Written By: James West August 21, 2015
And is it time to buy gold miners?
Investor interest in gold (XAUUSD:CUR) has been at an all time low recently, with many acknowledged ‘gold bugs’ having thrown in the towel as gold prices flirt with multi-year lows, and sentiment projected by mainstream financial media would have you thinking gold as an asset is finished.
This despite the growing comprehension by John Q Public that all of our markets are horribly manipulated. The disingenuous red herring of prosecuting members of the London Gold Fix group was designed to convey they perception that the industry is properly and diligently regulated. Such is not the case. But reconciling CFTC Commitment of Traders reports against trading patterns is an exercise in futility, since the reporting does not disclose which market participants are in which category. So analysts are left to deduce positions. Concentrated positions are thus difficult to discern.
All by design, according to gold market manipulation conspiracists.
But something extraordinary seems to be happening, manipulation notwithstanding. China’s surprise move to let its currency float ‘more freely’ against others in the Forex marketplace is looking increasingly like the proverbial straw that breaks the camel’s back. Or perhaps the shot heard round the world. Maybe the canary in the coal mine?
Is it possible that China’s capitulation to market forces might actually re-ignite the gold bull? Is it possible that these first cracks in the world fiat currency machine could spread to topple the house of cards that is the world’s debt-supported paper money illusion?
This must be considered against China’s passive-aggressive approach to regulating the renmibi, as is pointed in a Bloomberg article where BNP Paribas suggests China intervened heavily to prop up the yuan, and will only allow it to float 2 percent on either side of its target rate.
There’s nothing like a currency devaluation race to make gold look like the belle of the ball.
Consider:
If the Yuan is now completely (or even partially) at liberty trade against the U.S. dollar and Euro, and it is the real Chinese economy that is going to determine its value (not the equally nebulous State-loan funded economy), what effect will that have on the U.S. dollar? Might this devaluation of the world’s second most predominant currency catalyze a widespread crisis of confidence in all major, debt-riddled currencies?
Now that China has just stolen a 2 to 4 percent advantage in currency pricing over the USD, what and how will the U.S. react? Is the much anticipated September interest rate rise now even a credible notion? Are fingers poised over the ‘enter’ key on the liquidity fabrication I mean quantitative easing program on Fed computers?
If they are, and there is a renewed flood of synthetic demand in the form of fractional banking-enhanced liquidity, it is unlikely that the effect of QE is going to resemble anything like the last QE, which ended just under one year ago in October 2014.
That’s because the primary beneficiaries of QE – the top tier banks – have learned that the most risk-free way to deploy such capital is not through investment in the real economy, but through investment in their own originated synthetic derivatives, based largely on U.S. Debt. It is for the this reason that we now see bond funds worth hundreds of trillions of dollars, who can’t deploy capital into equity markets very easily because they need massive positions for them to be relevant, and only perhaps the S&P 60 qualifies.
In fact, if you take a look at capital flows in the U.S. investment industry, inasmuch as the data can be relied upon, we see a definitive preference toward derivative asset classes over primary ones such as real estate, equities, and – heaven forbid – commodities.
So five years in since the first effective capital infusion happened in 2008, these funds are even bigger, and their ability to deploy capital into the real economy is limited to the human infrastructure required to support the multiple homes, planes, boats and other indulgences of the elite class of fund manager.
Thus, equity markets break records, while real economic growth remains elusive. The world over.
What we are now collectively beginning to appreciate is that all that capital fabrication, while yes creating latent demand in the real economy through top tier ‘leakage’, record index closes are nothing more than the appearance of prosperity. There is no authentic stimulation of real economic demand: people are not suddenly resuming the two cars, a motorhome boat and cottage splurge of the mid-2000’s.
Conceptually, quantitative easing, as we are forced to define fabricating capital liquidity en masse by keystroke, is justified to offset deflationary monetary flows, where investment capital is withdrawn from markets and preserved in ultra safe instruments, as they are perceived and anointed by ‘smart money’. As the elite capital pools withdraw their financial participation out of risk concerns, the government’s central bank must step in to both replace the absent capital, and convey that the government will be an active intervener in markets, thus assuaging confidence.
