. Bix Weir says the age of metal is over and cryptos will prevail. Now Andy Hoffman admits that he sold all his silver over the summer. And I think (but I'm not sure yet) that he was still promoting metal on behalf of Miles Franklin while he secretly bailed himself.

That old saying "if you don't hold it, you don't own it" migh be backfiring. Bitcoin might be showing us that the fact you must hold gold to really own it might be its downfall. You must pay to ship it, insure it, store it, risk theft or fraud, risk a counterfeit. If you try to sell it you must ship it, insure it, get a 1099, sell all or nothing because you can't cut it in half. If you try to cross borders with it, confiscation is a real possibility. Then there is asset forfeiture in the US which is statistically a greater risk than losing it from burglary and robbery combined. If you try to spend it as money - well the list of problems is pages long.

Justin Case's picture

CRIMEX will never default. They retain the option to pay cash settlement, you have no right to demand physical delivery.

Montana Cowboy's picture

I'm not going to demand thousands of cases as evidence, because that is what it would take to impact markets. Just show me one case of a delivery default on Comex. Show me just one case where a long that called for delivery was refused. Its not the shorts rigging the paper markets. Most of the shorts are bullion banks that actually have the metals. Its the longs on the other side of those contracts that don't have the cash. That is why there will never be any delivery defaults. The longs are too broke to cause delivery defaults.

It amazes me how convinced people can be in the total absence of even one piece of evidence. Just go find one and I will go away and I let this shit fly forever more.

Justin Case's picture

The Chief Regulatory Officer or his delegate, upon a good faith determination that there are substantial reasons to believe that such immediate action is necessary to protect the best interests of the Exchange, may order that: 1) any party be denied access to any or all CME Group markets; 2) any party be denied access to the Globex platform; 3) any party be denied access to any other electronic trading or clearing platform owned or controlled by CME Group; or (4) any Member be immediately removed from any trading floor owned or controlled by CME Group.

Comex is prepared to shut down any trader or group of traders, irrespective of the traders’ motive, if such trader(s) engage in a trade or series of trades that might not be in the best interest of Comex. So if a trader(s) “standing for delivery” might indeed cause a default of Comex, that trader(s) can be tossed from the system. A trader so exiled from the Comex trading platform can appeal his ejected within ten days.

Under Rule 413.D. a trader’s access to the Comex system can be denied no more than 60 days “unless the Chief Regulatory Officer or his delegate, upon further consideration of the circumstances that resulted in a prior access denial action, provides written Notice to the party that his access will be denied for an additional period of time not to exceed 60 days.”

Thus, CME Rule 413 D gives Comex the ability to remove traders that may wish to institute trades that are not in the best interest of Comex.

Montana Cowboy's picture

This provision, as you have written it, provides authority to bar anyone from initiating trades. But its language does not affect contracts already existing. Even if it did, calling for delivery would not trigger this provision. Remember that calling for delivery is a demand made upon the other party in the contract, not Comex. Its made through Comex, but Comex is not the short with the delivery duty.

Even if there was a provision that permitted Comex to refuse delivery, it only creates a future possibility for an event that has never happened. The more important matter is that delivery defaults have never happened. Consider that the 'cartel' theory holds that metals have been down-rigged for decades. How could anything down-rigged to fire-sale prices for decades not get depleted by now? Shouldn't it have happened after 20 years? Simply because you can imagine it happening doesn't mean its coming.

Remember, there is nobody on the planet with any financial interest in bringing you my side of the story. Consequently, these guru coin dealers and miners have been unopposed for decades. In that environment, their stories have reached unimaginable levels of fantasy.

Justin Case's picture

So if a trader(s) “standing for delivery” might indeed cause a default of Comex, that trader(s) can be tossed from the system.

Montana Cowboy's picture

Not by the language in this rule. You will need to find another rule to support that theory. The rule you cited would only prevent them from trading. Calling for delivery is not a trade. Its an execution of a preexisting contract.

Justin Case's picture

one case of a delivery default on Comex.

Hunts

Montana Cowboy's picture

Are you contending the Hunts were victims of delivery defaults? Why don't you research this crap first?

There was never a delivery default on Hunt's silver contracts. They got all they demanded and flew it to Switzerland. They kept right on calling for delivery as their contracts matured and all silver was delivered to them - until the Hunts ran out of cash and credit.

