The Morgan Report Blog

David Morgan Talks Precious Metals, Credit Purge and the Inflation vs Deflation Debate.

 
Weekend Edition with John O’Donnell & David Morgan | http://www.TheMorganReport.com

John O’Donnell interviews silver expert David Morgan. They discuss metals, credit purge and the inflation vs deflation debate.

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

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The Gold and Silver “Shortage”?

 
The Gold and Silver “Shortage”?
By Chris Marchese

A pet peeve of mine is when an article is published talking about a shortage in silver or gold. Recently, we have seen an increase in articles claiming that there is a precious metals shortage simply because both the U.S. mint and Royal Canadian Mint ran out of blanks. Both government mints predetermine a rough amount they will mint at the start of the year. When demand surges, a “bottleneck” can occur and this has happened in the past.

Why is this such a pet peeve? Because a shortage in a specific silver product does NOT mean a shortage in the raw material. It would be like saying there is a rice shortage if Rice Krispies stopped being produced momentarily.

Can there ever be a shortage of silver or gold? Theoretically, if you take the industrial aspect of silver to the extreme and industrial consumption skyrocketed and consumed total silver supply (primary supply + secondary supply+ above ground inventory) where primary supply is worldwide mine production, secondary supply being recycled silver and above ground inventory which is roughly 2B oz., then yes, total silver supply would be consumed.

However, in this thought experiment the probability is that those holding silver for investment purposes, would be willing to sell silver at astronomical prices as the industrial demand continued ever stronger. But isn’t that a shortage? Wouldn’t there be pressure on and industrial user as to how much they would or could pay? In other words what influence would the market put on these buyers and sellers?

It must be pointed out that a vast amount of industrial products are price inelastic to the price of silver because so little is used per item. So even if silver were to go up ten or twenty-fold, the amount used is so small in price relative to the overall sales price of the item, that these industries would simply pay up to continue their manufacturing schedule. This is true in many electronic and medical applications.

High prices would drastically influence silverware and jewelry, which would likely see large declines in sales and that of course spills over into lower demand for silver as a raw material.

Further, let us admit here and now that perhaps some industrial users might stockpile silver or “hoard” metal. This is stated from experience as Ford Motor “hoarded” palladium for their assembly line as the price went parabolic.

Remember an increase in consumption of silver would lead to increased secondary supply. Roughly 20%-25% of silver is recycled. If industrial consumption began to exceed primary supply as a result of increased demand, it would necessarily increase the market price of silver as well as increase secondary supply, since it becomes more economical to recycle silver at $20/oz. than at $15. Taking this further, it is more favorable to recycle silver at $30/oz. relative to $20/oz. and so on.

Furthermore, due to the roughly two billion troy ounces in above ground inventory, even if Industrial consumption increased substantially, it could be offset partially or perhaps totally by secondary supply. Additionally, higher silver prices would allow mines which were previously uneconomic to become economic, and more silver mining could take place, adding to supply at the very least, under the current energy dynamics. So even if taken to the extreme, the idea of silver being in a shortage is a statement that one must consider carefully.

In practical terms seeing industrial demand skyrocket is nearly impossible at least in the current worldwide economic landscape because, the Greater Depression which began in 2007 has not ended. Since 2007-2008, the debt/GDP ratios in the major world economies has skyrocketed to dangerous levels such that providing an environment for real economic growth to occur, would cause the interest payments on debt to soar. In other words, because central banks do what the government tells them, allowing the natural rate of interest to prevail is realistically impossible.

Simply stated, industrial consumption skyrocketing at this time isn’t realistic and realistically, silver and gold are not in a shortage. The definition of shortage at least in this case is the demand for gold/silver being greater than the supply. But both metals are available at some price and given the fact the physical market has yet to overtake the paper market at current metals prices, speaks volumes – at least for now.

Again, we suggest in a panic, the metal needs to be available in the right location coincident with demand. Near the end of their hyperinflation, Zimbabweans could not get gold or silver, regardless of what they were willing to pay.

But even when the physical market is where true price discovery occurs, both metals will be available at some price, according to classic economics. For example, let’s say a few years from now gold is at $10,000/oz. and silver is $500/oz. and if you wanted to acquire 100 oz. of gold and 10,000 oz. of silver it would not be a problem. Even if it were a “problem” then an increased bid to a higher level would occur and clear this transaction.

