The Morgan Report Blog

Where is the Larger Bubble: the S&P 500 Index or U.S. Treasuries?

Today we have a plethora of companies reporting earnings and are moving through the 1st Quarter earnings season at a rapid pace. Thus far, earnings have been far from exciting and have made the previous 2013 forward earnings estimates laughable.

The only way we get to the proposed valuations is through multiple expansion which is simply going to require the Federal Reserve to continue to pump $85 billion into Treasury’s and MBS securities each month. I am confident they will comply.

There are a few analysts out there who are discussing the potential bubble forming in equities and other risk assets as Bernanke’s plan is working to the extent that asset prices are rising. However, even fewer analysts are pointing out that both retail and institutional money is constantly chasing yield at this point.

Simply take a look at the 2013 price action in high yield dividend paying stocks, high yield bonds, preferred stocks, and master limited partnerships. It is safe to say that a bubble has formed not just in equities, but in various fixed investments as well. Consider the following chart of the S&P 500 Index (SPX) shown as the dotted trendline and Johnson & Johnson (JNJ) shown as the solid black line.

Obviously from looking at the chart above, JNJ has outperformed the S&P 500 Index year to date. Has JNJ suddenly become a growth giant? Is it all about earnings growth and/or forward earnings potential or anticipated growth?

Or is the rally in JNJ really about the fact that Johnson & Johnson has a long history of paying strong, rising dividends. I am sure there are plenty of sell side analysts who will tell you that JNJ is going to $100 / share in the future for a variety of macro or quantitative reasons.

The sell-side analysts will tell you the economy is strengthening or that large cap multinational companies are seeing strengthening fundamentals and earnings growth. They are called the sell-side for a reason; they want to sell you stock.

Furthermore, my favorite recent discussion is about future earnings projections and the new strength that we are going to see in earnings. The following chart was posted at and originally came from Standard & Poors. The chart below illustrates the trailing 12 month operating earnings per share of S&P 500 companies.

Based on the above data, how is the stock market fundamentally sound when earnings are collapsing? I guess the Federal Reserve is going to print profits for the S&P 500 companies. Actually earnings are irrelevant when central banks all over the world including the Federal Reserve are juicing the markets with a sea of liquidity and where multiple expansion trumps real earnings or value.

Furthermore, these same central banks are openly purchasing equities and allocating sizable portions of their balance sheets to stocks. Several central banks around the world have more than 10% of their reserves allocated to stocks at this point in time. The world is long risk and money is still flowing into bonds at the same time. Simply look at the recent price action in Treasury’s for the past few weeks or note the strength in municipal bonds in aggregate since mid-March.

This brings me to my final point. For the past several years, bonds and stocks in the United States have rallied together. U.S. treasuries and domestic equities have been trending higher for more than three years as shown below. The S&P 500 is shown as the dotted line and the 30 Year Treasury Bond Price Index is the black solid line.

It is without question that both the S&P 500 Index and the 30 Year Treasury Bond have been trending higher for the past 3 years overall. Both underlying assets have produced strong gains during the same period of time. Now this brings me to my final question for readers to ponder. If both the S&P 500 Index and the 30 Year Treasury Bond can rally together, what happens if they selloff together?

The answer to that question is the real problem. Many sell-side analysts and economists ignore the bubble that the Federal Reserve has created in equity valuations. The bubble continues to be fueled by the monstrous liquidity injections that they have conducted beginning with the original quantitative easing. However, what is even less acknowledged by the sell-side is the massive artificial bullish valuations that have been created in the bond market.

Long dated treasuries are being purchased by the Federal Reserve to artificially hold down interest rates. This ongoing practice is causing a separate bubble to form in fixed income investments. So now we have a bubble in equities and long-dated treasuries forming and the sell-side continues to trumpet that higher prices are likely. Ultimately the sell-side may be right in short to intermediate time frame, but the end game has a finality that few want to consider.

When these bubbles finally pop as all excessively valued assets do, the result is going to devastate financial markets. It may be in 6 months or it may be in 10 years, but history will not be thwarted. The central banks can try to outsmart history, but they will ultimately fail.

