The Miles Franklin Newsletter
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From The Desk Of David Schectman
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David's Commentary (In Blue):
May is my favorite month. Susan loves the fall, but I am a spring kind of guy. Here we are, two-thirds through May and the temperature in Minneapolis will dip into the high 30s tonight. Rain and cold weather has been the norm lately, thanks to our friends up in Canada. Canada, you can keep your cold weather. Stop exporting it to Minnesota.
My wife is a wreck. She spent the previous week loading up the back of her SUV with plants and flowers and is freaking out that this below-40 weather will be fatal to all of her hard work. She used every extra sheet in the house to cover the plants on our sun deck and screened porch. Well, it’s better than nothing. I think they will survive. It’s only one night and the temperature will soar back into the mid 50s on Monday.
BEFORE
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Yes, we do have a spectacular back yard. We snuggle up against a large nature preserve. Our view is like one from a tree house, overlooking a forest. Our sun deck and porch in the back of the house are 20’ above the ground.
Susan is upset with the weather and I’m not very happy about what’s happening to gold and silver. We both have something to complain about. Last week we saw record low temperatures, gold matched its lowest close of the year, and silver set a new low, one that stretches back six months.
We have been touting silver as a better buy than gold since the silver to gold ratio was in the low 80s. If we are correct, and silver is a bargain at 80 to 1, then it is an even better bargain now at 88.75 to 1. You should look at this with a longer-term perspective and not over-react to a few weeks or months of abnormal price movement. Ted Butler says:
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“This is the highest the price ratio has been in 25 years, which is just another way of saying that silver is now more undervalued and cheaper relative to gold than it has been in a quarter of a century. Silver is the most undervalued asset of all.”
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Traditional explanations do not explain why the silver is so cheap. The supply/demand fundamentals do not justify the price. I guess that leaves the “tin-hat” theory that silver is manipulated. I am embarrassed to wear my tin hat in public. That would get more stares here, in ultra-liberal Minnesota, than wearing a red MAGA Trump baseball cap. Yes, if you want a logical answer as to why silver is so cheap, look no further than COMEX and JPMorgan’s role in the silver suppression scheme.
Last Monday, for example, 43,000 net gold contracts changed hands – in just one day. To put that into perspective, the commercials (JPMorgan and friends) sold 4.3 million ounces of gold, or around $5 billion worth. That’s the same as 15 days of worldwide mine production. That moved the price up by $13. That kind of buying power of PHYSICAL gold would move the price up more than one percent. Yes, the price for gold and silver is set in paper contracts at COMEX. These are strictly speculative trades, legalized gambling, but not hedging. The commodities markets were NOT set up for legalized gambling, they were created to allow the buyers and sellers of commodities (farmers, miners, etc.) to hedge their sales and purchases. And the CTFC was set up to monitor the trades and keep the price discovery mechanism honest. It has not worked out as initially intended.
The market followed up Monday’s one percent gain with a two percent loss on Tuesday. In the end, JPMorgan pocketed an estimated $50 million in profits at the expense of the computer-driven technical funds. Why should we care if the brain-dead technical funds lose big bucks on days like these? Because it affects the value of our physical gold and silver. But this is just short-term and as I have written many times, we don’t give a damn because we already know how the rigged game will end. If you want to trade gold and silver, you use ETFs or the futures market, not physical gold or silver. They are buy and hold – until you need them, but typically not for profit.
Since the 2008 financial crisis, nearly 2,000,000,000 ounces of silver bullion have been purchased by individual silver investors. It is unlikely that very much of the silver bullion has found its way back into world silver scrap recycling supplies.
We expect this trend to continue until the dollar price of silver moves considerably higher, or somehow those who hold the silver feel comfortable in moving out of silver and into other asset classes in masse. Silver is in strong hands. What price will it take for this hoard to become liquid and be sold into the market for future industrial fabrications? A whole lot higher than the previous two highs of $50.
It is difficult to be patient and to ignore weeks like last week, just as it is difficult for Susan to ignore one night of temperatures in the high 30s. Her plants will thrive, and so will our precious metals.