These metals have above ground inventories in the billions, and they’re not like wheat, corn or other agricultural commodities where they can be consumed entirely. The vast majority of gold is strictly for investment purposes, with a small percentage going to jewelry and much smaller percentage consumed in electronics. Furthermore, roughly – 99%of all gold ever mined in still in existence today. That being said, how could gold ever be in a shortage?

Again, in basic economics everything will clear (trade hands) at some PRICE. This strongly suggests that there can never be a true shortage. This does not mean than some participants involved in the precious metals business do not quit, and some manufacturing is disrupted –yet price is supposed to determine who receives the good or service at any point in time.

Yet, if we dig a bit deeper and look at what is the demand for money we may get a clearer picture of what many of the shortage articles may be thinking or feeling, yet in my view not really expressing clearly. Remember this is my missive and some will argue my point, but please follow my thinking.

There is an infinite demand for money is there not? It could be suggested that money plays a significant role in security during the human experience. If I had “enough money” I could quit my job… Or if I had enough money I could retire in comfort and not worry any longer… Or if there was just enough money then we could feed and house the whole planet sufficiently! Hopefully, you see my point.

Now it is possible that faith in the current “money” (private bank scrip) becomes trusted less and less and alternatives are sought more and more. In fact this is actually taking place, but few see it or even consider the implications. In this discussion we could get to a place where enough of the world market ceases to trust one currency as superior to the next and desires real money – gold and silver!

In this case what would happen? The fact is, no one knows for certain. At first, massive amounts of fiat could be exchanged for a single ounce of gold for example, but if the currency were not to be trusted, then precious metals’ owners may not accept currency at any price in exchange. Would this be a true shortage? The inability to exchange precious metals for paper is at the crux of this argument.

Would this ever happen? Well, there have been instances in world history where this did happen but were restricted to single countries and for short durations. Is it possible this could happen to the world reserve currency the U.S. dollar? If it were to happen or perhaps more importantly the psychology of the market was the US currency/bonds were failing or about to fail what would that do to the availability of gold and silver? Would these conditions mean –Shortage?

So to summarize, in the event of overwhelming and sustained demand, the markets might lock up in terms of being able to successfully allocate metal to those who demanded it. Sellers “speculating” on higher prices could hold back selling, creating massive bid-ask spreads, similar to what happened in 2008 in the retail silver market. All of these things and more, coupled with instant communications, might create contagion, with all academic theories and assumptions being thrown out the window…for a time. Perhaps just long enough for some to hold on to “reality” (real precious metals) when the rest of the world is “reset” to the new economic order.

Chris Marchese is the Senior Equity and Economic Analyst for The Morgan Report. He is co-author of The Silver Manifesto available on Amazon with the electronic version available across the web. He holds advanced degrees and worked as an equity analyst for a major Wall Street firm before becoming independent where his views would not be censored.

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

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China fears & global growth doubts grips markets

 
China fears & global growth doubts grips markets.

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

Join The Morgan Report Free for 30 Days *
* 30 Day Trial applies to new user sign ups only!
Offer does not apply to Premium Memberships.
  

Gold and Silver: Heading for a “Blue Screen of Death” Event?

 
Gold and Silver: Heading for a “Blue Screen of Death” Event?
David H. Smith

For personal computer users who by choice or circumstance, find themselves using a version of the Microsoft Windows operating software family, a dreaded condition known as the “Blue Screen of Death” (BSoD) is a seldom occurring, yet ever-present possibility. Wikipedia defines it as being caused by poorly written device drivers or malfunctioning hardware, such as faulty memory, power supply issues, overheating of components or hardware running beyond its specification limits.

You’re working along, thinking everything’s under control even if it’s not all that much to your liking -but at least you understand the picture…and then, Bam! Your screen goes blue! Nothing’s working. The computer tries to figure out what happened and (perhaps) do a hard reboot. Things may get back to normal…or they may not. Your system may have crashed, erasing all your work, your saved documents, your operating system’s “memory”. Now what!