Need A Simple 2-3 Trades Per Week Trading Strategy?

Join today

JW Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.


UPDATE: Analysts: Physical Market Watching To See If Gold Price Stabilizes

By Debbie Carlson and Allen Sykora of Kitco News
Tuesday April 16, 2013 3:37 PM

(Kitco News) – Traders and analysts are reporting some pick-up in buying of physical gold after the dramatic price plunge of the last two trading days, but they also describe many potential buyers as perhaps holding back to see if prices stabilize before jumping in with both feet.

On the coin front, they report that there seems to be more interest in silver than gold at the moment.

Meanwhile, they say physical demand from the key gold-buying region of Asia is likely to pick up further, particularly considering the price drop came ahead of a key holiday period in Asia.

Spot gold dropped nearly $80 an ounce on Friday and then tumbled nearly another $130 on Monday. In particular, the market will keep tabs on any physical demand that emerges at lower prices in the world’s two largest gold-consuming nations, India and China.

Observers offered slightly mixed assessments so far, with some describing a pick-up but others feeling there is still a wait-and-see tendency in the market.

Afshin Nabavi, head of trading with MKS (Switzerland) SA, said his firm has seen some increase in physical demand at the lower prices.

“The market is a little bit cautious at the moment,” Nabavi said. “They don’t know whether it is going to make it or break it at the moment. But, we’ve seen very good demand starting Friday. Yesterday, it was OK and today it’s more aggressive.”

Rohit Savant, senior commodity analyst with CPM Group, said many potential buyers in India appear to be still holding off.

“What tends to happen is you see buyers waiting on the sidelines to see where prices stabilize,” he said. Then they step into the market once they sense prices will be holding up.

UBS on Monday offered the same perspective, although noting that there was a pick-up in offtake from India on Friday. “Given the pace and extent of the move down, physical buyers are likely to wait for prices to stabilize before jumping in,” the bank said.

Nevertheless, gold has become cheaper for Indians two ways over the last few days, Savant said. This should be a plus and is a turnabout from last year when demand in the country was hurt by a weaker Indian rupee that meant higher prices in the local currency.

Gold just suffered its biggest two-day fall ever in U.S. dollar terms. Additionally, the Indian rupee strengthened in recent sessions, Savant explained. The dollar hit a low of 54.008 rupees Tuesday that was its softest level since March 25. The bottom line, Savant said, is that the price of gold in India slipped from 27,611.71 rupees for 10 grams as of April 8 to 23,869.73 on Monday.

Meanwhile, May is a month when many weddings occur in India, where gold is often bought as a gift. Further, the Akshaya Tritiya festival on May 13 is a key holiday when many Indians buy gold, Savant explained. In fact, the holiday is so significant that when there was a strike by jewelry shops a year ago to protest higher taxes on gold, the strike was called off a day ahead of the holiday so consumers could buy, Savant said.

Jeff Nichols, managing director of American Precious Metals Advisors, said his contacts and clients in Asia are buying.

“Based on my conversations this morning with clients and friends, I can say most definitely physical demand is up in Hong Kong, Shanghai, Mumbai, with increasing bar premiums over loco London,” he said.

The interest is in investment bars, while retailers are seeing interest in small bars and jewelry, particularly in India. The jewelry interest is the high-carat low value-added jewelry, he said.

“It’s very much price-inspired,” Nichols said, noting that there has been some hesitancy to buy earlier this year because of higher taxes levied on gold.

Meanwhile, in the North American physical coin market, Peter Thomas vice president of INTL FCStone Precious Metals North America, a physical precious metals dealer, said he hasn’t seen much immediate reaction to the sell-off from his clients, except to confirm a position.

“I’m hoping to see (gold) prices fall a little more to get all the money that’s on the sidelines (to) come back in,” he said. “We do need prices to stabilize first.”

Sean Lusk, precious-metals analyst with Ironbeam, said that his contacts in the physical market also related only a modest pick-up so far. “They’re not seeing anything of size – (just) smaller gold and silver purchases,” he said.

