Has the Phoenix Risen? Gold Prices Barrels Through $1,400, a Six-Year High; Be Bullish on Gold Mines!
No international agreements, no diplomats, and no supernational bureaucracies are needed in order to restore sound monetary conditions. If a country adopts a noninflationary policy and clings to it, then the condition required for the return to gold is already present. The return to gold does not depend on the fulfillment of some material condition. It is an ideological problem. It presupposes only one thing: the abandonment of the illusion that increasing the quantity of money creates prosperity—Ludwig von Mises, Economic Freedom and Interventionism
Gold Prices Soar to 2013 Highs: Expectations of Fed’s Easy Money Policies?
From the CNN: Gold bugs are finally having a moment. The price of gold topped $1,400 an ounce Friday. That's the highest level since September 2013. The price of gold is now up nearly 10% this year. Gold has gained momentum thanks to expectations of a rate cut by the Federal Reserve as soon as next month. Rate cut hopes have helped push the dollar lower -- and gold tends to rally when the dollar gets weaker because that makes it more attractive to foreign buyers.
From AFP/Philstar: The Federal Reserve opened the door to an interest rate cut on Wednesday, vowing to act to keep the economy growing as uncertainties about trade and other issues mount. US Federal Reserve chief Jerome Powell said trade friction and slowing growth worldwide have led many central bankers to feel the case for an interest rate cut has "strengthened" but most still want to see more data before making a move. But one policymaker dissented in the vote, advocating for an immediate cut -- something President Donald Trump has been calling for loudly and which many economists say is necessary given the damage done by the escalating trade frictions. Hasn’t the decade long growth of US economy been the longest. (bold added)
The US is poised to register the longest economic expansion on record next month, but by far has been the weakest. Powell’s Fed just raised policy rates last December, and now they’re contemplating cuts, why? Because US Federal Reserve chair Jerome Powell accommodated on the wishes of US President Donald Trump who threatened to him with demotion?
And why a turnaround from ECB’s Mario Draghi who proposed to "cut interest rates again or provide further asset purchases if inflation doesn’t reach its target"?
Didn’t US President Trump throw the gauntlet of the risk of a currency war by accusing ECB’s Draghi of “currency manipulation” for announcing the likelihood of ECB’s monetary easing?
Wouldn’t these imply an escalation of policy uncertainty for the global economy, aside from trade friction?
The Panic Bid on Global Treasury Markets!
And why the panic bid over global bonds?
Figure 1
The global stock of negative yielding bond exploded to $13 trillion by the end of the week, backed by a one-day record flow of $700 billion! (figure 1, top window)
The global money supply is at a record high but in the context of the US, money supply expansion has led to lower monetary velocity, depressing statistical inflation, and the estimated economic output. (figure 1, lower window)
Has the global money supply expansion been reflecting the escalation of financial repression; inflating asset prices and debt stock coming at the expense of the real economy?
Has the panic buying of global bonds been symptomatic of an escalation of deflationary expectations?
And or, have the global fixed income community been front-running global central banks in expectations of a coming financial bailout through the revival of large scale asset purchases (LSAP) or quantitative easing (QE) via massive bond buying?
Has moral hazard become deeply entrenched to have plagued the global fixed income markets?
And if the fixed income markets expect global central banks to respond aggressively to a sharp deterioration of economic conditions, why has the stock market diverged from this perspective?
Have financial markets become utterly dysfunctional from frequent backstops, manipulations and interventions?
Have financial markets been so enamored or mesmerized by the perceived power of the central banks to stabilize financial and economic conditions? (the Halo effect)
And have financial markets been kept blissfully blind from the escalating entropy of the real conditions?
As Doug Noland of the Credit Bubble Bulletin aptly puts: “Today’s prescription for unstable markets and finance: more monetary stimulus. For unstable economies: more monetary stimulus. For inequality, trade wars and geopolitical uncertainties: much more monetary stimulus.”
Soaring Gold and Treasury Prices: The Liquidity And Fear Trade
Have the Fed-led global central banks been truly in control of the markets?
Figure 2
Yield curve inversions have afflicted not just the US treasury markets such as the 10-year 3-month and the 10-year Fed Fund Rate, but also the US Libor curve, and the Eurodollar futures.