A look back at the charts shows that silver (and gold), in spite of having several attempts to move back toward their bull market highs (so far) of May, 2011, near $50, have actually remained solidly entrenched within the confines of a cyclical bear trend. Silver has lost 70% of its high-point value; gold is down almost 50%.

A Blue Screen of Death?

More on what led up to this situation later in this report. But right now, here’s the premise about what could happen in the silver space, sometime within the next 6-12 months. I’m speaking about the potential which hardly anyone expects or even believes possible of what could be called a “Silver Blue Screen of Death Event”.

If this circumstance was to come about, it would mean that the price of silver literally overnight could do a “hard reboot” launching itself upwards so quickly that if you slept in the next morning, it could be next to impossible to get aboard without taking on a massive degree of additional risk in relation to what would have been the case only a day earlier.

What might cause such an historic event? What effect would that have almost instantly on the price of silver? On the availability of the white metal? On the price of the underlying mining stocks?

Right now, mining stocks are simply “trading dollars”

Only a handful of primary silver producers are doing better than trading dollars from their sales, after All In Sustaining Costs (AISC) are considered. After subtracting the cost of doing business, getting the silver ore out of the ground, mill and turn it into Concentrate or Doŕe for the smelter, little or no profit remains.

About two-thirds of silver production actually comes as a by product from large base metals’ producers, making silver profit much less of a concern for them.

The only way most primary silver producers show a profit is to include returns derived from base metal production zinc, lead, copper into their dollars’ return mix. When you see a company reporting sales of X amount of “silver equivalent ounces”, that is what has taken place. Some mines have a fair amount of gold production included as well. The silver/gold ratio now stands at around 75:1, so you can see how even a small amount of gold production can distort the value/profitability of silver mined by itself.

Of course, mining stock shares have been eviscerated. The biggest producers are down 40-70%. Exploration companies without near term production or buyout stores are off 90-95%. Hundreds more have simply blown away.

Zombie miners litter the landscape

I read a series of news releases recently from a company in which I once held a large position. They had a good “story” from an excellent location in a great jurisdiction in eastern Canada. The gold is deep, but it’s there. Unfortunately the management wasn’t “all there”. They squandered millions of dollars trying to “prove up” a number of disparate properties, rather than focus on the best one and get it into production, sell or JV it to a major producer. All the while, the Management and Directors paid themselves fat salaries, eating up their working capital.

Their incompetence and lack of focus severely tarnished the reputation of at least one highly capable analyst. Both of us, and many other investors, lost quite a bit of money as operations slid into irrelevance. Now they’re raising $100,000 at a time which barely pays for one deep hole. They pay 10% of the principle and issue millions of new shares diluting remaining shareholders, in order to “continue a drill program” and pay for “other (unspecified) operational expenses”.

I visited another company several times which was on our watch list at The Morgan Report, but that never made it to the recommended portfolio as a speculation. It just did a 10:1 share rollback after several seasons of drill results that were interesting, but as they say in the trade, “no cigar”. They work a highly prospective, remote area in Canada, and are fortunate in that so far they are being bankrolled by a Major. But if they don’t find that cigar within the next drill season or two, they risk becoming footnote, in what has become by most accounts, the worst Canadian resource sector downturn of the past two generations.

Silver: Wearing You out or Scaring You Out!

David Morgan at themorganreport.com famously remarks that a silver downdraft “will either wear you out or scare you out.” Boy has he ever been right on that one!

Some mining companies have literally “gone to pot” marketing legal marijuana, as their previously worked mining operations go “up in smoke”. Several high profile precious metals’ analysts are now writing about uranium, instead of gold and silver!

Silver Supply…

Just this month, Steve St. Angelo at srsroccoreport.com reports that production from Mexico, the world’s largest silver producer, dropped 12% in April compared to the same month last year. Could this be a one-off event? Possibly, but looking at stats for the principle Mexican states involved, all but one shows a decline. This is not just one mine with a flooded shaft, or slowing production while adding a new ball mill. If silver production in Mexico continues to decline, the proverbial handwriting for longer term supply may be on the wall.