Lusk and others reported that there appears to be more demand for silver, such as coins, than gold at the moment.

Silver demand continues to be very strong, as it has been all year, Thomas said. “I haven’t seen (silver) demand like this (in a long time).”

The U.S. Mint Web site shows that silver bullion coin sales are around 2.22 million ounces for the month to date. With roughly half of April still to go, this would seem to put them on a pace to exceed the 3.37 million from February and 3.36 million from March. Year-to-date sales of 16.44 million are well ahead of 11.66 million for the first four full months of 2012.

“There’s a lot of interest in silver Eagles, even as the price dropped,” Thomas said. And, he said, the premiums for Eagles are still strong, even as the price has fallen. As of late Monday, he said the premium for American silver Eagles was $4 over the spot price.

The demand for silver over gold speaks to the price difference, he said, noting that $1,400 buys a person one gold coin, but many more silver coins.

David Morgan, independent precious-metals analyst with, also said he is aware of reports of strong demand for silver coins. “Physical demand for the smaller coins is strong. I’ve heard of two to three months to deliver product. The only product available is the 1,000-ounce bars,” Morgan said.

He said this reminds him of 2008 “all over again. You’re seeing it in the strong premiums for silver. Back then I bought three 1,000-ounce bars and eventually had them minted into coins.”

Morgan said the interest in silver over gold right now may come from those who see more utility for silver use in a worst-case scenario than gold. “Americans really don’t know this, but the word silver is money in many languages – argent. It’s much more easy to circulate,” he said.

Metal Investors Asked To Be Patient

Be right, sit tight in the metal markets.

Surge in Precious Metals

How to take advantage of market weakness.

You can listen to the audio here…

US States Push Gold Bullion as Currency Agenda, David Morgan Interview

David Morgan & Max Keiser talk SILVER & Crime-Generated Cash

BEST David Morgan METALS INTERVIEW, on Turd Ferguson Podcast

Protect your Assets with Precious Metals, David Morgan Interview

Silver’s Coming of Age

Richard (Rick) Mills
Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

Silver is winning market share from gold buyers.

2008 – In March 2008, sales increased nine times over the month before – 200,000 to 1,855,000.

In April 2008, the United States Mint had to start an allocation program, effectively rationing Silver Eagle bullion coins to authorized dealers on a weekly basis due to “unprecedented demand.”

On June 6, 2008, the Mint announced that all incoming silver planchets were being used to produce only bullion issues of the Silver Eagle and not proof or uncirculated collectible issues.

The 2008 Proof Silver Eagle became unavailable for purchase from the United States Mint in August 2008. The US Mint suspended sales of the silver bullion coins to its network of authorized purchasers twice during the year.

20,583,000 Bullion American Silver Eagles were sold in 2008. Silver averaged $14.99 an ounce and almost 80 percent more American Silver Eagles were sold then in any previous year.

“During 2008 there was a record inflow of over 93.1 million ounces (Moz) into the three main silver ETFs. Coins and medals fabrication jumped by an astonishing 63% to a record of 64.9 Moz. The main reason for this was a surge in investment-related purchases of bullion coins, both in the United States and Europe. Notably, fabrication of the U.S. Silver Eagle bullion coin achieved a record 19.6 Moz, approximately double the 2007 figure, and would have been higher if the U.S. Mint had sufficient blanks to produce coins to meet demand.”

2009 – 30,459,000 Bullion American Silver Eagles were sold.

On March 5, 2009, the United States Mint announced that the proof and uncirculated versions of the Silver Eagle coin for that year were temporarily suspended due to continuing high demand for the bullion version.

On October 6, 2009, the Mint announced that the collectible versions of the Silver Eagle coin would not be produced for 2009.

The sale of 2009 Silver Eagle bullion coins was suspended from November 24 to December 6 and the allocation program was re-instituted on December 7.

Total ETF holdings rose by 132.5 Moz and ended the year at 397.8 Moz. Coins and medals fabrication rose 21 percent to post a new record of 78.7 Moz.

Silver Eagle bullion coins sold out on January 12, 2010.

