How FED Chairman Jerome Powell sealed the fait of the US dollar and how Investors should react

Jerome Powell, just showed his hand. Much bigger balance sheet to come.

 

For years people have talked about the disastrous fait of the United States dollar. Those people have always been written off as quacks and go unheard. Well, After hearing Jerome Powell’s speech today, those quacks are about to be right.

Today Jerome Powell stated that the FED funds rate is at neutral. This assumption on FED funds rate differs from statements in the past. The new stance is clearly the result of how markets reacted in December when the FED continued to raise rates. Jerome Powell describes the market activity in his statement today as “crosswinds”. It is obvious that the economy can’t handle a “true neutral rate”. The only reason Powell was able to defend the current FED funds rate as a “neutral rate” is due to low inflation and low unemployment. Obviously these two things are great-but there are two obvious reasons why 2.25-2.50 percent can’t be the neutral FED funds rate.

First, the a neutral FED funds rate is not suppose to be accommodative or hinder economic progress. If inflation is slightly above 2% than the FED is still offering a real FED funds rate of 0%. Thus created an accommodative environment for moral hazards within the economy to keep growing bubbles.

Second, As Powell mentioned during his speech today, this means lowering the interest rate in times of crisis won’t be a strong enough tool anymore to jumpstart a spiraling economy. This lead Powell to candidly say that the balance sheet is in play to handle economic downturns. In 2008 we dropped the FED funds rate from 5% down to 0% and this wasn’t enough. We had to turn to a new experimental tool, quantitative easing (increasing the FED balance sheet via purchasing of bonds and bad debts) in order to quell an economic crisis.

After Jerome Powell’s statement today reports asked questions pointed that this was the “Powell Put”. This is a negative connotation used after FED chairman Alan Greenspan blew bubbles in the late 80’s, 90’s, and early 2000’s by constantly slashing interest rates that piled on debt until the chickens came home to roost in 2008. The truth is that this is the “Powell Put”. Only he has a second tool Alan Greenspan didn’t get to take advantage of-blowing up the FED reserve balance sheet.

So why are the Quacks that have been predicting the demise of the US dollar finally going to be proven right? Well, Jerome Powell just said himself that he is prepared to blow the up the balance sheet. In the last ten years the FED has constantly said they will clean the FED balance sheet at a rate of $50B per month. Well, as we saw in December, this caused great turmoil in the markets. We can’t tighten the money supply. So, Jerome Powell is using the “Powell Put”. He is stopping rate hikes and will inevitably stop Quantitative tightening, although he wouldn’t answer questions about the QT program after his speech.

We will inevitably have another recession. Its a 100% certainty. Some predict 2019-2020- I happen to agree with them. Whether we are right or wrong is neither here nor there. There certainly will be another recession. When that happens the FED has shown their hand that they will combat the problem with expanding the balance sheet-as Jerome Powell stated today. The way the FED expands the balance sheet is simple. The FED creates digital USD to buy bonds. This expansion of USD that are available increases the supply of USD and destroys the value. This is extremely troublesome as the US imports everything with our massive trade deficits. These deficits will be on steroids when our USD doesn’t buy as much as it had in the past.

So finally-the quacks will be the smartest people in the room. Assets like Gold, Silver, and oil that trade against the USD will be great places to be until they turn into a bubble that everyone will wish they were apart of from the beginning. They will mention the quack cousin that got “lucky”. They will say it was something that nobody could have predicted. When in fact, the FED chairman told everyone what was going to happen from the beginning.

Our current positions are in commodities that go against the US dollar. Owning physical metals is a great defensive position to be in. Owning ETF’s like USO (oil), SIL (Silver), and gold stocks with low debt are a fantastic offensive investment to be in.

 

 

 

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Silver is flashing Buy signals

 

Over the last six months silver has been forming a bullish cup and handle chart pattern. Combining this buy signal with the now dovish FED presents a fantastic opportunity. Not to mention we beneath $16/oz. and silver was almost $50/oz. three years ago. But how should one take advantage of the situation with silver?

