The Miles Franklin Newsletter
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From The Desk Of David Schectman
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Richard Russell wrote, “I think we’ll see the gold to Dow ratio decline to near 1.”
David's commentary (In Blue):
There were a lot of interesting story lines on Tuesday and Wednesday. The Fed lowered interest rates by another one quarter point with major dissent amongst the voting members; the Saudis displayed physical evidence that they say proves Iran was responsible for the missile attacks on their oil fields and the Department of Justice levied charges against several JPMorgan traders while invoking RICO laws, referring to JPMorgan’s precious metals trading desk as the Mafia.
But relative to our usual narrative, the most significant event was Russia and Iran are switching to a SWIFT-free banking system. The move is picking up steam to trade outside of the US dollar. We maintain that the most important reason to own gold and silver is that, in spite of the
appearance
of a strong dollar (on the USDX), the dollar’s days as the world’s Reserve Currency and it’s monopoly as the Petrodollar is slowly unraveling. These combined events will dramatically reduce the demand for dollars and less demand means a falling dollar. A falling dollar means higher prices at the pump and at the check out counter at your grocery store. To the average American that means one thing: Inflation. Since inflation is not rising prices, but an increase in the dollar supply this is inevitable. Always remember, rising prices are a result of too much money chasing goods and services. Rising prices are an effect; they are not the cause of inflation. And gold and silver are your “financial insurance” against events like this.
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The governor of the Iranian central bank, Abdolnaser Hemmati, announced Russia and Iran will transfer payments using an alternative system to the internationally recognized SWIFT money transfer network.
Instead of SWIFT, a system that facilitates cross-border payments between 11,000 financial institutions in more than 200 countries worldwide, the two countries will use their own domestically developed financial messaging systems – Iran’s SEPAM and Russia’s SPFS.
Tehran is set to officially join the Russia-led free-trade zone, the EAEU, next month.
Russia began development of SPFS in 2014 amid Washington’s threats to disconnect the country from SWIFT.
The first transaction on the SPFS network involving a non-bank enterprise was made in December 2017. Around 500 participants, including major Russian financial institutions and companies, have already joined the payment channel, while some foreign banks have shown interest in joining.
Last year, Belgium-based SWIFT cut off some Iranian banks from its messaging system. It came after US President Donald Trump abandoned the landmark nuclear deal with the Islamic Republic and resumed US sanctions against Tehran.
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Think In Terms Of Ratios, Not Price
The “price” of gold and silver can be very misleading. Prices bounce around, up and down, on a daily basis depending on President Trump’s latest tweet or the most recent quote from a Fed governor. I use two ratios to get rid of the “noise” of the day-to-day movement and the short-term affect of the hedge fund’s fickle buy and sell orders and illegal manipulation of the price of gold and silver.
I am a “Big Picture” guy. I own my physical gold as insurance and it is a long-term hold. So naturally I follow the Gold/Dow ratio to keep everything in proper perspective. The price of Gold moves up or down
relative to something else.
Its “price” is relative to the US dollar. Does it take more or less dollars to buy an ounce of gold? It is really the dollar that is rising or falling, not gold. To see how gold is doing, pay less attention to its “price” and pay more attention to how gold is doing relative to the Dow.
Gold/Dow Ratio
First off, let’s see what the Gold/Dow ratio is now. The Dow is 27,147 and gold is $1,496. The ratio is the Dow divided by the price of gold, so the current ratio is 18.15. Is that high or low? That is the question.
In 2005 Richard Russell wrote the following:
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I want to start with a dramatic chart sent to me by my old friend, John Carder, probably the best chartist in the nation. This is a
ratio
chart that depicts how many ounces of gold it takes to buy one share of the Dow.
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Here’s what this crucially important chart tells us. First, it tells us that there is a cycle in the relationship of gold with the Dow. The cycle runs from a point where a few ounces of gold buys a share of the Dow – to a point where it takes a good many ounces of gold to buy a share of the Dow.