The average cost of an ounce of silver in 2009 was $14.67

2010 – No proof Silver Eagles were released through the first ten months of the year, and there was a complete cancellation of the uncirculated Silver Eagles.

Production of the 2010 Silver Eagle bullion coins began in January instead of December as usual. The coins were distributed to authorized dealers under an allocation program until September 3.

Silver posted an average price of $20.19 in 2010. World investment rose by an 40 percent in 2010 to 279.3 million troy ounces (Moz).

“Exchange traded funds (ETFs) registered another sterling performance in 2010, with global ETF holdings reaching an impressive 582.6 Moz, representing an increase of 114.9 Moz over the total in 2009. A significant boost in retail silver investment demand paved the way for higher investment in both physical bullion bars and in coins and medals in 2010. Physical bullion bars accounted for 55.6 Moz of the world investment in 2010. Coins and medals fabrication rose by 28% to post a new record of 101.3 Moz. In the United States, over 34.6 million U.S. Silver Eagle coins were minted, smashing the previous record set in 2009 at almost 29 million.”

2011 – Silver posted an annual average price of $35.12 in 2011, more than double the $14.67 average price for 2009.

Global investment in silver bars and coins & medals produced yet another historic high of 282.2 million ounces – the equivalent of $10 billion, itself a record high.

Physical silver bar investment grew by 67 percent in 2011 to 95.7 million ounces, global coins & medals fabrication rose by roughly 19 percent to an all-time high of 118.2 million ounces.

The US imported 6,600,000 oz of silver for consumption in 2011 – up from 2007’s imports of 4,830,000 oz.

In 2011 the US Mint sold 40,020,000 Bullion American Silver Eagle Coins.

2012 – United States Mint Authorized Purchasers (AP’s) ordered 3,197,000 Bullion American Silver Eagle Coins on January 3rd, the first day they went on sale. That opening day total catapulted January Bullion Eagle sales higher than half of the monthly totals in 2011.

As of January 25th 2012, 5,547,000 Bullion American Silver Eagle Coins had been sold.

From February to September monthly sales were weaker then the corresponding months in 2011.

In October demand started to pick up. In November, bullion sales took off with sales of American Silver Eagles more than doubling the figures from November and December 2011.

On December 17th the Mint said all remaining inventories of 2012 dated Silver Eagle bullion coins had sold out – no additional coins would be struck.

Since the 2013 dated coins would not be available to order until January 7, 2013 that left a three week void where no one was buying silver Eagles – yet Decembers sales were the third highest on record!

In 2012, the US Mint’s silver coin sales surpassed the amount of physical silver produced via US domestic mine production.

2013 – On January 7th the new 2013 one ounce Silver Eagle bullion coins went on sale and a new record of nearly 4 million were sold that day.

According to David Baker over at the Sprott Group:

  • The US Mint’s silver coin sales reached an all-time high of 13.2 million ounces in the first three months of 2013. If annualized, the Mint would sell 52.8 million ounces of silver in 2013 – a new record.
  • The SPDR Gold Trust (GLD) has dumped 141 tonnes of gold year-to-date (March 22nd) while at the same time silver ETF’s added more than 20 million ounces of silver.
  • Finally      from David comes the fact investors are buying 56 times more silver ounces      than gold ounces – ask yourself if silver is 56 times more available then      gold?

The twin policies of zero interest rates and the continual creation of money and credit being enacted today, by all governments and central banks, means that the purchase of precious metals is the only way to protect the value of your assets.

The major monetary metal in history is silver, not gold.” Milton Friedman, Nobel Laureate

Investors are currently risk adverse and mining stocks are not well understood by the general investing public, but at least one thing is going to become very apparent to most – the best way to hedge yourself against inflation could be owning silver and the shares of a silver and gold producer.

Junior resource companies offer the greatest leverage to increasing demand and rising prices for silver. Junior resource companies are soon going to have their turn under the investment spotlight and should be on every investors radar screen.

If this is Silver’s Second Age we need to get ourselves some silver, both bullion and the leverage of shares.

The Morgan Report Blog