Well, we ourselves have purchased shares of the Global X SIL ETF at $26.00 per share. This is an ETF that is comprised of 20 silver mining companies. The last period of bullish sentiment in silver was between Dec. 2015-Aug. 2016. Silver saw a price increase going from just beneath $15/oz. to just over $21/oz. This is a nice  27% increase in the metal price. However, the SIL ETF saw their holdings increase from $14/share to over $50/share. This is a 300% on a 27% move of the commodity that the ETF follows.

Good luck to all investors!

China’s plan to pull the rug out from the US as world leader

Today – as we like to do every couple of years – we consider all the gold in China.

Next time the international money system comes under stress – and that time may not be far away – where the gold is, and who owns it, could be of great importance.

The world’s central banks have been stocking up on gold

You may think gold is an antiquated asset, irrelevant to a modern digital world. China clearly doesn’t. Since the global financial crisis, China has been accumulating gold at a staggering pace.

The implications are considerable.

There are going to be lots of numbers in this piece, so to anchor you with some kind of perspective, let me give you some of the major figures.

Total global central bank gold reserves stand at just below 34,000 tonnes, which is roughly 20% of the 175,000-or-so tonnes of total above ground supply.

The US is the world’s largest owner with 8,133 tonnes. That number works out at around an ounce per citizen. Precious metals analyst Nick Laird reckons that if you add private and institutional holdings to this official 8,133 tonnes, there are 26,000–27,000 tonnes in the US overall.

Below is table of central bank gold holdings, using World Gold Council Data data. In gold terms, these are the richest 20 nations. The UK sits proudly at 17th, two places below Kazakhstan and one above Lebanon.

Tonnes % of forex reserves
1 United States 8,133.5 73.8%
2 Germany 3,369.7 69.1%
3 International Monetary Fund 2,814.0
4 Italy 2,451.8 65.8%
5 France 2,436.0 59.5%
6 Russia 2,066.2 17.6%
7 Mainland China 1,842.6 2.3%
8 Switzerland 1,040.0 5.1%
9 Japan 765.2 2.4%
10 Netherlands 612.5 66.0%
11 India 586.4 5.7%
12 European Central Bank 504.8 14.9%
13 Taiwan 423.6 3.5%
14 Portugal 382.5 63.6%
15 Kazakhstan 341.2 43.6%
16 Saudi Arabia 323.1 2.4%
17 United Kingdom 310.3 7.9%
18 Lebanon 286.8 20.1%
19 Spain 281.6 16.1%
20 Austria 280.0 47.4%

Central banks, by the way, have increased their buying this year at the fastest rate since 2012. They now account for around 10% of annual gold demand.

The People’s Bank of China (PBOC – China’s central bank) announces its gold holdings every five years or so. The current stated figure is 1,842 tonnes. Below, we see China’s holdings since the 1970s.

Chinese gold reserves

So that’s what they say they have. Now let’s look at what they have accumulated. We’ll start with what they’ve mined.

In 2007, China overtook South Africa to become the world’s largest gold producer, mining 276 tonnes. Last year it mined 430 tonnes, about 50% more than Australia, the world’s second-largest producer.

China now accounts for around 15% of total annual global gold production. But China keeps all of the gold it mines; it does not sell a single ounce abroad.

As well as keeping all of the gold it mines, since 2010, China has ramped up its gold imports. In 2014, it overtook India to become the world’s largest importer, buying gold from Hong Kong, Switzerland, London, Australia and Singapore.

It is hard to get precise figures as many of these trades are over the counter, but Hong Kong does provide them – and they are astonishing. Between Hong Kong imports and Chinese gold production, China has accumulated more than 10,000 tonnes of gold since 2000.

Chinese gold production plus imports

(Charts courtesy of Nick Laird at goldchartsrus).

