PM Daily Market Commentary - 1/5/2015

davefairtex
By davefairtex on Tue, Jan 6, 2015 - 12:23am

Gold rose +15.20 to 1205.00 on moderately heavy volume, while silver was up +0.41 to 16.19 also on moderately heavy volume.  Gold traded generally higher in Asia and London, but really started taking off once the NY market opened.  Gold closed well above its 50 MA, while silver still seems to be having trouble breaking through its own 50.

If gold can remain above its 50 MA (and/or $1200) for a few more days, that will be encouraging for the bulls.  Next bullish milestone for gold: a close above 1240, the previous "lower high".

The dollar had an eventful day today, at one point rallying all the way up to 92.05, but then fell back to close up only +0.22 to 91.65.  Today it looked as though the buck was getting tired after going up 10 days out of the last 12, since it printed one of those disagreeable inverted hammer candles on the day.  This might mark a high for the buck for now - not saying the rally is over, just that this leg of it might have run its course.  Even a modest correction in the buck should help gold and silver.

What's more, the fact that gold did well on a relatively strong dollar day reminds me that gold is doing even better in other currencies.

Mining shares had another strong day, with GDX up +2.64% on moderate volume, while GDXJ was up +4.29% also on moderate volume.  GDXJ actually closed above its 50 MA for the first time since mid-August, which is an important bullish waypoint.  So far, miners continue to lead gold higher, and GDXJ moving more strongly than GDX is another bullish sign.

SPX sold off hard today, down -37.62 to 2020.58.  January seems to have just brought a whole lot of selling rather than the expected rally.  VIX rose +2.13 to 19.92.  Downside velocity in SPX seems large, feels to me like there is more downside left to this move.

TLT shot higher on equity market weakness, breaking out to a new cycle high, up a big +1.57%.  Money continues to pour into the long bond; 20 year treasurys yield 2.32%.  If the dollar does top out, it will be interesting to see where the money ends up coming from.  JNK fell -0.70%, sinking right along with the equity market.

The overall commodity index ($CRB) continued downhill, dropping -0.74%.  Commodities still show no sign of slowing, with CRB price remaining below its EMA-9 since late November.   Its likely the drop today was all about oil, which fell -2.86 [-5.42%] to 49.95 - the first time oil has seen the 40s since March 2009.  That's worth a chart - but it needs to be a monthly chart to go back that far.

Funny thing is, we haven't even had a crisis yet, and the oil chart still looks like 2008.

Here is my thinking.  Last time around, oil's drop signaled an impending crisis in the US.  Today, it is signaling an impending crisis somewhere else.  I say this because oil is an international commodity, and international prices can be driven by events anywhere in the world, not just the US.  The crisis might be Europe, might be Japan, or it might be China.  Hmm.  Come to think of it, it could be all three.  But my bet is on Europe, just based on the capital flows.

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24 Comments

davefairtex's picture
davefairtex
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PM and miner rally

As of right now, GDX (+5.84% +1.14) has broken its medium term downtrend by breaking above its previous "lower high" at 20.42.  It is currently trading at 20.57.  If it closes relatively near where it is trading right now, this move in the senior miners marks an important step in a return to a bullish posture for PM.

Gold is also up +14.10 to 1218.10 and silver +0.37 to 16.58; silver broke above its 50 MA, finally.  This on a day when oil once again is getting pounded and the equity market is having issues.

Bonds (10 & 20 year US treasury) are going absolutely nuts, although they are off a bit from their highs.

 

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Jim H
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But Armstrong said Gold would be going down?

He must not have realized that he was looking at manipulated prices all along.. and that price was already unsustainably low given the strong physical demand across the world.  

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Jim H
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More on Armstrong

He may have gotten the macro call on Gold correct over the last few years (it dropped) but I contend he has no idea why he was right.  He denies that it has anything to do with manipulation, and he simply imagines that Gold is out of favor, or somehow a relic of another era;

   

Nevertheless, such theories were predicated upon the simple fact that money was coinage. It was the difference in metal content that could be compared from one nation to another. The greater the debasement, the greater the hoarding, which simply contracted the money supply. Hence, the value of a currency issue was based upon CONFIDENCE. Since the debasement of Henry VIII brought out the collapse in credit (DEFLATION), what was overlooked here was actually the CONFIDENCE – not the mere metal content.

Bank Money became popular for once you deposited the coinage, it was preferable to pay by bank transfer. The coins did not have to be checked for debasement or clipping. Bank paper money actually rose as a premium.

Today, just follow the CONFIDENCE. That is the common-denominator. It is not whether or not money is gold, conch shells or slave girls as St Patrick reported to his shock upon arriving in Ireland. It is the oldest factor behind everything – do you trust the person you are dealing with.

http://armstrongeconomics.com/2015/01/05/goodbye-inflation-hello-deflation/

Total garbage.. he has no idea what is actually going on in the Gold market.  What's really going on is this;

Gold has begun an irreversible movement into strong hands that will hold on to it, and will not relinquish it, even in the face of steeply rising prices. Fallen prices since September 2011 have been a blessing in disguise for physical gold accumulators. A lower price for paper gold has made it easier for participants to demand delivery on maturing futures contracts; exchange balances are being siphoned; ETF balances are being raided, recast and sent to Hong Kong as kilo bars before disappearing into China forever; central banks are scrambling to repatriate gold back within their physical control; mine supply is being earmarked well before it reaches the surface; and Gresham’s law together with gold’s Veblen good characteristics means higher prices will not necessarily tempt the general public to feed the scrap supply monster.....

