Inflection Point (Part 6): What Precious Metals?

Inflection Point (Part 6): What Precious Metals?

So far, the Inflection Point Series appears to be largely unfolding along the lines that we laid out beginning in Part 1, which argued that the long run equity valuation cycle had more than run its course.  The key factors which had propelled the Stock Markets to dizzying heights, i.e., earnings and sky-high P/E ratios, were at such extremes that it became highly unlikely to experience a further push higher (https://markonomics101.com/2018/07/12/inflection-point-part-1-the-long-term-equity-valuation-cycle/).  In Part 2, we made the case that Hard Assets would EMERGE while Financial Assets SUBMERGED (https://markonomics101.com/2018/07/15/inflection-point-part-2-financial-assets-give-way-to-hard-assets/).

This was premised on a return to a rising inflation rate environment from years of the Federal Reserve’s policy of “Quantitative Easing” (QE), or equivalently “Zero Interest Rates” (ZIRP).  These policies were the most aggressive monetary easing that the Fed had ever undertaken in response to the fear of Recession and Deflation.  Thus, once all the paper used to keep rates at near zero had made its way through the system, inflation would pick up and the new emerging leadership, we argued, would include Precious Metals, notably Gold and Silver.  Uh, not so fast.

Part of our case was based on the expectation that interest rates had only one possible direction to go, UP.  Part of the reason for higher interest rates would, of course, be higher inflation as economic growth accelerated and created the types of scarcities and shortages that send energy prices higher, food prices higher, and Gold and Silver higher.

In June, we asked whether Precious Metals were Nearing Completion Of a Long Term Bullish Setup (https://markonomics101.com/2018/06/18/precious-metals-nearing-completion-of-a-long-term-bullish-setup/)?  Despite some quite positive looking charts, some great fundamentals, and a Partridge in a Pear Tree, Precious Metals have been the worst performing sector, other than Cryptocurrencies, since then.  The charts we used on June 15th, which are below, could not have looked much better.  Silver (SLV) looked to be completing a Rounding Bottom and was reaching the end of a Triangle pushing the $16.50 level while Gold (GLD) was testing Resistance at $132.  This is why one must ALWAYS place a stop, or form of mechanical loss limit, as part of a potential trade.  GLD NEVER broke $132 to turn BULLISH but did break below $115 to turn BEARISH and has since traded as low as $111.  SLV NEVER broke its Triangle in a BULLISH way and immediately hit the skids to its current close of $13.25

Precious Metals were believed to be ready to resume their 5000-year track record of being great hedges of currency devaluation, also known as inflation.  The facts, on the other hand, are different.  The surprisingly strong weakness in Gold, Silver, and other commodities suggests that the Economy is QUITE WEAK and the data suggesting GDP growth exceeding 4% is overstated.

Nominal or “Non-Inflation Adjusted” Gross Domestic Product is measured as growth in OUTPUT combined with increase in PRICES.  A NOMINAL GDP of 7%, for example, could be the result of output growth of 4% and inflation of 3% OR growth of 1% and inflation of 6%.  Thus, an “intentionally” lower estimate for Consumer Prices not only keeps a lid on the built-in cost increases of Federal Spending Programs tied to inflation, but also misleads the voters into believing that economic and employment prospects are better than the actual figures would show.  Anecdotal evidence suggests that the dismal 1.5% growth in GDP from 2009 to 2016 could have been EVEN LOWER than reported, with the economy having spent most of those 8 years in a recession.  The unemployment rate itself MAGICALLY shrank to under 8% one month prior to the 2012 elections.  Yet, fewer people were employed than ever before.  The unemployment rate suddenly ignored large swaths of unemployed people and VOILA, the unemployment rate plummeted.

The Systemic Point of Inflection that had Hard Assets replacing Financial assets, appears to have simply been delayed but not abandoned.  More important than reported inflation is the overall level of interest rates, currently hovering near 3% for the 5 Year Treasury, 10 Year Treasury, and 30 Treasury as covered in two recent pieces on inflation, inflection, and interest rates (https://markonomics101.com/2018/09/15/interest-rates-continue-to-edge-higher/) and (https://markonomics101.com/2018/09/10/interest-rates-poised-to-turn-higher/).

At 3%, interest rates do not even adequately compensate a holder for inflation, let alone provide any type of “real return”.  So, while the definitive market-based signs of inflation are still “Missing In Action”, one sign that the Inflection Period will have been completed will be confirmed by rates exceeding 3% for the Treasuries.  This appears imminent.  Are Gold and Silver no longer useful?

For one thing, strong sentiment exists that Gold Prices have been “artificially” suppressed by the Federal Reserve in order to eliminate Gold’s price as an indicator of the health of the Financial System.  Paul Volcker, (the Fed Chairman who engineered the interest rate spike which ultimately created the severe recession which brought down inflation), has been quoted on many occasions as saying that Gold is the “enemy” of policymakers because its price is inversely related to confidence in the system.  Under Volcker, Gold rose from $35 per ounce when it ceased to back the dollar in 1971 to a high of $668.  The manipulation of Gold prices is further suggested by the abject opposition to an audit of Fort Knox and the Federal Reserve itself.  A rising Gold Price would make keeping interest rates at absurdly low levels virtually impossible.

The Gold Newsletter, Le Metropole Café (http://www.lemetropolecafe.com) published by Bill Murphy, by far, has best chronicled the machinations of various central banks in generally keeping a lid on Gold Prices as well as provided the broadest and most comprehensive information on the Precious Metals Market.  Murphy has tirelessly revealed and spoken out against these practices, and, in so doing, has developed both a large following and high degree of both visibility and credibility.

Market manipulation of the kind referred to by Murphy has been a growing factor in various markets for decades.  After the 1987 Crash, a group colloquially called the “plunge protection team” (PPT) was formed to intervene during periods of “crash like” behavior in order to prevent a cascading market from developing into a full-on crash.  The existence of the PPT was scoffed at for years as conspiracy theory, especially by the perma-bulls at CNBC.  More often than not, the automatic dismissal of a contrary point of view or assessment as “conspiracy theory”, eventually is accepted as the “theory” is eventually undeniable and original detractors simply “knew it all along”.   The Federal Reserve’s own “Quantitative Easing” is as openly an overt policy of interest rate and equity market manipulation as anything ever suggested by the “conspiracy theorists”.

GLD’s chart is better than SLV’s but both remain BEARISH and should remain underweighted until their price action demonstrates that the long-awaited upward advance has begun.  One key fact weighing in Gold and Silver’s favor is that the cost of mining new production is thought to be substantially higher than the current price (http://www.mining.com/gold-miners-sustaining-costs-22-since-gold-price-bottomed/).  Ironic, isn’t it, that the COST of mining Gold shows proof of inflation, while the price of the metal does not?

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Comments (2)

  1. Sep 16, 2018 at 2:39 pm

    The precious metals are locked into a trading range that may well last for decades. Our children, perhaps, will see a significant rise in prices for the metals and the remaining mining shares (as some miners will not be around then).

    One reason that the metals can be suppressed and manipulated is that Westerners do not want to own the physical metals, but defer to paper holdings. One wonders if there really are millions of ounces truly backing these ETF and other paper claims for metals. For silver the problem is that there is too much of it above ground. As such, silver is not really a precious metal.

    • Oct 13, 2018 at 4:11 am

      Larry, good points and unarguable. I believe that todays trading will propel commodities and that retail demand will overwhelm suppressed supply. If you follow Bill Murphy’s LeMetropole, which is one of the few recommendations i’ll make, you will have enough info to decide. I’ve been bullish to long, but now I may just be right.

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