On the demand side…

  • So far this year, India has purchased 40% of the world’s newly-mined silver.
  • China, which used to export 100 million ounces annually, now imports it.
  • Canadian Silver Maple Leaf sales continue to flirt with another annual record.
  • New uses are found for silver in industry and medicine on a daily basis.
  • Total U.S. 1st quarter silver imports are up 531 metric tons from last year
  • On Tuesday, July 7th, 1 million American Silver Eagles were sold, causing the U.S. Mint to suspend sales for 2 weeks, until new blanks could be procured. (In all of 2014, investors bought about 43 million Silver Eagles. .)

Just one of over 10,000 uses for silver.

25 year monthly Silver Price Chart (barchart.com)

Physical supply-demand and “paper silver’s” constricting tectonic plates

Declining grades and amount of silver output – most taking place right now below the cost of production – leased metals’ and futures contracts, in addition to financial derivatives amounting to hundreds of trillions of dollars around the globe. These factors taken in total, are stimulating the tectonic plates of silver supply and demand like never before. Something has to give, and it will sooner rather than later.

Steve St. Angelo, in a major new silver report here, has noted that investors tend to ramp up purchases of silver when the price is either moving strongly up or down. When it trades in a broad sideways movement, chartists refer to as “congestion”; physical purchases, especially of Canadian Silver Maple Leafs and American Silver Eagles, tend to decrease.

As if to prove his premise in short order, on Tuesday July 7, 2015, in the wake of the Greek “No” vote the preceding weekend about paying back massive loans from the ECU, silver dropped over a dollar an ounce in early morning trading, eventually closing down .55 cents on the day. Sales of American Silver Eagles reached such a crescendo (over one million that day alone) that the U.S. Mint announced it was temporarily suspending sales in order to replenish its supply of blanks.

U.S. Mint Gold Eagle Sales, July 1-10.

On an even more telling note, the U.S. Mint reported that the day before, on July 6, sales of Gold Eagles rose to o 21,500 – as much as were sold during the month of May. During the first 10 days of July, a stunning 65,500 Gold Eagles were purchased!

Record short sales of silver futures contracts on the COMEX (or as cynics call it, the “CRIMEX”), are a short term bearish, longer term bullish factor. Bearish short term, because heavy shorting (where investors make money if prices drop) may portend an attempt to push silver into new lows for the move. Bullish, because if lower prices don’t materialize, or when the shorts try to take a profit, the price will be bid up substantially and quickly. Whenever a short moves to offset his/her contract(s), they must do the opposite of the initial trade, in this case buying back the contracts they originally sold. This demand, in addition to new investors who believe the price will rise, and who therefore buy their own new contracts, initiates a powerful upwards impulse..

Whether or not this buildup by the shorts portends “another leg down” in the silver price remains to be seen. At this writing the area around the 4 year lows printed last November at $14.15 are still holding. Either way, the ongoing crush of events underscores just how unstable and unpredictable the global financial house of cards has become. Given that gold and silver have been, for thousands of years, the “money” of last resort, it’s probable that as we approach the next financial unraveling, people will once again seek to hold them as preferred “insurance” if they can be found.

How a Silver Blue Screen of Death Event Might Look:

It’s a Sunday evening…

  • In overnight markets, the price of Silver rises $2 – $4 an ounce.
  • In pre-open trading the next day, silver stock ETFs open 50% higher.
  • American Silver Eagles/Canadian Maple Leafs sell out in a few hours.
  • Premiums on “junk silver” triple from the previous day’s level.
  • Local coin shops sell out of physical silver by noon the next day.
  • Silver moves up sharply each day and ends the week $15 higher.
  • Over the next two weeks, silver retraces just 25% of its meteoric price rise, forming what technicians call a “bull flag”. On the third Monday, the “moon shot” continues, easily breaking through multi-year resistance at $38, then $44, and finally the all time (nominal) highs above $50, closing a few weeks later at $75 an ounce.
  • For several months the price forms a broad trading range below a spike high at $80, but is unable to drop below $55 an ounce. Almost no retail metal is available, and when it is, the premium is $15 over spot. Primary silver mine producer stocks trade well above their 2011 highs, in some cases 50 times higher than their bear market low.
  • Unlike 1980, silver trading this time is a global phenomenon. Internet news is instantaneous, with Chinese markets setting the price. The COMEX has defaulted on its futures’ contracts and settles by paying out paper promises.