Haven’t these been indicative of TIGHT monetary conditions?
And hasn’t the collapse of the spread of 10-year Fed Fund been a dynamic even before Trump’s “trade wars”?
Figure 3
And what just happened to the Fed’s floor system? The Effective Fed Fund rate has been drifting ABOVE the Interest on Excess Reserve (IOER) since April, the latter which is supposed to serve as a ceiling. (figure 3, top window)
And why have primary dealers have been massively hoarding US treasuries? Have collateral issues been intensifying? Have surging gold prices been a manifestation of an ongoing rapid depletion of liquidity, through a growing scarcity of collateral (rising repo fails), to inspire “fear trades” in both gold and government treasuries? (figure 3, middle and lower windows)
Has the volte-face of the FED been from these liquidity risk factors?
Why have these occurred if the Fed and central banks have been in control?
If so, has gold been pricing in magnified risks of a global economic and financial shock?
To add, geopolitical risks have been mounting.
For instance, though US President Trump had second thoughts to bomb Iran, in retaliation to Iran’s downing of US drones, he ordered a cyber assault on Iran’s military facilities instead. Bombs struck two oil tankers from unknown sources in the Strait of Hormuz, but the US government lays the blame for this on Iran. And this may be another reason for Trump's aborted bombing. The Indian government sent warships to protect its shipping interests.
Hong Kong’s mass protest against the extradition bill had blamed by the Chinese government on Western interference.
The Italian government desires to control its central bank by asking for legal powers to make the appointments of the members of the Bank of Italy.
Which will be proven right in a not so distant future (perhaps 2H of 2019?), the Gold-Treasury Fear Trade or the Risk-ON Equities?
Gold Price Ramp in Other Currencies, Philippine Peso Based Gold Prices Approach Record High
Figure 4
Gold prices in USD crossed the 1,400-threshold for the first time since September 2013.
Surging gold prices have become apparent everywhere.
Gold prices in the Philippine peso (upper window) soared to 2012 highs and may be testing the all-time 2011 peak soon.
Meanwhile, gold prices in the Malaysian ringgit (lower left) and the Indonesian rupiah (lower right), among the many others, raced to new records.
Though the USD will remain the benchmark against gold, individual currencies will perform distinctly relative to gold.
An uptrend in gold prices should manifest in most currencies.
Mining Investments: Be Fearful When Everybody Is Greedy And Greedy When Everybody Is Fearful!
From an investment/market point of view, global gold mining stocks were on fire this week.
Figure 5
The FTSE Gold mines surged 7.6% this week and posted a 21.58% return for the year. (Figure 5, upper window, from US Global Investors)
Meanwhile, the NYSE Gold Bug Index (HUI) soared 9.35% over the week, constituting almost half of its 18.31% 2019 return.
The Philippine mining index was higher 2.12% (-10.93% y-t-d) this week primarily from gains of gold mines. For the week, Philex Mining bested the field up 10.65%. Apex Mining’s +7.44% came in second, then United Paragon’s +4.62%, Lepanto +3.6% and Manila Mining +2.7%.
With the passage of the BSP’s Gold Bill, the war on gold has ended, which should reduce political uncertainty and risk of the sector. [See Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law! May 26, 2019]
Therefore, a sustained uptrend in gold prices should benefit the underappreciated and highly unpopular industry.
As Warren Buffett advised, Be fearful when everybody is greedy and greedy when everybody is fearful.
It is time to apply the same formula to the mining sector.
Fear will remain the dominant sentiment over an extended period. As such, returns should outperform as risk diminishes.
In the fullness of time, mines will become a mainstream bubble similar to its previous cycle (2004-2012) which climaxed in 2012.
Let me share a truncated refined excerpt (from my MDR report) for a potential exposure to Apex Mining [PSE: APX]:
APX provides three buying windows which are all dependent on the success of the seed, or the recent breakout.
The first window is at the present levels (1.25 to the early 1.30s), representing an eight-month downtrend.
The second is the three-year (2016) resistance (1.40-1.50).
The third is on the psychological threshold the two-year high of Php 2.
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Nota Bene: A sustained upside of the international prices of gold ultimately determine the feasibility of the gold trade.
Be greedy when everybody is fearful.
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