Meanwhile, all the gold that enters China must be sold via the Shanghai Gold Exchange (SGE), and it is possible to get numbers for SGE withdrawals since 2008. These take the grand total of imports and production to 14,111 tonnes.

Chinese glod production plus SGE withdrawals

There is also, to add to this number, all the gold that was in China, whether as bullion or jewellery, prior to 2000.

So how much gold does China really have?

Not all of the gold that makes its way to China goes to the central bank, it should be stressed. Indeed, China has encouraged private accumulation of gold.

Quite how much is falling into domestic hands is hard to quantify, but Bron Suchecki of the Perth Mint, studying gold flows, argues that China aims for private citizens to accumulate 55% of flow – with the remaining 45% going to commercial banks and the Chinese central bank. Even if half of that 45% goes to the PBOC, then their holdings are likely to be higher than the stated 1,842 tonnes.

However, as precious metals analyst Koos Jansen argues, the PBOC does not buy all its gold from the SGE. It goes elsewhere. There are several reasons for this.

The SGE sells its gold in yuan and the PBOC prefers to use dollars. The PBOC likes to buy 12.5kg bars, which do not trade on the SGE. The SGE has stated that only consumers buy gold over its exchange – although in practice that doesn’t seem to be the case.

The PBOC does not like to disclose all its gold purchases, which on the SGE it would have to do. It prefers “monetary gold” which does not require disclosure on customs reports. The PBOC prefers an OTC (over-the-counter) market such as London, to an exchange such as Shanghai (less disclosure required).

What’s more, as Ross Norman, CEO of Sharps Pixley, tells me: “There are other state agencies apart from the PBOC, which buy gold – there’s the State Agency for Foreign Exchange, China Investment Corporation (the sovereign wealth fund) and the military, for example.

“And they all often use other means to the SGE to buy their gold. There’s the London Bullion Market, other market makers and banks in London, there are the Swiss refiners, a lot goes through Dubai. This is all official gold one way or another, but the real numbers are obfuscated and unknown.”

Norman continues: “The PBOC’s figures can be whatever they want them to be. In all probability, it’s much higher than officially stated. My guess is that they gave that figure of 1,842 tonnes to be high enough to get credibility with the IMF to satisfy its criteria to be included in SDRs (the IMF’s international currency basket), but not so high as to issue any kind of challenge to the US.”

Jansen concurs, estimating official Chinese holdings to be around the 4,000 tonne mark. That would make it the second-biggest owner of gold after the US.

Jansen’s grand total of all the gold in China now stands at around 21,021 tonnes.

China's estimated gold reserves

Norman, who works at the coalface of bullion dealing, thinks it’s even higher than that. “So much gold has been making its way to China without being declared. It really wouldn’t surprise me to see official Chinese gold holdings above the 10,000 tonne mark.”

That’s an extraordinary number. It would mean that China has more gold than the US.

China’s official gold holdings currently amount to just 2% of its foreign reserves. 10,000 tonnes would equate to 11% of foreign exchange holdings. That’s about the international average. In those terms, 10,000 tonnes is not such an extraordinary number.

But there is no way China could declare that it was holding 10,000 tonnes today. It would cause enormous disruption. First, it would send the gold price a long way higher – which it won’t want to do while it is still accumulating.

Second it would cause untold disruption in the forex markets – a yuan backed by gold could strengthen significantly. China doesn’t want this just yet, either – it wants the yuan low for trade purposes. Meanwhile, it has an extraordinarily large US dollar holding in its foreign exchange reserves. I rather expect it wants to protect the value of its holding – at least for the time being.

But third, and perhaps most of all, to declare that it had more gold than the US would be a direct challenge to American supremacy, almost a declaration of war. China’s not ready for that. Not yet, anyway.

-This fantastic article is written by Dominic Frisby at moneyweek.

The ultimate case why Silver can increase 900% in the next 5-7 years.

silver 20 year chart

It sounds crazy to say that the price of Silver can increase 900% in the next 7 years. Fact of the matter is silver already did that between the years 2004-2011. The price spiked from $5/oz. to $45/oz. in seven years due to a weakening US dollar.