The low extremes during which an ounce or so of gold bought a share of the Dow occurred in 1896, 1932 and 1980. At the other extreme when it required a good many ounces of gold to buy a share of the Dow occurred in 1929, 1966 and 1999,
So it’s clear that it didn’t take much gold to buy a share of the Dow at bear market lows in stocks. And it took a lot of gold to buy a share of the Dow at bull market highs in stocks.
Note the rising trendline connecting 1929 to 1999. It’s clear that at each successive peak it required substantially more gold to buy a share of the Dow.
Based on the chart, it’s obvious that in 1999 something changed in the Dow/gold relationship. In 1999 it required a record 43.85 ounces of gold to buy one share of the Dow. But in July of 1999 the ratio reversed, and a dramatic decline in the ratio began. The ratio dropped from 43.86 in 1999 to 21.07 in early-2003, a decline of 51 percent.
In other words, it now takes only half as many ounces of gold to buy a share of the Dow as it did six years ago in 1999. Wait; let me bring the study up to date. The ratio low of 21.07 was recorded in February 2003. Since then the ratio has risen a bit to 23.7 today.
From here on, we’re forced to guess at the future of the ratio. Will the cycle continue as it has occurred before, and will the ratio decline to 1, 2 or 3? My guess is that it will. And if so, where will be, and where will the Dow be? I’m going to hazard a guess.
I think we’ll see the gold to Dow ratio decline to near 1. If the ratio is going back to 1, my guess is that we’ll see both gold and the Dow at around 2000 to 2500. Fantastic, impossible, absurd? Never use any of those words about the markets – where the markets are concerned, anything can happen!
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Let’s move forward a bit. In 2008 the Dow bottomed out at 8451 and gold was $869.75. It took slightly less than 10 ounces of gold to buy one share of the Dow. In 2011 the Dow hit 12,600 and gold was $1,900. It took 6.6 ounces of gold to buy one share of the Dow. Russell’s prediction of a 1 or 2 or 3 to 1 ratio was not so far fetched after all. We didn’t see the 1 to 1 or 2 to 1 or 3 to 1 Russell predicted, but I say we probably will on the next leg up of the current young Gold bull market. And today’s ratio of 18 to 1 suggests that gold is still very cheap relative to the Dow.
Gold/Silver Ratio
The other ratio that I closely follow is the Gold/Silver ratio. It currently resides at 84.56 to 1.
Here is the high end of the ratio. In 1940 it took 97 ounces of silver to buy one ounce of gold. In 1991 it took 94 ounces of silver to buy one ounce of gold. And a few months ago it took nearly 93 ounces of silver to buy one ounce of silver. It took a lot of silver to buy an ounce of gold.
Here is the low end of the ratio, in 1967 it took less than 17 ounces of silver to buy one ounce of gold. In 1980 it only took 18 ounces of silver to buy an ounce of gold. In 2011 it took 31.5 ounces of silver to buy one ounce of gold. Silver is very cheap relative to gold.
And when you factor in the following information from Keith Neumeyer, CEO of First Majestic Silver, it becomes clear where the ratio is heading.
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“Silver faces serious supply constraints, and although most people may not realize, it is a very rare metal that should be trading in the triple digits in price. We’re mining eight to one, so for every one-ounce of gold that’s being mined worldwide, we’re only mining eight ounces of silver. Silver is extremely rare and people don’t get it,”
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So as good as the price of gold looks, relative to the Dow, silver looks even better. Both metals are very undervalued compared to the stock market but “when” not “if” the price of silver is reflected by the amount being mined compared to gold, the price of silver will outperform gold by
ten times
. Silver will be selling for hundreds of dollars an ounce. I hope I live long enough to see it and I ain’t no spring chicken.
Gold as Financial Insurance
How much gold is necessary to provide the “financial insurance” you think is adequate? Well, it depends on where you mine your data. If you use the inflation data provided by the BLS or MSM then inflation is not an immediate threat, logging in around 2%. But is that a realistic number?