As we reach the end of the year the outlook for gold in 2015 remains uncertain. Gold has been in backwardation 40% of the time during 2014 and remains there today. Given the uncharted financial territory in which the global economy currently finds itself it seems likely we will continue to witness the same market participants continue their accumulation of physical gold, creating further physical tightness in the gold market in 2015.

https://goldmarketmacro.wordpress.com/2014/12/31/low-gold-prices-are-a-b...

 

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davefairtex
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armstrong's computer

JimH-

If its a struggle between your goldbug writers who were dead wrong for the past four years, and Armstrong's Computer that seemed to be making better calls, for me, his computer wins.

And he actually said there would likely be a "reaction rally" into mid-January.

Your goldbug gang are like a stopped clock.  Eventually they will be right - but why on earth would you ever listen to them for trading/timing advice, given how totally wrong they've been in recent years?  I'd prefer someone with a more nuanced approach who can spot a trend, and actually utter the words "gold is in a downtrend" without having to use manipulation as the sole explanation.

Armstrong maintains that gold will have its day, but that its all about cycles.  The more I watch how the world works, the more I agree with him.  This oil down-cycle, for instance, will take time to play out.  It won't instantly reverse back up to "normal."  There are so many time-based cycles in the world; tides, seasons, life, and death - and markets too, it turns out have cycles.  Rising, falling, bullish, bearish - momentum up, momentum down, all based on herd behavior prodded along by interest rate manipulation.  The herd behavior has momentum behind it.  Its hard to describe but I'm starting to see it now.

You are right, Armstrong doesn't focus on stories like "strong hands" and "weak hands" and "gold moving from west to east", nor does he talk about "strong hands that won't relinquish it regardless of price", etc.  He does not treat gold with a quasi-religious reverence.  He relies on his computer that watches capital flows between various sectors, and applies his own cycle theory to the whole mix and then watches market prices for clues to where things will go.  He issues no magical "call" for what will 100% guaranteed happen next month or next year.  He lets the market tell him where it is (directionally) headed using closing prices, and provides if-then scenarios - the way all good traders do.

You seem to prefer your newsletter writers with their emotionally reassuring storylines.

But these same writers have been directionally wrong about gold for the past four years.  They had it easy during the 11 year gold bull market.  They could say "gold is rising because...the earth is warming, and a warming planet makes gold more valuable", and rising prices would have seemed to have confirmed that story, just like bitcoin in 2013.  "Rising prices confirm that bitcoin is the most useful thing ever."  Until the 75% bear market in 2014.  Ooops.  Now we know it was Chinese gamblers.  Who woulda thought?

A falling market separates the men from the boys.  During the past four years of correction, the only explanation these writers could proffer on why they were wrong about their perpetual bullish call is "manipulation" - endless, endless cries of manipulation, the Deux Ex Machina that rescues all goldbug newsletter writers from being strung up as charlatans by their angry readership.  "I would have been right - justifying all the subscription money you've paid me - if not for the evil manipulators."  Dog ate my homework, check is in the mail, we're from the government and we're here to help you.

So I ask you - with such a terrible track record over the past four years, why on earth would anyone listen to them and their money-losing stories, and their lame excuses for why they were wrong?

I want someone whose basic worldview encompasses both the uptrends, and the downtrends, which all markets exhibit.

But that's just me.

I still believe in holding a core position in gold as an insurance policy against an accident in the financial system, regardless of uptrends or downtrends in gold itself.  I just don't have to buy into the whole goldbug newsletter-writer storyline to reassure myself that a gold-based insurance policy makes sense.

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Jim H
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Dave...

You simply have the story completey wrong.  Gold does deserve a certain reverence... it deserves to be fully understood as money that cannot be printed and has no counterparty risk, vs. the dreadfully abused nature of debt-based fiat money.  What is dreadful about unbacked debt-based fiat?  Simple:  It is part of a system that includes inbred Keynesian PhD central planners (what Jim Grant calls the,  "PhD std.")... the banks that have managed to buy the favor of our political class.  The result is crushing debt.. much more than can ever be repaid. 

Gold deserves a certain reverence because the entire monetary establishment is against it... they would kill it completely if they could.  There is so much brainwashing against Gold... those of us who understand how bad fiat is, and how much we need unprintable money to keep us grounded.... must speak of it in this way to counter the falsehoods.  

The price action of the last few years has been manipulated theatre.  Many of the so-called Gold bugs know this, and preach accordingly.  That does not mean Gold can never go down in a free market.. it certainly can.. it simply means that, in a world where the WW stock of money has been continuously expanding based on the hot potato of QE printing being passed around between the ever conspiring Western influenced central banks, coupled the demonstrable trends of acquisition in the East, where consumption is more than mine supply... well.. it would not be natural to be bouncing around at a three year low in any event.  There are plenty of signs of tightness in the physical market, and plenty of obvious markers of manipulation in the paper futures market.