Here is an interesting thought. Ted Butler believes that the only way the technical funds can continue to loss all this money on their trades is for them to take under-the-table payments from the commercials (JPM). There is no proof that such is the case, but it makes sense. You see, what is happening here. By manipulating the price of gold and silver lower with paper contracts, JPMorgan has been able to accumulate the largest hoard of physical silver and a huge amount of gold at un-realistically low prices.
Here is what Ed Steer had to offer on last weeks gold and silver moves…
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As I stated at the top of today's column..."the 'long knives' were out for the precious metals yesterday." None of Friday's price action had anything to do with China, the U.S. dollar index, or anything else. This was all engineered by 'da boyz' in the COMEX futures market...forcing the brain-dead/moving average-following Managed Money traders to puke up long positions for big losses -- and slamming them onto the short side for more losses later when precious metal prices are allowed to rise.
Gold is now well below its 50-day moving average -- and silver below its 200-day. Platinum was closed well below its 200-day moving average as well on Friday -- and another new low for this engineered price decline. Palladium's 200-day moving average is proving to be a tougher nut to crack.
I don't know if we're done to the downside or not. I was surprised that JPMorgan et al were able to get more blood out of the silver stone yesterday -- and I would have paid a decent sum to have a peek at silver COT Report as of the close of COMEX trading on Friday.
Gold's 200-day moving average is the only moving average of importance left -- and it remains to be seen if they go for it or not. This has been the Sword of Damocles hanging over the gold market for the last couple of month now -- and I feel badly that I have to keep mentioning it. But I'd be remiss if I didn't.
However, to end this discussion on a positive note, there was some very serious bottom fishing going on in the precious metal equities yesterday -- and it wasn't John Q. Public or the mutual fund crowd doing the buying. These was the smart 'deep pockets' money that knows that far better days are ahead. And despite the big down day in the metals on Friday, their buying was actually aggressive enough to close the p.m. stocks in the green. So all is not lost.
With gold now back below its 50-day moving average, I'll bring up the possibility once again that JPMorgan et al still have gold's 200-day moving average in their sights. That's about 31 dollars away -- and it can be assumed that if they go for it, the price low at the bottom of that engineered price decline will be somewhat below it. But by how much, I don't know.
Also in gold, in my conversation with Ted yesterday, we were talking about how the brain-dead/moving average-following Managed Money had their faces ripped off covering shorts and going long on Monday's penetration of gold's 50-day moving average -- and how they got their faces ripped off again yesterday, puking up those recently-purchased longs and resetting short positions. How much of their client’s money they lost during the last four trading days is something that Ted might touch on his weekly review on Saturday.
Silver is back to a closing price not seen since the COMEX close on Monday, December 3, 2018. Ted's of the opinion...and who am I to argue...that 'Da Boyz' are using this current price smash in gold to further reduce their collective short positions in silver.
Bill King had this to say in his King Report on Wednesday..."
Have we mentioned that the U.S. stock market is so perverted and manipulated that it is nothing more than a parlor game dominated by shills and riggers?"
That's the way it has to be now, as John Q. Public is no longer actively involved...leaving only the index and hedge funds with their algorithms and high-frequency trading running the show.
Here's a 50-year chart of the Dow Jones Industrial Average. The active management of the stock market began after the "crash of 1987"...which I remember all to well. It was at that point where President Ronald Reagan's "
Working Group on Financial Markets
" was formed -- and they've been hard at it ever since.
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The real economy separated from stock market valuations long ago -- and none of the companies currently in the Dow were there fifty years ago -- and some of them didn't even exist back then. So what kind of average if this really? I could show the S&P500, but its price pattern is the same.
And as Doug Noland so correctly pointed out in his commentary from a week ago..."[T]this week had me pondering the next crisis. It will, after all, be the first international market crisis in an era of competing global powers. Do the rivals come together or seek advantage at the other's expense? I grimaced some months back when President Trump began using his Twitter account to troll the struggling Chinese markets and economy. And in this age of the strongman head of state, where will this leave central bankers when things turn dicey? Has the era of putting a select group of like-minded global central bankers in a room and empowering them to orchestrate a strategy to reliquefy the world run its course?"
And it is coming, dear reader, just as surely as the sun rises in the east -- and sets in the west.
