US economic and precious metals outlook

I remain reluctantly bullish on gold, silver and platinum (and bearish of palladium). I fear we are entering a time of turbulence via geopolitical events, monetary policy tightening (during the greatest policy experiment perhaps in human history); a national, state and city debtastrophe, retail implosion (in a sector that employs millions) and an increasingly gig-oriented job market — that provides quite poorly for its paycheck-to-paycheck participants. The housing bubble 2.0 is beginning to sputter with almost as much leverage as 2007 in the speculative areas (flippers especially).

Further, I fear that the economic recovery did not manifest as hoped, and instead we’re seeing fudged metrics across the board (whether it is labor statistics that are double and triple counting the aforementioned gig jobs as separate people each getting a new job — when it is a single person with 2-3 jobs). We see funny data coming from Facebook where they are saying they have more users than the US census says we have population. We see enormous misallocations of capital as a result of these and other fuzzy numbers. At the end of the day we have a weak economy that is limping along, despite the record setting stock market saying otherwise as its returns grace the headlines on a near daily basis.

GDP growth has largely been predicated upon expansions in cost, not true increases in activity. Medical costs being one of the primary drivers, which are now rising at about 200% the rate of inflation by conservative measures. Compounding that problem is the fact that the FIRE (finance, insurance, real estate) component of the economy continues to occupy an outsized portion of GDP, creating a situation that has changed the lubricant for the engine of economic growth in to a drag.

So much wealth has been transferred vis-a-vis QE and this ongoing monetary policy experiment, from the working and middle glass to the very wealthy. This further creates an enormous strain on the largest input of US economic growth — consumption. Combining that with the overhang of student debt which is now approaching or exceeding $1T depending on the measure. We have a growing swath of consumers that can’t afford to engage in their namesake activity. And we just broke through record credit card debt in the US. So it’s safe to say we’ve pushed a lot of consumption forward without the means to keep that pace going.

Shifting gears to the central bank conundrum, a Warsh appointment at the Fed doesn’t do much to resolve the largest quandary in the institution’s history: how to unwind a 4.5 trillion dollar balance sheet before the next crisis — without causing the next crisis? Warsh’s own WSJ op-ed opined about his remorse and skepticism regarding QE. Will he be capable of unwinding what he admits he (and others at the Fed) barely even understand? It will be fascinating to watch. Makes buying VIX long dated calls look tempting if he is appointed and such an endeavor is undertaken. The current unwinding of the balance sheet is unrealistically slow unless they never intend to normalize.

What are the odds that this equity bull market, the second longest in US history by my calculation, continues unabated? I would imagine further strength in equities is required to keep the Fed determined to raise interest rates — and significant weakness could pause the tightening or even reverse it. Even if Warsh is at the helm, he would be under massive pressure from the administration to keep the economy looking better the closer we get to re-election.

That all said, I think we are navigating one of the most fascinating markets in my lifetime. It has evaded almost all logic and reason. So many much more gifted investors than me have missed a lot of this rally having been extremely skeptical of its durability and potential.

At this time I don’t see a lot of value in the US markets. Valuations feel stretched and equities priced to perfection. I’ve been allocating more capital in to emerging markets where the yields are higher, the valuations are more fair and there is some potential for hedging against US dollar weakness — which still concerns me over the intermediate to long run.

I plan to increase my own exposure to high quality silver miners based on my thesis that silver industrial usage will increase with larger demand for solar power, communications, computers, mobile devices and weapons systems (such as drones and missiles). Unlike gold, silver is used and quite hard to reclaim. Silver investing may also grow in time, but that isn’t the center of my thesis with silver. I suspect, instead, that investment will remain flat and the outsized portion of increased utilization will be non-reusable applications. That, and the fact that silver is generally mined as a secondary metal (incidentally rather than purposefully) at most mines, makes the opportunity a bit more bullish for me than gold.

It’s a very difficult metal to analyze, though. Thinly traded, often beaten up by large banks in concert (silver price rigging investigations have proven that several of the largest banks in the EU and US were working together covertly to suppress prices — and they saw minimal consequences for this activity).

Trading silver is not for the faint of heart, either. I spent a few months trading small lots of silver mini contracts and found the volatility very difficult to execute against because the bid would just dry up during times of high selling pressure. Most of the silver miners are much more liquid than the futures, which is a bonus. But there are very few of them to choose from and even fewer worth investing in.

As always I hope my commentaries are constructive to those who make their way through them!

Full disclose: Long positions in emerging markets bonds, stocks, precious metals mining companies; short position against NASDAQ 100.

Correction brings opportunities in resource sector

The resource sector is getting slammed today on account of a marginally higher dollar, and one dissenting Fed member (Bullard) jawboning an April rate hike (conceivably to test the market’s reaction).

In all likelihood, given that the Fed has all but lost its credibility and certainly doesn’t want to be credited with causing deflation, a rate hike will not happen in April.  In fact, if anything I expect more dovish language on account of a deteriorating domestic housing market, more global economic uncertainty and the fact that we are right in the midst of election season (and the Fed seems to have more of a democratic bias — perhaps because many republicans are openly hostile toward the Fed).

My thought is that Bullard’s bluff will be called. That means the lower prices I am seeing now across the resource sector could be a wonderful opportunity to allocate capital at a discount.

Stay nimble.

Negative interest rates, positive investment returns?

I wrote in January that it was time to look at the resource sector. Since then energy, materials and precious metals producers have provided double digit returns. And this is likely only the beginning.

Negative rates are the new normal.