So, I believe you are completely wrong in the narrative you present.  I think this is important because your narrative leads folks who may not be able or willing to do their own due diligence to think that they can wait to buy some Gold... or that the price will remain at today's lows, near the cost of extraction.. for a long time to come.  Or maybe that, like Armstrong says, it is going down more from here.  Some folks will end up with no Gold because of the stories you tell.  Some folks may have ended up with some $1800 Gold because of the stories I have told over the years.  In the end, we are all responsible for our own decisions.   

Pro-manipulation Gold commentators that understand and respect the power of manipulation;

Friday is a Non-Farm Payrolls Report.  The last time the metals were smacked, they rolled them up higher, got some specs in with stops, and then just smacked them down, hard. 
 
When you are able to rig so many global markets with virtual impunity, the many possibilities are open.  Pick a quiet hour and drop more tonnes of paper metals than a miner can produce in real bullion in a year.  Why not?  It is only money, and the Fed can print more of it.   And they would be as gods.
 
So, the only thing that really matters to the gold and silver bulls now is a follow through to break the bearish downtrend.   This will put some proper regards back in the Street, but we are not there yet. 
 
The political neo-cons and the economic neo-liberals are riding high, heedless, invincible, winning.
 
What could go wrong?
http://jessescrossroadscafe.blogspot.com/2015/01/gold-daily-and-silver-weekly-charts_6.html
 
 

The new year begins with dysfunction and dislocation across nearly all major currencies. That gold and silver are holding up...though still hard capped at $1200...indicates that the physical supply breakage that we first discovered back in November continues to dominate the picture.

But let's start today with the currencies as we continue to see historic value swings. Recall that Raoul Pal warned everyone that stuff begins to really unravel at "a DXY above 90". Hmmm. What do we have today? I have a last of 91.48. Now, lest you think this is all dollar strength, let me remind you that the POSX is nothing but an index that compares The Pig to a basket of other fiat currencies. So, when the USDX (DXY or POSX, whichever you prefer) is rallying, it is primarily due to weakness in the other currencies.

http://www.tfmetalsreport.com/blog/6504/great-currency-wars-2015

 

Mario Draghi the bully is trying to bluff Germany into more money printing right at the moment Greece is heading for a default. The “surprise” will be that Germany vetoes this parry, and the next round of ECB QE Lite will be a big disappointment to the markets. Germany will also veto any significant bailout package for Greece. France will have to go along with Germany because of the strength of Euro-skeptic politics in that country.

This will mark the peak of the misguided faith in central banks and mindless neo-liberal debt expansion. Draghi will be exposed as a talker, with little ability to act. I predict he is shuffled away to handle privatizations and seizures, which Germany will support. This will be resisted by all countries affected and cause an uproar in Europe.

The hyper-inflated European sovereign bond market will fade. The crowded U.S. dollar against the Euro trade will reverse. The year 2015 will be when the widespread, central-bank-infected mal-investment unravels, and the time when investors who are focused on this benefit. There are derivative blow-ups galore once the unraveling takes hold, and there is no cushion. Gold will soar under this scenario. The cabal criminals like Soros are secretly short European sovereigns and have vaults full of gold bars.

http://winteractionables.com/?p=17545#more-17545

 

The downward manipulation of the prices of precious metals prevents the “crisis warning transmission system” from properly functioning.  More important, the decline in the price of gold/silver vs. the U.S. dollar conveys the illusion that the dollar is strong at a time when, in fact, the dollar should be under pressure from the over-issuance of dollars and dollar-denominated debt.

What we have been experiencing since the 2008 crisis is not only the subordination of US economic policy to the needs of banks “too big to fail,” but also the subordination of law and the financial regulatory agencies to the interests of a few private banks. The manipulation of the bullion markets is illegal whether done by private parties or on public authority, and so we have the spectacle of the US government supporting a handful of banks via illegal means. Not only has economic accountability been set aside, but also legal accountability.

http://www.paulcraigroberts.org/2014/12/22/lawless-manipulation-bullion-...

 

A fiat currency printing press is an amazingly powerful tool for fooling people. The world’s governments have been able to use trillions of dollars of newly-created, largely-fictitious currency to force down interest rates across the yield curve and push up equity prices. This signals to market participants that 1) things are basically okay, so relax, 2) it’s actually prudent to go for growth and yield by buying equities, junk bonds and houses, 3) it’s reasonable to borrow for things like college and cars because there will always be plenty of money, one way or another, to cover those debts, and 4) betting against the status quo will be punished. Short sellers and savers will lose because equities will be secretly supported, competing forms of money like precious metals will be depressed, and cash will yield next to nothing.

http://davidstockmanscontracorner.com/2014-in-review-how-the-gold-bugs-w...

 

The price of gold is going down. That is what the charts, newspapers and pundits are all saying. What I think they are deliberately not saying is that the value and desirability, as opposed to the price of gold, is going up and will go up further.

Make no sense?  Well I think it does if you remember there are two types of ‘gold’ for sale. One is metal, the other is paper. It is paper gold that is being dumped not the metal. The metal is being bought at a fair old rate. But because there is so much paper gold around and the major sellers and market makers in paper gold prefer metal and paper to be confused, even thought to be identical (their trade depends on this confusion), no one seems to be pointing out the very different dynamic happening in paper and  metal gold.

http://www.golemxiv.co.uk/2013/05/paper-gold-metal-gold-when-worlds-dive...

 

 

 

 

 

 

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1micahsh
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Trends or why?