In many of my posts, I have mentioned that it is the longs with no money that are to blame for up-rigging the prices, not the shorts for down-rigging because shorts (bullion banks) mostly do have the metals. Well. this is exactly what happened with the Hunts. The Hunts ran out of cash and bank credit lines, then defaulted on their contractual obligation to take further deliveries.

Pearson365's picture

Never mind the Hunts.  This time around it's not the big fish who are a threat to gold manipulation.  It's the billions of little fish, especially in Asia.

Montana Cowboy's picture

But the billions of little fish in Asia didn't hatch yesterday. And that culture certainly didn't learn about gold yesterday. If they could drain the supply, why hasn't it happened? I know, I know .... its coming. That is the standard rhetoric from the Church of Gold and Silver. So I'll also ask the next logical question: How long would it need to go without happening before subscribers accept it isn't going to happen? The honest answer from the 'cartel' theorists is NEVER, although they won't admit it. Its called religion. They think something becomes true because they subscribed to it. Then they are invested in belief, which makes it even harder to break away from.

RAT005's picture

Cowboy, I'd give you thumbs up for effort but thumbs down for accuracy.  Have you been buying Phys since 2011 high?  There have been shortages, backorders, delivery delays, backwardation, etc.  The gov. used to publish the eligble vs. registered ratios.  Hidden now like M3.

You are correct to a point but the image you are endorsing is part of the manipulation.....nothing to see here.

Justin Case's picture

The Hunts wanted delivery of their silver.

Montana Cowboy's picture

There has been no such shortages. Remember that the three largest coin/metal dealers are all in bankruptcy and their owners in jail or being prosecuted. Bullion Direct, Tulving, and Northwest Territorial all deployed the same tactics to maximize their thefts from the public. They would collect all the money they could from customers while claiming there was a shortage and delivery delays. Customers waited for 3 to 4 months before they realized there was a problem. This is where the illusion of shortages came from.Through that period of several years, Apmex promptly delivered anything you wanted.

There have been times when silver was in very short supply IN CONSUMER FORM. During that time, I did my due diligence. I spoke to Ross Hanson at the Northwest Territorial Mint because he is not just a retailer. He actually fabricates bars and coins. He told me that he has 999 silver stacked to the ceiling. But he was unwilling to purchase additional fabrication assets for what was only a temporary aberration in the physical markets.

There are no shortages until there are actually shortages. I'm not saying its impossible. But the current conditions suggest just the opposite. The three largest dealers bankrupt. Mines closing down all over the planet. US Mint sales down to 1/3 of normal. This is the wet dream scenario of stackers. If you can't get a physical shortage with these conditions, there most certainly is a glut. If it were any commodity other than pretty metal, everyone would conclude a glut. Remember, the largest supplier of silver is the ground. Currently, the ground is charging miners about $14 per ounce. Why do you all think Comex got this wrong?

RAT005's picture

You're mostly correct but mixing a few things. The bankruptcies were dealers trying to make more than the premium by playing the market with customer money instead of delivering.  Separate from that the tight market I described has been on and off.  Right now demand is off and premiums are low.

I don't know which direction the next leg will go. I suspect down before back up. If the premiums stay low I'm interested around $16.60 silver.

Simple summary: you are mostly correct, USA is bankrupt, fiat will be worthless, gold and silver are manipulated. 

There is enough gold in the world for each person to have 1oz. I suggest people new to stacking work towards that then decide for themself what to do next.

Montana Cowboy's picture

"The bankruptcies were dealers trying to make more than the premium by playing the market with customer money instead of delivering."

Those dealers stole stored metal from their customers. But the dealer likes to think he only borrowed that metal and that his customer has a metal-receivable account. You know, "I didn't steal it because I'm gonna give it back". In fact, Bullion Direct amended their storage contracts late in the game with this ambiguous provision: "Bullion Direct may use a customer's stored metal". What the hell does that mean? McAllister (owner) said this means that storage customers have a receivable for metal and that he has no duty to ever hold or produce it until it is demanded.

With this logic, it follows that dealers' motive in buying metal futures was to protect against price escalations for customer's metals they had to replace. That is where they need protection. And it might also offset a fraudulent intent because these dealers actually sold the customer's metals.

Pearson365's picture

Well cowboy it don't mean shit what a bunch of US metal pump and dump clowns like Andy Hoffman and Bix Weir say.  The Krauts and the rest of the world know the score and the dumb yanks like you will be left out in the cold when it pops.