The first four years of the silver spike was due to US national debt ballooning out of control. The spike in silver prices that occurred from 2009 to 2011 was fueled not only because of national debt-but the new quantitative easing experiment the FED was embarking on. The fear that QE would cause massive inflation in everyday prices like gas and food bid up the prices of precious metals. QE did not cause inflation above 2% between 2008-2018 for the following simplified reasons:

  1. As the FED practiced QE (FED purchased bonds to drive down interest rates in order to stimulate asset classes like stocks and housing) they paid a higher rate of interest to banks on their excess reserves than the market place would’ve paid if the banks would’ve loaned money to the market place. Therefor everyday prices remained stable. If banks would’ve loaned out the money to the market place than the excess cash in the real economy would’ve caused the inflation in everyday goods.
  2. The US economy after the 2008 financial crisis was experiencing a deflationary process. QE therefor pushed against those forces and leveled out.

At the start of QE the FED has a balance sheet of less than $800B. Today the FED has a balance sheet of over $4T. At the beginning of QE the FED also had the benefit of being able to slash interest rates from a normal rate between 5-6%. However, even slashing the FED funds rate in 2008 from 6% to 0% wasn’t enough to stimulate the economy. Hence the introduction of QE. Today the FED funds rate is 2.25-2.50%. In the event of another recession we don’t have enough runway to slash interest rates to boost the economy. With an inflation rate of 2% we are almost still at a real interest rate of 0%. Therefor, we are only one recession away from another round of QE.

The difference between this round of QE and all of the others:

  1. The FED for the first time since introducing QE tried to raise the FED funds rate and unload their balance sheet to payback the $4T at a clip of $50B per month. As the process unfolded the economy began to shake. The FED at one point stated the offloading of $50B was on auto pilot has now pivoted to stating the unloading of $50B could be halted if the situation dictates. The FED has already shown the world their hand- we have demonstrated that we can’t unload our balance sheet without causing real problems in the economy. As this becomes more apparent confidence in the US dollar will begin to shake.
  2. As confidence in the USD and the US economy weakens- it will be become harder to sell our our treasuries to other nations that have been lending us money. Those same nations are embarking on their own version of trying to shrink central bank balance sheets. When our treasuries aren’t being purchased- the interest rates will start climbing higher and higher on short and long term bonds. As these interest rates begin to climb- the FED will have a harder time paying banks to keep the money in excess reserves. Banks will have to pay out more money via interest on savings accounts at their institutions than the return they are receiving on 10 years worth of low interest rates they lent out on mortgages. Therefor the FED would have to start paying higher interest rates to banks if they want them to keep their cash in excess reserves. So in the end the FED’s cards will be seen-they can’t go through quantitative tightening- they will only be able to issue more QE and blow past their current $4T mark now with higher interest rates. More than likely the FED won’t be able afford the rate of interest on the expanding balance sheet. Banks won’t keep the funds in excess reserve accounts. Banks will have to lend the money to the public in order to stay solvent. Massive inflation will occur as the money floods main street.

How does this scenario push silver up between 2019-2025?

  1. We are about to begin a period just like 2009-2011. The period when the world was worried that inflation was going to hit main street because of QE. During that period silver increased from 10 oz. to $48 oz. People will begin to realize the US can’t do anything but flood the market place with USD to keep our over leveraged economy away from higher interest rates. The FED has already shown their hand that quantitative tightening isn’t possible. That the reality is only more QE. This will stoke the fears of inflation far more than the period between 2009-2011.
  2. As the FED funds rate rises- so does the value of the USD. As of today the FED is in a wait and see period with interest rates. They have walked back their mid 2018 tune of an automatic two rate hikes in 2019. It is probably the USD has seen its peak within this business cycle. A downward dollar is bullish for gold and silver.
  3. Technically speaking- when looking at the 20 year chart we see a head and shoulders pattern. As the USD stops increasing we imagine we are at the end of this pattern and ready to make new highs.
  4. Silver often times follows the price of gold. Silver is a by product of other metals being mined. Today it costs approximately $1,200 to mine one ounce of gold. The price of gold today is just above at around $1,290. Just like OPEC cuts oil when it doesn’t make economic sense- so do gold mining companies to stabilize prices.
  5. International affairs have foreign governments buying mass quantities of gold. US sanctions stripping foreign governments and companies access to US dollar have forced them into a position to buy gold in order to store value.
  6. Countries that have lent the US government are purchasing gold as a hedge against their lofty lending the the United States.