I am no where near as sophisticated as you all are about all of this, and enjoy reading all perspectives.  My story is that when Au was last around $1000/oz, I bought into the logic that printing money ad nauseam couldn't be good for the dollar in the long run and thus that PMs could be a good hedge/security, etc.  Since then, I've bought physical Au and Ag steadily - to hold, not to trade.  But I've learned that just as the dollar could be weakened by printing, it can be buoyed by events abroad.  Somehow, nws our (reckless?) monetary and spending policies, the US and the US dollar enjoy what seems now to be an undeserved benefit of confidence vis-a-vis the rest of the world.  Still, thinking that our mounting debt and continued printing are unsustainable (when will the world stop believing we can pull out of this nosedive?), and even though most of my positions are now underwater, I'm looking long term and am not uncomfortable with my investment.  

The above said, in retrospect, if I had the choice of knowing the trend and being correct versus knowing why and being wrong, well, I'd have invested better and would own more PMs today (having bought at better times).  To me, it's been expensive to learn that "why" seems less important "trend" or "price."  Just one man's (invested) perspective.  Perhaps I'm not alone.  Bill

 

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davefairtex
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reverence for gold

Gold deserves a certain reverence because the entire monetary establishment is against it... they would kill it completely if they could.  There is so much brainwashing against Gold... those of us who understand how bad fiat is, and how much we need unprintable money to keep us grounded.... must speak of it in this way to counter the falsehoods.

I think that violates ... what was it again?  First Commandment?  And for me, it violates the laws of common sense.  Gold is an insurance policy.  I hold gold in exactly the same reverence I give State Farm.

There is a common sense reason for my position.  There will come a day when gold will be overpriced, after a reset happens, etc.  If I am emotionally (reverentially) attached to gold, I will be reluctant to sell.  If I have no attachment to a hunk of yellow metal, I can make the right move without reverence for a bunch of lifeless molecules standing between me and the execution of my own good judgement.

Its fine with me if you choose a different path, but I encourage you to understand the impact it will have, as well as the impact on everyone else who follows you down this particular emotion-laden story-filled rabbit hole.

So, I believe you are completely wrong in the narrative you present.  I think this is important because your narrative leads folks who may not be able or willing to do their own due diligence to think that they can wait to buy some Gold... or that the price will remain at today's lows, near the cost of extraction.. for a long time to come.

Take a hypothetical gold-less individual.  You would counsel that person to buy gold at virtually any price ($1910, $1218.50, whatever) and I would counsel them to buy some now (at or around costs of extraction, seems like a reasonable deal to me), and some more once the market has demonstrated via price action that the four-year downtrend is over.

Yes, I do believe that we might have another downspike in 2015.  If we have another Lehman-style event caused by a Grexit, gold and literally every other commodity will probably be hammered by deleveraging.  My guess is gold will probably rebound relatively rapidly, and it will be injured less than most other things in the downdraft, but I think that's an entirely possible scenario that may not be too far in the future.

And, price may simply drop further all on its own.  In spite of the recent rally and my personal hopes to the contrary, a cold-eyed analysis shows that gold remains in its four-year downtrend.  Downtrends last until they end.  Gold's downtrend is not yet over.

Here's the thing.  I trust people to be responsible with information and act accordingly.  You don't want to worry them, so they will end up making "the right decision" all "for their own good."  I find that approach paternalistic, and I reject that approach.

I believe intelligent adults can make up their own minds, they don't need to be told emotionally-reassuring pleasant fictions by storytellers to get them to "do the right thing" regardless of the truth of the situation or the stress it will put them under during the next Lehman-style deleveraging.  People told to buy gold at 1800 near the highs suffer a real crisis when gold then drops.

So I'd say "buy some now, but know you may have to endure a downdraft during the next crisis, and also know that although we hope otherwise, the downtrend in gold may not be over just yet, even though gold remains at or near its costs to produce."

 

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davefairtex
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trends vs whys

micahsh-

The above said, in retrospect, if I had the choice of knowing the trend and being correct versus knowing why and being wrong, well, I'd have invested better and would own more PMs today (having bought at better times).  To me, it's been expensive to learn that "why" seems less important "trend" or "price."  Just one man's (invested) perspective.  Perhaps I'm not alone.

That is a really good summary of my own learning process over the last 8 years.  As humans, we love stories, because we remember and retain things best when there is an emotional tag attached to the event, and stories give us that emotional tag.  I too started out with the why, and thought "why" ruled everything.  I think everyone starts out from that point.

Come to find out, there are cycles, and herd behavior, and trends that can totally overwhelm the rational "why" for long periods of time.  And sometimes, "why" has a too-limited perspective.  If you lived in Europe, and were faced with European issues, you might intuitively understand the attraction of the dollar more clearly.  Same with Japan.

But we live in our own places, and we have our own worldview, and we suppose that our personal "why" rules the roost.

In some sense, understanding and respecting the trend is a more humble approach than insisting our own personal "why" contains all wisdom.  Its not that we say the herd or trend is "right" - but we give the power of the herd great respect.  Its not wise to stand in front of the herd as it comes thundering towards you...

That's not to say you must join the herd.  But its important to know where the herd is going, because the herd drives prices.  Acknowledging the herd's power is merely wise.  Dotcom in 2000.  Housing in 2006.  Silver in 2011.  Bitcoin in 2013.