Major changes are occurring in the global picture. Changes that may appear to be disorienting.  Such as today’s ECB rate cut and QE extension causing a massive near 2% rally in the Euro, defying all expectations.

Or the Bank of Japan’s negative interest rate program boosting the Yen.

This may be a sign of something much more critical to resource sector stocks: a beginning of the end for the US dollar rally.

I wrote last year that the US dollar rally was stalling. Since then the dollar has stalled, moving up and down, but having a very hard time making a decisive continuation of its short term uptrend — or its long term downtrend.  Instead it has been consolidating with a more downward bias as of late.

This to me is suggestive that the US dollar rally is in a phase where the next trend is being decided by the conviction of buyers and sellers and the global economic picture as it changes.  And it is changing — rapidly.

There is no doubt that the US economy has made some progress since the depths of the crisis in 2008-2009, but it is not the level of progress that the stock market would suggest or that the unemployment rate seems to portend.

Instead we’ve enjoyed a very slow, very weak recovery that has mostly created part time, low paying jobs. And this is not as much of a political issue as it is a monetary policy issue.

QE, low interest rates and bail outs have transferred wealth from the working class, and shrinking middle class to the wealthy.

This actually hurts the economy. Slowing consumption, reducing confidence and shrinking the job market. Reality is setting in. Federal Reserve policy makers seem to be realizing that their hawkish hopes of hiking interest rates may be just that. We may even see negative interest rates before we see a 1% Federal Reserve interest rate again.

Such a development is very positive for those traditional inflation hedges.  Which is why I will continue to circle various components of the resource sector in pursuit of misunderstood or undervalued companies which could be valuable investments for the long term.

China halts, dollar faults, buyers bolt

Storms are brewing. The wind will carry them from the east to the west. Be careful out there.

Thursday will be another difficult day in stocks and risky credit markets. The dollar is no longer being seen as much of a safe haven. Gold is catching a bid, but for how long?

Psych! No hike.

With all the prognostication of an interest rate increase happening from Fed watchers and certain economists, I feel a sense of Deja Vu for previously expected rate hikes in this business cycle.  There was no hike, no easing — just more of the same.  What does it all mean?

It’s the economy, stupid.

We’re not recovering. The Fed can see that in its magic crystal ball of financial and economic data. There are even hints of deflation in consumer prices.  Oh no, perish the thought of things getting cheaper when people have less to spend!

What about December?

Hiking near Christmas would make the Fed the Grinch Who Stole Christmas!  It won’t happen.  The next chance is going to be in 2016.

How did markets react?

The Dow briefly turned negative, the S&P shrugged off some of its modest gains and the US dollar dropped.  Some commodities are gaining — as they should — because the dollar’s strength was pushing them down.  And that strength was built on the rumor of a rate hike.

Where do we go from here?

Expect more jawboning about rate hikes, but a hesitant trigger finger.  I don’t think global markets, let alone our own, can withstand higher interest rates.  Ultimately, however, the Fed is losing credibility here — and fast.

Gold continues tumble without outside catalyst

Producer prices were flat as was the US dollar index, but that didn’t stop a determined seller from pushing gold prices down this morning.

What is driving the selling pressure?

Most traders are paid to execute orders to maximize value.  That is to say, if you are selling a commodity you want to sell it for the highest price (or short it at the highest price) to maximize your profits.

What we’ve seen within the last several years is the opposite of that.  Regular dumping of gold (and silver) futures contracts with heavy volume at the lowest prices.  Huge lots executed at once — rather than distributed over the course of a day to achieve a volume average weighted price.

Are prices being fixed?

This leads the gold investing community to believe that there is malicious manipulation underway in these markets.  And with just about every other market in the world having been proven to be manipulated, such as LIBOR, foreign exchange, bonds, equities and other commodities — perhaps, just perhaps it’s not too paranoid of a theory after all.

A reason to sell so many contracts in to the market at once would be to push price down through sell stop orders.  

This action forces prices even lower and pushes many out of long positions.

Only the people pushing the sell button truly know their own intentions (or that of the institution they are employed by).  An outside observer of these markets is forced to draw their own conclusions.

How can so many claim to own the same gold?

The ratio of futures contracts to ounces of physical gold at the COMEX has risen to the highest levels on record.  Last checked, it was closing in on 250 gold futures claims per ounce of physical gold actually available.  This means that should there be a large demand for COMEX gold delivery, there may not be the gold available to fulfill the order — necessitating a cash settlement.

If one was seeking delivery to obtain physical metal for storage, this would force that party to seek gold elsewhere as soon as possible with that settled cash.  And given that so many parties seem to have claims on the same ounces of gold, that could prove to be an interesting setup for a phenomenal short squeeze that drives prices much, much higher.

Potential scenarios for the continued decline.

How this particular situation resolves remains a mystery, but I am inclined to speculate that we have two possible scenarios that could play out:

1: We are witnessing the beginning of the one of the greatest deflationary collapses the world has ever seen, as evidenced by commodity prices imploding, China’s economy in serious decline and recent volatility in equity markets.  If this is the case then it will be difficult to find a safe home for one’s money almost anywhere.

2: The precious metals markets’ prices are being guided lower in order to reduce the bid for what were once considered safe haven assets by many.  Eventually, if such a scheme is underway, it will unravel with prices going much higher.

Which of these scenarios is playing out remains to be realized.  

The former means the global markets are coming unglued at the seams and the global economy is crushed.  The latter would indicate that certain parties are concerned that a higher gold price could reduce confidence in other markets such as stocks and bonds.