Most of you have already heard of John Williams and his
Shadowstats
newsletter. Williams points out that over the years, the government has changed the way we calculate inflation so that the real number looks a lot lower than it actually is. If Inflation were still calculated using the same basket of goods and services that were used to determine what the annual rate of inflation was during Clinton’s Presidency it would be around 6% per year (see chart No 1). If it were calculated the way is was during the Carter years (1980 based, see chart No. 2) it would be around 10% today.
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Are you getting an annual raise of 6% or 10% a year? If not, you are falling behind. That’s why so many Americans have to work two jobs and why most families have two wage earners pooling their income to make ends meet. And still, a majority of Americans are living off of their credit cards and are unable to save anything toward retirement.
How do you earn a “safe” 6% or 10% a year? You don’t. And that’s why virtually all pension plans are moving toward insolvency. How do you keep up with this level of dollar debasement over time? Well, that’s what gold is supposed to do. My view is that sooner or later “reality” will prevail. The price of Gold will provide the reality. And silver too, even more so.
But what about the gold you bought as insurance? Do you have enough?
I like to recalculate how many ounces are “enough” from time to time. Let me give you an example. If you decided that 10% in gold relative to your investments was sufficient when you purchased it 10 or 20 years ago, where does the percentage stand today. As an example, if you insured your house for one million dollars against a loss and your house today is worth $1.5 million would you keep your insurance policy at one million or increase it to $1.5 million?
Most of our clients have a portfolio of common stocks and they have tripled in value in the last 10 years. Gold is your “insurance” against a major drop in the stock portfolio. It is there to rise as the value of your stocks fall. So has the value of your gold tripled along with the rise in the stock portfolio? Do you have enough OUNCES to maintain your 10% gold position that you originally felt was prudent? This will vary with each individual, but it is a good idea to do a simple calculation and see if you still have the coverage you originally wanted. You may be surprised that what you thought was enough gold is much less than you have today. And since the price of gold is trending UP now, it will never be cheaper to rebalance your portfolio than it is now. Just because I say gold is not an investment (it is insurance) does not mean that you can’t make money on your gold. You will, but the question becomes will you want to sell it when it does? I think we will all have to ask ourselves that question in the next few years.
Speaking of gold as a financial asset, the following chart should come as a surprise to many of you. My stock loving friends tell me that gold has not performed well compared to their stock portfolios. Oh, is that so? The following chart is very enlightening.
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The other day, Fed Chairman Powell said, “
We looked at them; they worked reasonably well elsewhere; we do not look to employ NIRP; we would use large scale asset purchases
." Freely translated it means that massive QE is on the way at some point -- and most likely sooner rather than later. Jim Sinclair used to say “QE to infinity.” It looks like he was right and it is coming back. Along with QE you will see gold rise rapidly, as it did in the mid 2000s.
According to Citigroup, Gold could hit $2,000 in the next year or two. They said,
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Speaking of support, perceived risks of a global recession and the likelihood that the Federal Reserve will lower rates to 0 percent could be enough to push gold up to a record $2,000 an ounce.
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The first shot toward QE4 was just fired. Did the Fed just lose control of the most important funding market in the world?
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"It is certainly possible that we’ll need to resume the organic growth of the balance sheet sooner than we thought."
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For a number of years, Ed Steer, Ted Butler, Chris Powell and yes, Miles Franklin wrote that JPMorgan is behind the manipulation of the price of gold and silver. Were we right? The Justice Department just chimed in.
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Ed Steer Wrap
Not that there was any doubt in most people's minds, but the fact that JPMorgan is the capo di tutti capi of the price management scheme in the precious metals in general -- and silver in particular, was put up in lights by the U.S. Department of Justice on Monday. The manipulation deniers can say whatever they want, but the facts of the case now speak for themselves.
And as Chris Powell stated in one his dispatches yesterday..." [It's] a powerful vindication of silver market analyst and whistleblower Ted Butler, who long has said the racket began with JPMorgan Chase's acquisition of Bear Stearns." And it also jibes quite nicely with what Jim Rickards has said in the public domain about JPMorgan over the years, calling them "the biggest criminal organization the world has ever known."
And to top it all off, just about everything that's in the indictment is what Ted has written about for the last ten or so years regarding the take-over of Bear Stearns by JPMorgan.