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The final deleveraging in a manipulated market

I am going to pick one particular point you made... and show how the context, i.e. whether one believes that the current price is manipulated or not, can change how you view events, and whether you interpret them correctly.  Dave said, 

Yes, I do believe that we might have another downspike in 2015.  If we have another Lehman-style event caused by a Grexit, gold and literally every other commodity will probably be hammered by deleveraging.  My guess is gold will probably rebound relatively rapidly, and it will be injured less than most other things in the downdraft, but I think that's an entirely possible scenario that may not be too far in the future.

This may happen in the paper market, but you are implying that this will be an opportunity to buy physical on the cheap.  My expectation is that such an opportunity will be very, very short lived in nature.. i.e. that the storeshelves will be bare of coins and bars in a short matter of days.  If you don't understand what is going on, you may end up iced out of the market.  By denying manipulation, you would have the reader believe that next time will be like last time.  There are those who watch the Gold market and know it better than you or I who think that next time will be different.  Among those is Steve Ellis, whose bio I will first post below;   

Steve Ellis is an expert on gold bullion investment strategies, with experience from a lengthy career as a gold analyst and fund manager. In particular Steve’s expertise covers the physical gold market and his research is focused on gold lease rates, physical gold premiums and the phenomenon of backwardation in gold.

Based in Perth, Australia, Steve works as a fund manager for Baker Steel Capital Managers, a specialist precious metals and natural resources investment manager. Earlier, from 1996 to 1998 Steve worked for the Reserve Bank of Australia (RBA) as a senior Bank Analyst and studied the sale and leasing of RBA’s gold reserves. He has investigated the global gold-leasing market ever since. By 2006 Steve had worked in the derivatives markets at international banks in both Sydney and London for over 10 years and since October 2006 has managed his own gold funds.

https://goldmarketmacro.wordpress.com/about/

OK, so what does Steve think is going to happen?

Gold has begun an irreversible movement into strong hands that will hold on to it, and will not relinquish it, even in the face of steeply rising prices. Fallen prices since September 2011 have been a blessing in disguise for physical gold accumulators. A lower price for paper gold has made it easier for participants to demand delivery on maturing futures contracts; exchange balances are being siphoned; ETF balances are being raided, recast and sent to Hong Kong as kilo bars before disappearing into China forever; central banks are scrambling to repatriate gold back within their physical control; mine supply is being earmarked well before it reaches the surface; and Gresham’s law together with gold’s Veblen good characteristics means higher prices will not necessarily tempt the general public to feed the scrap supply monster.

As these, and other similar trends, converge and continue apace, the price of the nearby futures contract will drop to previously unimaginable depths, relative to the cash price, making backwardation worse. Ultimately this will make backwardation irreversible and only those that have acted in advance will be positioned to transition well to Bretton Woods II.

So let's talk through this scenario and read Steve's post very carefully.  Steve says,

the price of the nearby futures contract will drop to previously unimaginable depths, relative to the cash price

Let's not fool ourselves... this deleveraging you speak of Dave is folks selling futures contracts... it's not folks selling physical Gold.  There is no leverage in physical Gold... it is simply money, unleveraged, with no counterparty risk.  You can make fun of me for holding it in high reverence relative to unbacked fiat currency, but that does not mean I would not be able to part with it in exchange for other things I want or need someday.  I just will not part with it at today's prices unless I absolutely have to.  I suspect you would not either. 

Anyway, back to the deleveraging;  Ellis is saying that all this selling of paper futures contracts will cause the price of said contracts to drop... but unlike you, he differentiates this from the spot price, or the price of real, physical Gold.  This event then, viewed with an understanding of how the market is manipulated, becomes the final decoupling of Comex paper and real physical.  Some Gold analysts believe that the couple between paper and physical will be picked back up in the Eastern markets... a reset of sorts.  This event will almost certainly be marked by a shortage of available physical.. and high premiums.  Be prepared.    

 

       

  

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Oliveoilguy
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Backwardation Explained

Thanks Jim H for great analysis. The Steve Ellis's article https://goldmarketmacro.wordpress.com/article-archive-2/permanent-gold-backwardation/ is brilliant. This is a must read piece.

Anyone who thinks they can be cute and trade the transition to Bretton Woods II is certain to be hurt in the process. All these calls like: "this is it", "PM's are finally moving", "this is the moment we've been waiting for" are so irrelevant. The moment has long since arrived. The die is cast. The process is in motion. All we as individuals can do, is prepare on an individual level and have enough humility to realize that the game is way out of our league.

Thanks for the common sense position. Got to get back to work on my land.

 

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davefairtex wrote: As of
davefairtex wrote:

As of right now, GDX (+5.84% +1.14) has broken its medium term downtrend by breaking above its previous "lower high" at 20.42.  It is currently trading at 20.57.  If it closes relatively near where it is trading right now, this move in the senior miners marks an important step in a return to a bullish posture for PM.

Gold is also up +14.10 to 1218.10 and silver +0.37 to 16.58; silver broke above its 50 MA, finally.  This on a day when oil once again is getting pounded and the equity market is having issues.

Bonds (10 & 20 year US treasury) are going absolutely nuts, although they are off a bit from their highs.

 

With historical p/e's still high, I wonder how the miners will do in global crash.   If gold goes gonzo, I would assume miners would be the best stock play in the crash without using shorts or puts or leverage.

