“RATE HIKES” AND PRECIOUS METALS
by Andy Hoffman, Miles Franklin
It’s Tuesday morning, and there’s lots to get to today – including today’s extremely important principal topic. Not that every issued discussed isn’t extremely relevant to the process of building your personal due diligence mosaic. However, the topic of the supposed “rate hikes” propagandized to be inevitable – be they imaginary or otherwise – is one I have wanted to discuss for some time. And like a fine wine, the concept finally “ripened” while I on the Stair Climber, er this morning.
Before I get there, let’s start with what I discussed in yesterday’s “the truth will set you (financially) free” – of how global gold demand continues to surge, no matter what propaganda is published, or how viciously the Cartel attacks paper prices on the soon-to-be destroyed COMEX. To wit, seemingly each day, a new story highlighting gold’s importance surfaces – not that the MSM spends a second covering them; such as last week’s news that Austria is repatriating half its gold reserves, which for decades have been held at the Bank of England. Or yesterday’s news that the University of Texas, which back in 2011 made waves when its endowment fund purchased $1 billion of physical gold, has decided to build its own depository in Texas, enabling it to “repatriate” said gold from the New York vault where it is being held by none other than the very criminals that manage the GLD ETF…HSBC.
And last but not least, confirming what we have claimed all along, is the below chart from our good friend Nick Laird of Sharelynx – depicting the massive gold imports into “Chindia” over the past four years. Yesterday, I noted that, based on available information, it appears China alone is consuming roughly 85% of all global gold production; and this, excluding the unpublished imports coming through the new Beijing and Shanghai trade zones. As you can see, just the “observed” China plus India imports are now exceeding global production; and in India’s case, demand may be equally understated by the fact that due to moronic government import tariffs, its black market has literally exploded. Given the horrific global political, economic, and financial trends, it’s inevitable that such explosive demand will broadly increase in the coming years – amidst an environment of increasingly short supply, and “precious” little available for sale metal.
And then, of course, is the $64,000 question – of when China will actually reveal their true gold holdings. As I opined last month, China will eventually be forced to do so, whether the timing of such moves suits its government. That moment could be far sooner than most imagine – particularly if a new financial crisis forces their hand. And when that day arrives, if you haven’t already procured your stash, it may well be too late.
Speaking of too late, if I hear one more “positive rumor” of a pending Greek deal, I’m going to snap. Long a PPT strategy, the “unfounded positive rumor” is used to goose markets whenever they need a boost – which amazingly, never seem to reverse when the rumors prove unfounded. When it comes to Greece, there is ZERO possibility of a positive outcome; as the beleaguered nation simply owes too much money – with a populace hell bent on escaping the debt serfdom it was tricked into by Wall Street, enabling the so-called “troika” to rule it with an iron first. Whether this Friday – when Greece owes a measly €300 million Euros it doesn’t have; at the end of June, when its “four month bailout extension” terminates; or shortly afterwards, Greece is toast. And with it, the rest of the PIIGS; countless trillions of bad debts; and likely, not only the Euro currency, but the European Union as well. But don’t worry, as – kudos to Zero Hedge for digging this up – back in 2010, Nobel Prize winning economist Paul Krugman, fresh from the pages of Atlas Shrugged, decisively claimed all’s well.
“The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works.”
Perhaps that’s why the “tectonic market shifts” I discussed last month have only worsened – with German bund yields literally exploding this morning, by more than 20% compared to yesterday’s close (yielding one of the dollar index’s worst days in years). Here in the States, too, rates continue to inexorably rise despite plunging economic activity and commodity prices; with the exception, of course, of the “oil PPT” supported crude oil market. Which, if history is any guide, will wreak additional havoc on an already collapsing economy. I mean, yes, the oil and gas sector will benefit. However, no one else will; and as sure as night follows day, the best way to destroy economic activity is with surging gasoline prices; which I might add, has already occurred here in the States, where prices have risen a whopping 60% from January’s lows. Frankly, I don’t know what to make of the oil market anymore; other than to say that plunging prices destroys America’s only profitable industry – and rising prices, everything else. Of course, if we go by Janet Yellen’s own words – that falling oil prices are a “net positive” for the economy, I’d hate to see what the economy will look like now that prices are not just rising, but surging.
As for the moribund U.S. economy, nine out of ten data releases have been not just negative, but decidedly so, for the entirety of 2015. And when the rare “strong” number is reported, such as yesterday’s 2.2% April construction spending gain, essentially all aspects of it are questionable. Be it due to a surge in government defense spending or a regional “anomaly” that makes no sense, there’s always something about the “internals” that gives away the data’s true negativity. And then, of course, there’s the new “pink elephant” in the room; i.e., the “double seasonal adjustments” the government will be applying to economic data starting with second quarter GDP, under the new “GDP plus” methodology. In other words, did construction spending really rise 2.2% in April, despite such a number decidedly contrasting with even the “island of lies” diffusion indices that have been under relentless pressure? Or, for that matter, lumber prices – down 26% this year, to three-year lows? Which, by the way, is not far off from the mid-2013 peak of the local market here in the Denver/Boulder suburbs – which is probably why the massive 25%+ property tax increase assessed as far as the eye can see is being based on mid-2013 pricing. And LOL, as I write at 10 AM EST, April factory orders were just reported to be a significantly less than expected negative 0.4% – whilst the Gallup “Economic Confidence” survey came in, for the second straight month, at an extremely ugly negative number – having inexorably plunged since peaking in January.