Of course it remains to be seen at what point in this ongoing and now public conspiracy, that JPMorgan will exit stage left as short seller of last resort -- and sometimes first resort as well. If or when they do, the remaining short sellers will be on the hook for potentially catastrophic losses. And if I were a short seller of any size in the precious metals arena in the COMEX futures market, I would be looking to cover as quickly as I could...because the first person out the door will lose the least.
I suppose, as Ted Butler said on the phone yesterday, that doesn't preclude 'da boyz'/Big 8 traders from engineering another price decline. But if they did, they would be doing it full view of the DoJ...who are obviously wise to the whole scheme from A to Z...but didn't come out and say it exactly those words.
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Here are a few Critical Reads that were featured in Ed’s fine daily newsletter.
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The Fed may or may not launch QE4 at some point in the near future, even though Powell said that growing the balance sheet is "certainly possible", but for now the Fed is stuck with the only liquidity-injecting operation in its arsenal, namely
repo
, and after two consecutive days of repos, one for $53BN on Tuesday, and another for the full $75BN allotment today, moments ago the NY Fed announce that a third consecutive repo would take place on Thursday between 8:15am and 8:30am ET, "in order to help maintain the federal funds rate within the target range of 1-3/4 to 2 percent."
As a reminder, today for the first time in a decade, the Effective Fed Funds rate was fixed at 2.30%, 5bps above the top range of the fed funds range.
The Thursday overnight repo op will be the same size as the previous two, or $75 billion, which means that once again investors will be watching if the offering will be oversubscribed as it was today, when over $5 billion in Primary Dealer bids did not find the liquidity they needed.
The question of course is whether the market will be satisfied by this option, or will de boycott the continued use of band-aid solutions such as repos, and overnight repo rates will soar, making it clear that the repo market freeze will continue until the Fed finally launches QE.
Those wondering what tomorrow's general collateral repo rate will be, it will be revealed on Thursday morning shortly before 8am, or minutes before the repo is set to take place. If the rate soars again as it did on Tuesday, expect more "technical difficulties" and more delays, as the market makes its displeasure clear to Powell.
Moscow has continued to sell off U.S. Treasury securities, cutting its stockpile by $2.35 billion in July, according to the latest U.S. Department of the Treasury data released on Tuesday.
Russia's holdings of U.S. state debt amounted to $8.5 billion in July, with long-term U.S. Treasury securities standing at $6.2 billion and short-term at $2.2 billion. In June, Russian investment in Treasury bills was around $10.8 billion.
Japan remains the biggest holder of U.S. Treasury securities for the second month in a row. In June, Tokyo held Treasury bills worth of $1.13 trillion, around 8 billion more than it had a month earlier. Japan is followed by China with $1.11 trillion.
Russia used to be one of the major holders of U.S. Treasuries, but since last year it has been steadily cutting the investment in U.S. debt in line with the nation's de-dollarization policy. Russia is now on par with countries like Oman and New Zealand, which are at the bottom of the list of U.S. Treasury holders.
As a matter of state policy, Moscow has also been diversifying its reserves, increasing bullion purchases to record levels and earning the title of the world's most committed purchaser of gold. As of September, Russia held the fourth largest gold reserves in the world worth $109.5 billion, according to the country's central bank.
Russia and Iran will transfer payments using an alternative system to the internationally recognized SWIFT money transfer network, the governor of the Iranian central bank, Abdolnaser Hemmati, announced.
Instead of SWIFT, a system that facilitates cross-border payments between 11,000 financial institutions in more than 200 countries worldwide, the two countries will use their own domestically developed financial messaging systems - Iran's SEPAM and Russia's SPFS.
"Using this system for trade and business exchanges between EAEU [Eurasian Economic Union] member states can help develop and expand trade exchanges between the member states as well," Abdolnaser Hemmati said, as cited by Mehr News Agency on Tuesday.
Tehran is set to officially join the Russia-led free-trade zone, the EAEU, next month. The document on Iran's participation was ratified in June by the nation's parliament (Majlis) and President Hassan Rouhani has already ordered that the free trade zone agreement be implemented.