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the great COMEX default

JimH-

As these, and other similar trends, converge and continue apace, the price of the nearby futures contract will drop to previously unimaginable depths, relative to the cash price, making backwardation worse. Ultimately this will make backwardation irreversible and only those that have acted in advance will be positioned to transition well to Bretton Woods II.

So, from reading all this, I didn't get the sense this happens overnight.  From the actual words he wrote, its a trend, and a process, one that can be observed and actions taken prior to the eventual denouement of "irreversible backwardation" and the oft-forecasted COMEX default.

Simply put, he's describing premiums over COMEX rising until they become very large, and permanent, after which a COMEX default occurs.

I'm a big fan of watching for this exact thing.  I'm happy that both you and Mr Ellis agree with me on the importance of premiums as an indicator in order to see a COMEX default coming.

But until the premiums start to blow out, COMEX futures set the price of gold.  It's a simple equation: deleveraging in the futures markets will hammer the price of gold.  If and when premiums on the big bars start to blow out as a result of short supply, and believe me, I'll be watching them daily during the next crisis, it is the very first thing I'll notice.  Premiums on PSLV and PHYS and OUNZ are another proxy for big-bar physical shortages.

I promise, I won't keep this info to myself.

My recommendation:

I suggest if you don't have gold, these price levels seem reasonable.  However if you have a sufficient golden insurance policy, and you have some spare cash and are looking for a good time to pick up more and you don't mind rolling the dice, there may well be better prices in the offing when there is blood in the streets as a whole bunch of deleveraging in the futures markets yank prices dramatically lower - the next time we're in the midst of a crisis.  Say for instance a Grexit.

Prior to the COMEX default, of course.  Which we will see coming because of premium expansion.

Jim's recommendation:

Buy buy buy now now now because gold is moving from west to east, central banks are madly repatriating, and the COMEX could blow up tomorrow, overnight gold will hit $5000, followed by $50,000 the next day, the fiat unbacked paper dollar will be instantly turned into worthless confetti, and then you will feel like you really missed out!  And then you'd feel really stupid!  OMG!

Did I miss anything?  :-)

 

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davefairtex
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miner P/E ratios

KC-

P/E ratios are not great indicators for company analysis when the companies are not making money at a time when all in costs equal revenues.  A better metric for comparing companies during such times are price/sales ratios.

In a global crash, gold may move skyward, or it may tank due to deleveraging.  If it rockets higher, miners should follow, since they are (usually) leveraged to the price of gold.  If gold tanks, so will the miners.

Juniors are typically the most highly leveraged to the price of gold.  Also, so are the high cost producers.  A crazy recipe: if you expect gold to go nuts, find the crappiest, highest cost miner out there, and buy that one.  It has probably declined 97% since the highs in 2011.  If gold bounces back to $1900, that miner will give you a 20-bagger, unlike a high quality miner like Goldcorp which might only be a double.

Price/Sales ratio lets you see how crappy the market thinks the miner is - which might also be its relative distance to bankrupcty.  Below are 3 different companies P/S ratios:

Goldcorp Price/Sales: 4.55

Kinross Price/Sales: 1.07

Allied Nevada Price/Sales: 0.32

Goldcorp shares are worth $4.55 for each $1 in gold it mines.  Allied Nevada shares are worth 32 cents for each $1 in gold it mines.  I'd guess that ANV is close to bankrupcty, has a lot of debt relative to cash flow, and is a high cost miner.  ANV was trading at 40 in 2011, and now trades at $1.

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davefairtex
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gold backwardation & arbitrage opportunity

So while I believe in the theory of this gold backwardation & arbitrage opportunity and what it all means, I don't believe the examples Mr Ellis was citing in his paper represent anything close to current reality.

I'd like, just once, for one of these people citing backwardation to show me the math on what the actual profit opportunity on the arbitrage is that is supposedly being ignored by the marketplace, proving gold is in such dreadfully short supply.  He gives an "example" of 10% per annum.  But I don't want examples, I want to understand what reality is right now, so I can judge for myself whether the situation is serious or not.

So since Mr Ellis didn't provide the resource, I went to the futures market to answer this question myself:

http://www.cmegroup.com/trading/metals/precious/gold.html

Feb 2015 gold: 1219.40

Dec 2015 gold: 1222.60

Dec 2016 gold: 1231.20

So what does reality say?  Notice how the prices go up?  That's not a backwardation situation.  There is no $50 discount for buying gold 10 months out.  In fact, there's a premium - its all of $3.20.  You pay MORE for gold 10 months out, not less.

So you tell me.  Is gold in backwardation?  Can you sell your gold today and make a $50 profit in six months when you buy it back again?

No.  Gold is in contango.  There is no arbitrage opportunity.

If there were, that would indeed be huge news, and things would be just as interestingly dire as he paints them.

Of course, if we had ham, we could have ham and eggs.

If we had eggs.

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Jim H
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backwardation...

Is usually only seen in the closer in months... it has to get really bad before it infects out to one year.  It should never happen.... you cherry picked the very far out month contracts to make your point. 

Jan 6 2015

 

-.05%                     -0300%                       -.00%                +.0167            .145%

 

Jan 5 2014:

 

 

-.05%                     -.025%                  -.01330 %               +.015%               +.1375%

Today, the rates hardly moved. The one month GOFO stayed stationary and in backwardation.  The two month GOFO  moved more negative.