In our opinion gold is going much higher. Silver flows with the price of gold but in a more volatile clip-often times 3 times the moves of gold. Our very bullish position on gold also has us bullish on silver.

Oil ETF’s up 10% since our call on Dec. 29th

Oil hovered around $45 a barrel since we added it to our watch list of bullish commodities on December 29th. Today oil has increased approximately 10%. Bullish oil ETF’s that the individual investor has access to are up approximately 10%.

Oil ETF’s are a great play to take advantage of the drop in oil prices. Oil ETF’s provide a diversified exposure to the black commodity without having the worry of poor management from a single company. We have a 1-3 year timeline to see a 25-50% return on a well run bullish oil ETF.

Beaten down sectors like Gold, Silver, and Oil until 2020.

 

oil picture

Candidate Donald Trump on Unemployment and the Economy…He was right then and lying today.

Candidate Donald Trump ridiculed the inconsistencies about US employment numbers and our bubble economy. AND HE WAS RIGHT!

President Donald Trump sings a different tune…

Isn’t it odd that President Trump rages on about bringing jobs back from over sees when we have an unemployment rate under 4%…? Who would fill these jobs?

Truth of the matter is that President Obama changed how unemployment statistics were calculated in 2009. Unemployment began counting any person that worked just a single hour as employed. Furthermore anyone that dropped out of the workforce was no longer counted as “unemployed”.

The mere notion that President Trump can say we have the best unemployment in US history is ridiculous. We have only been using the current employment calculation for the past ten years.

Candidate Trump was right about unemployment and the stock market in the video below. President Trump is carrying on the political charade when boasting about unemployment and the stock market.

When US Cash is Trash-what are investors to do?

US Dollar Index Since 1973

As seen from the chart above the US dollar index has been on a steady decline since 1973. In 2018 we failed to break through resistance at the 105 level and retracted to the mid 90’s. The fundamentals make this chart a more terrifying scenario.

FED Chairman Jerome Powell in mid 2018 stated that quantitative tightening and the raising of interest rates was going to be on autopilot. Essentially QT would extract US dollars from the market. The raising of interest rates would put a higher price tag on the USD. Both of these acts would raise USD value. The benefits being we as a nation could important more things-giving is more bang for our buck.

However, this scenario won’t play out because we as a nation can’t afford the rising interest rates. Our corporate debt and now $22T worth of federal debt can’t be serviced. We are at our peak capacity for interest rates. Any further rate hikes will strangle our economy and bring on a recession more quickly.

Housing, auto, and financials are all in bear markets. Manufacturing index hit an unexpected 54. Anything beneath a 50 is retraction.

Because we never de-levered corporate and federal debt- we don’t have tools left for the next recession. We are kicking the can down the road but found the wall. We can’t cut interest rates without going below zero. Well, we can, but the EU is seeing how that move has effected their economy. So what is the FED’s next move?

The next move from the FED is to sacrifice the dollar. We will quit Quantitative tightening. We could even see a rate cut in the FED funds rate. Last but not least we will resume Quantitative easing. Essentially printing more money to keep interest rates down in order to service or debt. We simply don’t have the option to pursue a stronger dollar. What should individual do?

Pursue US dollar sensitive commodities that are near a bottom such as gold, silver, and oil. Don’t buy the dip-buy the bottom.