Four months later, silver prints a new all time nominal high and surges into the $125-$175 per ounce range, in the biggest metals’ bull market in modern history. Gold penetrates $6,000 per ounce on the upside.

Note: Even at $125 an ounce, silver would still be cheaper in inflation adjusted dollars than it was in 1980! Is such a scenario possible? Stay tuned…

Gold’s real value is after the crisis has passed.

Sometimes you will hear a person remark that “You can’t eat gold in a crisis.” Well, that’s true. But where gold (and silver) really shine is during the period after a currency has been devalued sharply (think Venezuela, Mexico, Argentina) or has collapsed outright (think Zimbabwe and again, Argentina). When the old currency is removed from circulation, your precious metals which will have retained their pre-revision value can be exchanged for the new currency.

Ask a Zimbabwean citizen if they would rather have traded one trillion old Zimbabwe dollars for one new one, called a “banknote”…or an ounce of gold for $1,400 new U.S. Dollars one of several international currencies now being used for domestic transactions? Think about yourself in a similar situation some day.

Perhaps we cannot hold accountable, those who serve themselves first, and us not at all. But we can take it upon ourselves to follow the spirit chronicled in Dr. Janice Dorn’s and Pat Gorman’s inspiring book, Personal Responsibility: The Power of You. Do whatever you can to make yourself independent of the government. Keep some cash outside the bank, but within your reach. And hold physical gold and silver, either in direct possession, or in an allocated segregated account.

Hugo Salinas Price, is one of Mexico’s wealthiest citizens. Two years ago, in an open letter to the Greek government, he suggested they mint and circulate a one-tenth ounce silver coin that would trade alongside the euro, or a reinstated Greek drachma fiat currency. It’s value would rise with the spot price, and never be reduced. The proposal fell on deaf ears, but the game is not yet over. A few months ago, he had this to say about the financial mess now enveloping much of Europe, even as the same kind of storm clouds build here:

This is apocalyptic. We are in a terrible mess, and there is no way out without suffering. Apocalypse means prices are going to go haywire. Business is going to stagnate. Unemployment is going to prevail. There is going to be enormous disorder. That’s what I see will happen. We are not going to get out of this mess easily. It is going to be painful. One way to avoid pain is to have something you will be able to trade for what you need – and that is gold and silver.

Whom do you believe to be more prescient and trustworthy? Whose advice makes more sense? Hugo Salinas Price? Or the central banker/politician who keeps telling you that there’s absolutely nothing to worry about…until the message changes over the airways on a Sunday afternoon…?

It’s About Confidence

As long as people retain faith in the banking system, and what politicians tell them, the charade will continue. Greece’s near-default, the Chinese stock market melt down (where investors have been told they cannot sell their stocks for six months), cyber attacks which have laid bare the personal information of tens of millions of Federal Government employees as government watchdog agencies again failed “to connect the dots”. How much more will it take?

On Wednesday, July 8, there was a “glitch” or a so called “technical hiccup” on the New York Stock Exchange, the world’s largest, forcing a three hour trading halt. The Washington Post described it thus: ‘So what exactly went wrong?’ We’re not 100 percent sure. NYSE officials called the problem an “internal technical issue” early in the day. There are some reports that the exchange was planning to update some of its software Wednesday morning. It may be that those updates went awry…

It may have been a big deal. Or it may not have been. What you can be sure of however, is that “the government” in its infinite wisdom, is not going to tell you the truth unless it’s in their best interest. Don’t forget, that confidence contains the word “con”. Time and time again the Federal Reserve, major banks, financial houses and politicians have said one thing at the time, and then something else in the event. We might find out years later, only by queries through the Freedom of Information Act, that they were lying.

The Authorities understand that once confidence evaporates, the game is over. So they will do and say anything in order to keep the masses of people believing all the while lining their own pockets. Study history, and you’ll see that this is nothing new. People for thousands of years have understood this, and the more alert among them have taken steps to prepare accordingly.

Analysts have known that Puerto Rico was on a path to bankruptcy, though at the present time they technically cannot file for it. But the obvious can no longer be hidden. This July, in an event rare in the annals of political history, Garcia Padilla, the Governor of Puerto Rico, commenting on that commonwealth’s inability to pay its $72 billion debt, publicly stated the unvarnished truth:

The debt is not payable. There is no other option, I would love to have an easier option. This is not politics. This is math. Further to the point, he concludes, My administration is doing everything not to default. But we have to make the economy grow. If not, we will be in a death spiral.