The Three MOnth GOFO went to zero and thus still in backwardation.  The 6 month and 12 month are positive and out of backwardation and it moved more to the positive needle.

http://www.silverdoctors.com/harvey-organ-oil-plunge-blows-up-bank-deriv...

 

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davefairtex
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backwardation

I guess you didn't look at my reference.  I'll give it to you again.

http://www.cmegroup.com/trading/metals/precious/gold.html

Jan 2015: 1219.30

Feb 2015: 1219.40

Mar 2015: 1219.70

Apr 2015: 1220.20

Jun 2015: 1220.70

Can you point to the backwardation here?

Note: there is no MAY contract.  I'm not excluding it just to scam you.

 

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ScottT
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Ups and downs

I want someone whose basic worldview encompasses both the uptrends, and the downtrends, which all markets exhibit.

I still believe in holding a core position in gold as an insurance policy against an accident in the financial system

Davefairtex - I can identify with your perspective and would be one of those people whose worldview encompasses the uptrends and downtrends. Reality is that no single person has a clue what will happen to the gold price tomorrow or in 5 or 50 years from now.  What is a core position?  For different people that will mean much different things. For me it means much less than 10% of my assets in PM.  By themselves PM's do nothing other than be a placeholder of "value". I am of the mind that there are far more valuable things to hold as part of a core position and they include things such as cultivatable land with access to clean water and shares of real and viable companies that produce things which are useful to people. 

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Jim H
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For now we are just seeing GOFO backwardation I guess..

The term is sometimes applied to forward prices other than those of futures contracts, when analogous price patterns arise. For example, if it costs more to lease silver for 30 days than for 60 days, it might be said that the silver lease rates are "in backwardation".

https://www.princeton.edu/~achaney/tmve/wiki100k/docs/Backwardation.html

Nothing to see here.. lot's of Gold.  Move along. 

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davefairtex
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backwardation: hype vs reality

My only point: his example was dramatic.  Reality didn't match.

If you can get Mr Ellis to provide a calculation for what the financial opportunity is for a trader capitalizing on the GOFO backwardation, I'd be interested to hear it.  For instance, that -0.60% 1M GOFO rate we saw in November.  How much money did that represent?  Was that a 0.60% return per year, or per month?

In his example, it was 10% per year.  That's huge.  What was reality in November?

Jim you are extremely skeptical of literally everything I say.  If you only applied 1/10th of that skeptcism you display toward me and focus it on critical thinking about what your goldbug writers are saying, you'd quickly sort out fact from fiction.

If Mr Ellis is trying to educate the world about backwardation, he'll be happy to explain.  If he is just talking his book and trying to motivate (i.e. scare) us all into buying gold blindly based on his resume and a fearful example he created from whole cloth, he won't be interested in explaining.

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davefairtex
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backwardation charts

I ran a calculation on the contango/backwardation in the gold futures market over the last 30 years.  I came up with some interesting results.  First chart, run through a 50 point moving average to smooth out the bumps.  While there was a $10-$20 contango back during the gold bubble in 1980, and a $5 contango during the housing bubble, it looks like "normal" is around a $1-$2 contango.

Also, there did seem to be a period of backwardation recently...

It was largely smoothed away by the 50 MA, so I zoomed in and displayed the raw data to see the magnitude of the backwardation: two main episodes, about a month each, in the middle and at the end of 2013, for as much as $2.

The math is simple.  Price of GC2 contract - price of GC1 contract.  The opportunity for arbitrage?  As Mr Ellis said, sell gold now for $1200, buy a month later for $1202.  Risk-free profit: $2, or about 2% per year.

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theordore
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Future gold priice curves
Thanks to all you contributors for highly educational material.  I bring you a Newbie's questions that arise from this thread and many other related discussions.  Until some accident causes Confidence in "the currency" to drop dramatically, aren't the Powers able to keep creating money, by means of simply making entries in computerized ledgers, sort of indefinitely?  (This would mean, it seems, that globally we are on a treadmill of recurrent debt forgiveness  -- accepted loan defaults. Indeed, any large-scale repayment of the debt principal would entail major removal or liquidity from the economy and would crash some key banks in a debt-based monetary system.)  Don't the Powers have unlimited resources to keep the price of paper gold just above the level needed to keep the miners in business, by simply printing the money they need to play the markets?  Could we not have such a disjunction between the paper gold market and the physical gold market that they could in the future show unlinked price curves?  
   
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Arthur2014
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cycles in economy and elsewhere

Dear davefairtex,

 

I ‘m always very relieved to read your sober analyses. This is meant literal. There is no irony or additional meaning implied, no implicature and so on.

davefairtex wrote:

Armstrong maintains that gold will have its day, but that its all about cycles. 

In the strict sense a cycle is a geometrical figure. Speaking of cycles in economy is rather  metaphorical speech. Instead of speaking of “cycles” one could speak of “waves”, “fluctuations” “oscillations” or “upward (respectively downward) spirals” and so on.

The metaphors we use influence and direct the way we think about a phenomenon / an object of investigation. Changing the metaphor changes our intuitions about the object of study and our approaches.