However, what the elite capital pools understand, is that they need not risk the capital windfall they receive as beneficiaries of quantitative easing. They understand the tacit deal whereby they are the beneficiaries conditional upon their participation at auctions for Treasuries in part, which gives them the Tier 1 capital base from which additional leverage is derived for more speculative pursuits. Speculative insofar as debt derivatives and swaps are only slightly less risky than treasuries themselves. Further down the risk pyramid, we encounter ETFs, securitized debt, then higher risk hedge and mutual funds, and finally toward the bottom, corporate debt and equities.
Those final rungs of the ladder are not very popular these days, outside of US and Chinese techs.
But with the new QE programs already launched by China, and well underway in Europe and Japan, and perhaps soon to be resumed in the US, the secondary and tertiary capital flows into equities will likely not materialize for the reasons listed above. What if this time, the fabricated capital doesn’t leak down? What if the fractionally banked-out credit and equity stays of the real global economic balance sheet, and remains in the off-balance sheet accounts of the largest capital pools in the form of debt derivatives?
That is what may already be happening. The recklessness of the PBOC’s unilateral devaluation suggests a new phase of the currency war is about to unfold, where instead of acting in concert, the largest economies are abruptly thrown into the ‘every man for himself’ mindset that is the hallmark of a major inflection point in the history of fiat currencies: hyperinflation as a result of competitive devaluation.
One thing is certain: if it does, the only game in town is going to be gold and silver, and the gold bull will come back with an absolute vengeance.
The ‘Short Gold!’ Signal Appears to have Stopped Working
On April 10, 2013, the Wall Street Journal published this headline: “Goldman Sachs: Short Gold!” That extraordinary headline (The only other time the Wall Street Journal adorned a headline with an exclamation mark was in 1940 when it shouted “U.S. at War”), which was presented as a quotation from an unidentified source at Goldman Sachs, was followed by an article quoting Jeffrey Currie, Goldman’s lead commodities analyst, waxing bearish on gold, but in much less sensational tones (and punctuation).
Over the next few days, the futures price of gold fell an astonishing 15%, making Currie either the most prescient gold forecaster of modern times, or the most influential commentator on the monetary metal since J.P. Morgan himself.
That leading call was obediently followed up with coverage on it from substantially all of the mainstream financial media, thereby amplifying the reach of the message and its effect.
But last month, Currie was once again quoted as suggesting the price of gold was poised for new bear territory, this time suggesting it would fall below $1,000 an ounce. But the effect of that statement was negligible. In fact, with the evidently ‘out of left field’ yuan devaluation, it was almost entirely ignored. Gold is powering higher, and so far, there hasn’t been the usual mega-sale of futures in a single transaction in the middle of the North American night that has been the pattern of past major downward market moves.
His skepticism was duly re-reported throughout the financial mediasphere, but again, the effect was largely muted. That in and of itself is a significant signal. If Jeffrey Currie can’t even manipulate the price downward anymore, what does that signal for the current reversal in gold price?
While it is obviously still premature to do a dance in the end zone, you might want to revisit your favourite junior gold and silver miners and explorers in the meantime, and figure out which ones are likely to be the winners in a rising gold price environment.
The last time we were looking at a market swoon like the one now underway was in 2008. In January, February and March of 2009, Midas Letter picked 30 gold stocks, all of which rose by anywhere from 100 to 2,000 percent within a year. We’re not ready to roll out that strategy just yet, but if Stanley Druckenmiller is putting a $300 million bet down on gold, it just might mean the gold bull is about to rise again.
According to Bloomberg, ‘Druckenmiller, who shut his hedge fund firm Duquesne Capital Management in 2010, now manages his own fortune, estimated at $4.4 billion. His fund had one of the best track records in money management, gaining an average of 30 percent per year from its inception in 1986.’
Druckenmiller bought shares of SPDR Gold Trust, an exchange-traded product backed by gold, worth $323.6 million at the end of June, according to a quarterly filing with the Securities and Exchange Commission.