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Here is a simplistic explanation on the cause of our massive trade deficit with China, which is one of the main reasons why Trump is entering into a trade war with China - and many of our trading partners. As you have been reading, is not good for the American consumer. We, the American consumer will pay more for our food and electronics and most of what we import from China and the retailers will have to bear some of the cost increases too. China will subsidize their exporters but it is not in their best interests either. We ARE the Chinese economy.
There are a lot of bright people who are warning Trump not to do this, it will end up badly. Since when does Trump take advice from anyone? The strong-arm tactics he used in his private business life do not work well in international trade.
The playing field may not be level, but it’s our fault for allowing it to happen in the first place.
How will the new tariffs affect inflation and gold? According to Jordon Roy Byrne,
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Although most of the precious metals sector has trended lower in recent months, Gold has held up well. It and the other, weaker components of precious metals got a boost on Monday when China retaliated with tariffs of its own.
There has been little follow through since.
This begs the question; will a trade war lead to a new bull market in precious metals?
The short answer is yes if it leads to a downturn and Fed rate cuts.
Note that the currency market can amplify or diminish the impact of the tariffs. A stronger dollar can mitigate the increased inflation while a weaker dollar could amplify it.
Certainly there are several “ifs” to this situation and perhaps that explains why Gold hasn’t made a move yet and the gold stocks and Silver remain relatively weak. A rate cut isn’t a certainty nor is a full-blown trade war.
The market is now expecting a rate cut by January 2020 and is showing a 52% chance of a cut by September. Given this information, one would think precious metals (and gold stocks and Silver especially) are underpriced.
However,
as we wrote about in March
, precious metals outperformance began at the exact start of the previous two rate cut cycles. The sector bottomed before the first rate cut and the strong performance began with the first cuts.
Circling back to the trade war, it could be a significant catalyst for Gold if it leads to Fed easing in the immediate future, as well as higher inflation expectations.
The downside for Gold is the trade war dissipates, the stock market breaks to a new high and Fed easing talk dies down as bond yields rebound.
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And just where did all of this start? I say it all started in August 1971 when President Nixon took the dollar off of the gold standard. So, you ask – what does that have to do with our trade war and tariffs with China 38 years later in 2019? Everything, that’s what.
When gold backed the world’s currencies, until August 1971, large trade deficits were not possible. Gold was used to settle trade imbalances, so if you imported more than you exported to another country, you made up the difference with gold. You either kept your imports and exports in balance or you relinquished your gold.
By 1971 our hoard of gold, by far, the largest in the world after WWII, was rapidly dwindling. Half of it was gone, mostly to France, who redeemed their excess dollars for our gold. Nixon “closed the gold window” to stop the hemorrhaging. In essence, he told the rest of the world, “You keep our dollars and we will keep our gold.”
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US Gold Reserve
(1945 – 1959) US Gold reserve; amounting 21,707 tons in 1949 maximally.
US/Swiss/W-Germany/Japan Gold Reserve & Foreign Currency (1955 - 1970)
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At that point, all currencies were free to “float” against each other and were no longer tethered to gold. Soon thereafter, we cut a deal with the Saudis where they would only denominate oil in dollars and we would offer them our military protection in return. The dollar was now the world’s reserve currency, and we had the monopoly to print it out of thin air in any amount we desired.
So now, we could import far, far more than we exported, and the check-and-balance of needing gold to account for the balance of trade deficit was no longer in place. Instead, the dollar was used to make up the difference and there was no limit on how many dollars we could create to allow us to live way above the standard that would have been possible if a gold standard was still in place.
So Trump is complaining about our trade deficit when in fact we created the very system that allowed it to happen. As usual, politics is all smoke and mirrors and mostly bullshit.
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About Miles Franklin
Miles Franklin was founded in January, 1990 by David MILES Schectman. David's son, Andy Schectman, our CEO, joined Miles Franklin in 1991. Miles Franklin's primary focus from 1990 through 1998 was the Swiss Annuity and we were one of the two top firms in the industry. In November, 2000, we decided to de-emphasize our focus on off-shore investing and moved primarily into gold and silver, which we felt were about to enter into a long-term bull market cycle. Our timing and our new direction proved to be the right thing to do.
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