In economics sometimes the terms “cycle” and “wave” are used synonymously:

https://en.wikipedia.org/wiki/Kondratiev_wave

and:

“In economics, the term pork cycle, hog cycle, or cattle cycle describes the phenomenon of cyclical fluctuations of supply and prices in livestock markets.”

https://en.wikipedia.org/wiki/Pork_cycle

“The term business cycle (or economic cycle or boom–bust cycle) refers to fluctuations …

Despite being termedcycles, these fluctuations in economic activity can prove unpredictable.”

https://en.wikipedia.org/wiki/Business_cycle

 

Sometimes Martin Armstrong refers to life as an example for a cycle respectively for a cyclical process. But this not correct. Mr. Armstrong is wrong in classifying life as an example into his theory of cycles.

Life is not cyclical - neither the life of an individual nor life as a cosmic phenomenon. The individual life on earth ends with death. Even if one believes in reincarnation on earth individual life is not cyclical because the soul / the spirit would permanently stay alive during its transmigration to a new body.

Nor is life a fluctuation between the state of being alive and the state of being dead.

Life as a cosmic phenomenon (the bush of life) is rather an overlapping sequence of countless individual lives.

At least Martin Armstrong’s hypothesis of cycles is not a universal hypothesis applicable to anything and everything in the universe. As any other hypothesis it has its constraints and its limits.

 

Best regards

Arthur

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davefairtex
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life & cycles

Perhaps don't get hung up on the word cycle.  Or rather, use it in the same way people use "product adoption cycle", or "product life cycle."  Product is created, used, and then dies off because nobody cares.  If you don't like the word "cycle" to describe that a completed movement through a set of different stages, perhaps you could suggest a different word.  :-)

Its said that the grandchildren of revolutionaries don't really care at all about the things their grandfathers died for.  Two cycles (generations) pass, and Glass Steagall gets repealed because nobody remains in power who remembers how critical it was.

Spring-Summer-Fall-Winter, night and day, the lunar cycle, physical life is full of cycles.  And our bodies provide us with a cycle too, for our life.  As a result, we all receive similar emotional experiences driven by how the human life cycle happens.

Children all get the experience of being dependent and cared for (or not) by adults.  Teenagers get the experience of having been children, and wanting freedom.  Adults get the experience of having to raise children, watching them grow up, and move out.  Old age brings wisdom (usually) but reduced strength and eventually leads back to dependence again.  All of us together have (most of) these experiences, driven by the life cycle of humanity.  Innocence, strength, sex drive, weakness, (opportunity for) wisdom, dependence - all shared experiences driven by the human life cycle.

And if you believe in reincarnation, these same set of fixed experiences driven by the human physicality are constant for each new experience.  Born again = starting a new cycle.  Life tracks can be dramatically different, some lives get cut short while others live out the full cycle, but each soul more or less gets to go on that same ride, defined by the physicality of humanity, starting with birth and moving along the time axis towards death, with shared experiences driven by physicality along the way.

Writ a bit larger, similar life-cycles apply to civilizations based on the date of creation of the civilization and its life cycle/aging process.  Economics too - the business cycle driven by expansion, ponzi, contraction, and whatnot.  Wars - after two cycles went by in Europe with no serious conflict, they got WW1.  Another cycle, WW2.  Roughly speaking.  Products too have life-cycles.  It takes time for a culture to adopt a dramatically new product: the train, electric power, the car, the computer, the internet.

It turns out, that time axis is really important.  That's why some things just need time to work themselves out.  Enough people get fed up, pressure builds over time, and one snowflake causes the avalanche.  But the "time" bit is critical.  Trying to cause an avalanche before its time is wasted effort.  Trying to get everyone to use cell phones too far ahead of the more-or-less built-in adoption rate is just not gonna happen.  The distribution of age and "adopters" among the population drives that adoption rate - the product adoption cycle.

"Science advances one funeral at a time."  Enough scientists who built their reputations on the old theories have to die off before the bulk of the community is able to accept a new theory.

On the deck of a rolling ship at sea, trying to move that loose cannon when the deck is tilted against you is extremely difficult.  It becomes quite easy - indeed, almost impossible to restrain - if you wait for the cycle to shift.  "Wait for the roll" and your job is infinitely easier.

Gold is having its down cycle right now.  It may be rolling along the bottom, ready to shift back up again.  Or not, its hard to say.  That's why Armstrong says "manipulation against the trend" is impossible.  Its the equivalent of trying to move that cannon at the wrong time.  And "manipulation" at the right time is easy.  One might even argue, unnecessary.

Goldbugs who imagine that gold must only have an up-cycle, and that any downward movement in gold is prima facie evidence for manipulation, think gold is (or should be) immune to the cycles that influence literally everything else on earth.

Well that's the theory as I understand it anyway.

Given all that - what word would you use to describe what I call a "cycle"?

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Arthur2014
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Posts: 56
davefairtex wrote: Perhaps
davefairtex wrote:

Perhaps don't get hung up on the word cycle.  Or rather, use it in the same way people use "product adoption cycle", or "product life cycle."  Product is created, used, and then dies off because nobody cares.  If you don't like the word "cycle" to describe that a completed movement through a set of different stages, perhaps you could suggest a different word.  :-)

...

Given all that - what word would you use to describe what I call a "cycle"?

Dear davefairtex,

 

I’m always very pleased to get an answer.

I learned English as a foreign language. The word “cycle” made me too much thinking of the mathematical meaning “circle”.

But what is meant here is a process with defined stages / phases in a temporal order.

Of course, it is pointless and needless to propose another term.

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