To that end, the true state of the U.S. economy was told by yesterday’s report of ZERO growth in April consumer spending – for the fifth time in six months missing “expectations” – and loudly validating the aforementioned Economic Confidence survey. This is because real employment is as weak as at any time in our lifetimes – including Wall Street, which is laying off workers en masse; whilst the cost of living, government “deflation” fears notwithstanding, has never been higher. Keep in mind, the -0.7% first quarter GDP reading was not only goosed by the largest inventory build in U.S. history; which must eventually be unwound, to the detriment of future GDP results – and likely, corporate profitability – but the first negative price deflator in six decades. Raise your hand if your cost of living declined in the first quarter. And for the remaining 99.99%, how’s your cost of living doing today, given the aforementioned 60% surge in gasoline prices? Gee, I wonder if the BEA, along with its new “double seasonal adjustments,” will figure out a way to reverse the explosive surge in the real price deflator. And by the way, nearly all the (extremely modest) wage increases reported in recent months have been due to mandatory minimum wage increases, putting money into the pockets of the most indebted portion of society – such as this morning’s “arm-twisted” Wal-Mart announcement that it will raise the starting wages of 100,000 deli and other similarly unskilled positions. In other words, such “riches” will NEVER, EVER be “spent” on the massive inventories built up by corporate America; but instead, on paying rapidly stacking up bills – in the case of credit cards, at massively usurious rates.
Speaking of usury, what could be a better segue to today’s topic than the horrific ramifications of rising rates, both overseas – such as in Japan, where a top BOJ official recently claimed that even considering an end to Abenomics would be a “nightmare scenario”; to China, where the PBOC is maniacally lowering rates and blowing asset bubbles to offset its collapsing economy; to Europe, where the ECB just expanded its massive QE program just two months after it commenced; emerging markets, where the inflationary impact of rising rates (prompted by collapsing currencies) is multiplied; and in the United States of Reserve Currency Debauchery?
To wit, a reader yesterday sent me a message; rightly assuming “they can’t keep the Ponzi scheme together much longer” – before diving headlong into propagandized waters, in stating “I just wish the Fed would normalize rates (4%-5%) so we could start the unwinding process and then begin rebuilding. I mean, it’s going to be painful but it has to happen eventually.”
Rebuild, indeed – after the entire fraudulent, global fiat Ponzi scheme collapses! And as for “unwind,” I just noted what the BOJ thinks of even considering such actions – let alone, acting on them. To that end, let’s forget for a second the financial markets; which, rigged as they are, will utterly implode if rates meaningfully rise. Not to mention, as the untold trillions of interest rate swaps deployed to suppress rates blow up. No, let’s simply consider the impact on history’s largest debt edifice – which worldwide, is not only at unprecedented levels, but is now rising parabolically. Nowhere is this truer than America, which boasts not only $18+ trillion of on-balance sheet debt, but $5+ trillion off balance sheet, atop hundreds of trillions of rapidly rising “unfunded liabilities.”
And that doesn’t even included $2+ trillion of state debts (and don’t forget quasi-backed Puerto Rico); untold municipals debts; and of course, all-time high corporate and individual debt – all amidst the worst economic conditions of our lifetimes, going South fast. Putting this financial nightmare in perspective, debt service on just the $18 trillion of on balance sheet national debt – which will rise by $500+ billion the second the current “debt ceiling suspension” is unfrozen – which is largely funded by short-term debt that needs to be quickly rolled over, increases by nearly $200 billion with each 1% rise in interest rates. And thus, a 5% increase in rates would add nearly $1 trillion in annual debt service costs – along with all the other economic and market horrors (check out this chart, of just how bubblicious Fed/PPT supported equities have become) that go along with such a massive interest rate back-up.
Unfortunately, my daily three page limit has been reached, as I could write of the horrors of rising rates – both in the U.S. and overseas – for days on end. But suffice to say, it doesn’t take much of an imagination to realize how horrifying a rising interest rate environment would be. Except, of course, in Precious Metals; which not only would benefit from the resulting economic and currency carnage – but in a sense, already has. I mean, think about how long we have been told economic “recovery” has arrived, yielding the “certainty” of rising interest rates. Heck, rates have actually started to rise this Spring, despite collapsing economic activity the world round. And yet, despite the most vicious Cartel attacks on record, gold has held around $1,200/oz month after month – as has silver, in the $16-$17/oz range.
Part of this stellar performance, with essentially all “powers that be” forces pointed at them, is due to the fact that both metals are well below the industry’s cost of production – and more so each day, now that oil prices are rising. But equally important is our firm belief that all possible “negative” scenarios for Precious Metals have been fully discounted; not that such a scenario actually exists outside the realm of propaganda and manipulated markets.
As David Schectman noted yesterday, the key to success is to prepare yourself for the worst of times, but be ready for the best. And in Precious Metals, the worst of times has clearly been the past four years – during which, the evil Cartel has held the upper hand. But it won’t last forever – and with each passing day, global events are pushing us inexorably towards a “tipping point,” in which all the fraudulence of the post financial crisis era will be recognized for what it is. Precious Metals will unquestionably benefit more from this inflection point than any other asset class; and don’t be surprised one bit if it’s “rate hikes” – either willingfully on the part of Central banks (highly unlikely), or forced by the markets – that catalyze it!