For a long time, nothing systemic happens because people have “confidence”, because “the government” has “everything under control”. And then…everything seems to happen all at once, and it doesn’t. When systemic issues are merely papered over rather than dealt with in a realistic way, this is what you get.

Bill Holter, collaborating with Jim Sinclair, recently wrote the following:

Once the belief that “debt is an asset …or even money” is broken, just as a spooked herd of cattle runs wild, so will investors. They will seek the safety of “no one’s liability” because no one will be trusted. This includes the central banks and sovereign treasuries themselves. Gold, (no one’s liability) will not pay you interest and will not make promises that cannot be kept, it will simply “remain”. Gold will remain as the world’s purest asset and purest money. In a world where most all “assets” are finally understood to really be someone else’s liability, there is no telling what value might be placed on the purest form of asset/money? Gold will be seen as the “anti liability of last resort”. I guess better said, gold is the ultimate central bank for the asset side of the balance sheet!

…………………………………………………………………………………………………………….
David H. Smith is Senior Analyst for The Morgan Report and a regular contributor to Money Metals Exchange. He has investigated precious metals mines and exploration sites in Argentina, Chile, Mexico, Bolivia, China, Canada, and the U.S. He shares his perspectives with readers, the media and audiences at North American investment conferences. This essay first appeared on the BuySilverNow.com.

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

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Why Government Coin Sales ARE Meaningful

 
Why Government Coin Sales ARE Meaningful
By Chris Marchese

Many Internet discussions of government coin sales conclude–“Those are meaningless amounts because they account for such a small percentage of total supply (Primary + Secondary Supply).” But only part of this statement is correct, that is they account for a relatively small percentage (~14%) of total supply.

However they are not meaningless, for several reasons. The first is that demand for silver coinage can increase very sharply. When the 2008 financial crisis took place demand for silver eagles doubled. After the financial crisis of 2008 the demand doubled AGAIN! That is correct; prior to 2008 the demand for US mint silver was about 10 million ounces per year. Financial crisis doubles the demand- interesting? And post 2008 many more people “woke up” to the idea that precious metals are a nonrecourse way of owning real money without interference. Even with the “recovery” the demand for silver of this type (government minted coins) has not abated—again interesting?

Could demand double again? Certainly if you consider the global economy is in a more dangerous place relative to 2008. More debt that cannot be serviced based on oil prices that no longer exist, monetary inflation going to the banking sector, and the rampant debt accumulation across the board.

Thus if government issued silver coinage were to double over 2014, it would increase total demand to over 140m oz. This is a significant increase and could cause prices to increases at least in a market absent of intervention.
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Furthermore, because we don’t know how tight the silver market actually is, otherwise the demand needed for the physical market to overtake the paper market, could be a modest amount. All markets move at the margin and the last ounce sold at a given (low) price could be enough to see the price of silver gap up significantly. If we follow the logic an investment by a modest size fund could potentially trigger the price of silver to skyrocket.

Another reason is because government coin sales are a gauge for investment demand as a whole. Which means commercial bar demand by institutions has more competition as commercial bars are the raw material of most silver strikes by official mints? This is because some precious metals funds buy and hold commercial bars for investment purposes. More importantly are the retail investment bars.

Many precious metals investors are unaware of the details of the Chinese physical markets. While most of gold taken for delivery occur on major exchanges, the majority of silver taken for delivery occurs on much smaller, domestic exchanges which aren’t required to report deliveries such as the Shanghai White Platinum and Silver Exchange among others. But even if we just focus on the major exchanges i.e. the Shanghai Gold Exchange and Shanghai Futures Exchange, silver for delivery is material yet excluded from investment demand altogether in the GFMS Silver Survey and the CPM Silver Yearbook. Those not familiar with these exchanges would say “they are excluded because they are in commercial bar form and because both studies exclude commercial bars from investment demand, this makes logical sense.”