Russia began development of SPFS in 2014 amid Washington's threats to disconnect the country from SWIFT.
The first transaction on the SPFS network involving a non-bank enterprise was made in December 2017. Around 500 participants, including major Russian financial institutions and companies, have already joined the payment channel, while some foreign banks have shown interest in joining.
This news item appeared on the
rt.com
Internet site at 2:58 p.m. Moscow time on their Tuesday afternoon, which was 7:58 a.m. in Washington -- EDT plus 7 hours. I thank George Whyte for pointing it out -- and another link to it is
here
.
Two current and one former JPMorgan Chase & Co executives were charged over allegedly participating in market manipulation in the trade of precious metals including gold, silver, platinum and palladium between 2008 and 2016, the Department of Justice said on Monday.
The three men - global precious metals desk head Michael Nowak, precious metals trader Gregg Smith, and former trader Christopher Jordan, who left JPMorgan in 2009 - were charged with a racketeering conspiracy and other federal crimes, it said in a statement.
A spokesman for JPMorgan declined to comment. One of the largest gold traders in the world, the bank said in an August regulatory filing it was "responding to and cooperating with" investigations by various authorities, including the Department of Justice, relating to trading practices in the metals markets.
Reuters reported on Sept. 12 that Nowak and Smith had been placed on leave from the bank pending the ongoing investigation.
"It's truly regrettable that the DOJ decided to go forward with a prosecution of Mike Nowak, who has done nothing wrong. We look forward to representing him at trial and expect him to be fully exonerated," Nowak's attorneys, David Meister and Jocelyn Strauber of Skadden, Arps, Slate, Meagher & Flom LLP, said in an emailed statement.
The defendants "and their co-conspirators allegedly engaged in a complex scheme to trade precious metals in a way that negatively affected the natural balance of supply-and-demand," Federal Bureau of Investigation (FBI) Assistant Director William Sweeney said in the statement.
"Not only did their alleged behavior affect the markets for precious metals, but also correlated markets and the clients of the bank they represented," said Sweeney, who works in the FBI's New York Field Office.
Ted Butler found it rather outrageous that one of the lawyers defending JPMorgan's Nowak is, in fact, a former CFTC Enforcement Division head -- and was holding that position during the time period that these offenses occurred over at JPMorgan.
You couldn't make this stuff up! This
Reuters
story, filed from Washington, was posted on their website at 4:47 a.m. EDT on Monday morning -- and was updated about eight hours later. It comes to us courtesy of Doug Milne -- and another link to it is
here
.
Who would have thought that JPMorgan's precious metals trading desk is the functional equivalent of the mafia, and that its one-time leader, Blythe Masters, was the mafia's don?
Well, almost everyone who didn't mind being designated a conspiracy theorist for years. And now comes vindication, because this has just been confirmed by the DOJ, which accused the PM trading desks at JPMorgan of being deeply involved in what prosecutors described as a "massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants."
In an indictment unsealed on Monday morning, the DoJ charged Michael Nowak, a JPMorgan veteran and former head of its precious metals trading desk and Gregg Smith, another trader on JPM's metals desk, in the probe. (Blythe Masters was somehow omitted).
"Based on the fact that it was conduct that was widespread on the desk, it was engaged in in thousands of episodes over an eight-year period -- that it is precisely the kind of conduct that the RICO statute is meant to punish," Assistant Attorney General Brian Benczkowski told reporters.
Here are all the gory details, as this
Zero Hedge
story has the entire DoJ indictment document embedded in this article. It might just has well have come straight from Ted Butler, as it contains every detail of what he's spoken about regarding JPMorgan since they took over Bear Stearns in March of 2008. It was posted on their website at 1:52 p.m. on Monday afternoon EDT -- and it
certainly falls into the must read category
.
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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.
We are rated A+ by the BBB with zero complaints on our record. We are recommended by many prominent newsletter writers including Doug Casey, Jim Sinclair, David Morgan, Future Money Trends and the SGT Report.
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