But what is so surprising is the silver taken for delivery isn’t in commercial bar form (1,000 oz. +/-). On the Shanghai Gold Exchange a market participant can take delivery of either 1 kilogram (32.15 oz.) or 15 Kilograms (482.25 oz.) and shouldn’t this be considered investment demand?

Deliveries on just the major exchanges have been increasing and it is likely silver deliveries have been increasing at a much faster rate as more locals frequent the smaller exchanges. That brings us to investment demand 1oz-to-100 oz. bars throughout the rest of the world. In 2014, physical bar investment just in India was 66.8m oz. and slightly over 100m oz. when North America is added. Is it odd, that record sales by the U.S. mint and Royal Canadian Mint more or less ebb and flow with demand for coinage?

In summary, government coin sales are a good barometer for true investment demand worldwide. Additionally, government coin sales are meaningful to the silver balance and therefore prices. At this point in time it may seem as though government coin sales are immaterial as well as retail silver bar demand. Further, it may continue to seem that way until it doesn’t, and that my friends is at the point where the physical market allows for true price discovery.

Chris Marchese is the Senior Equity and Economic Analyst for The Morgan Report. He is co-author of The Silver Manifesto available on Amazon with the electronic version available across the web. He holds advanced degrees and worked as an equity analyst for a major Wall Street firm before becoming independent where his views would not be censored.

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

Join The Morgan Report Free for 30 Days *
* 30 Day Trial applies to new user sign ups only!
Offer does not apply to Premium Memberships.
  

RMB Devaluation, Chinese Foreign Reserve and Gold Price

 
RMB Devaluation, Chinese Foreign Reserve and Gold Price
August 19, 2015

On May 29, 2015, The Wall Street Journal reported:
“On May 22, 2015, Yi Gang, the Vice-Governor of the People’s Bank of China (the “PBoC”) said at a forum in Beijing that “It’s not necessary” to bolster growth by devaluing the yuan. Mr. Yi pointed to China’s trade surplus, which has narrowed in recent years but remains relatively large, indicating Chinese exports are still strong.”

On August 12, 2015, Yahoo news reported:
“China cut the yuan’s value against the dollar for the second consecutive day Wednesday, roiling global financial markets and driving expectations the currency could be set for further falls.

The daily reference rate that sets the value of the Chinese currency against the greenback was cut by 1.62 percent to 6.3306 yuan, from 6.2298 on Tuesday, the People’s Bank of China (PBoC) said in a statement on its website.

The move took the reductions to 3.5 percent this week — the largest in more than two decades — after a surprise cut on Tuesday, but the central bank played down expectations it would continue to depreciate the currency.

The combined drop is the biggest since China set up its modern foreign exchange system in 1994” , when it devalued the yuan by 33% at a stroke.

This sudden change of course is not typical of Chinese central planners. What happened in the three months that led up to such a dramatic about-face?

1. Slump in exports?

On August 8, 2015, Reuters reported:
“Chinese exports tumbled 8.3 percent in July, their biggest drop in four months and far worse than expected, reinforcing expectations that Beijing will be forced to roll out more stimulus to support the world’s second-largest economy.”

US$ hundred million


Looking at the table data, the 8.3% drop referenced above compared Chinese exports in July 2015 to those in July 2014. Chinese exports in 2015 had in fact, been steadily increasing. Thus, the amount of actual Chinese exports is unlikely to be the cause for the sudden RMB devaluation.

2. Deteriorating Current Account?

The current account is an important indicator of a country’s economic health. It is defined as the sum of the balance of trade (goods and services exports minus imports), net income from abroad, and net current transfers. A positive current account balance indicates that the nation is a net lender to the rest of the world.

US$ hundred million


China continues to show a positive current account balance. In fact, 2015 numbers are better than those of 2014. Thus, current account level is unlikely to be the cause for the sudden RMB devaluation.

3. Slowdown in Foreign Direct Investment?

US$ hundred million


While foreign direct investment in 2015 has been a shadow of those in 2014, it has been steadily increasing. Therefore, it should not be a major cause of concern.

4. Slow Down in GDP?

US$ billion


China’s GDP growth continues to be on a positive trajectory, with 2015 GDP growth expected to be 5 – 7%. In absolute terms, 5% of US$10 trillion in 2015, is the same as 10% of US$5 trillion in 2010.

5. Sway IMF to include RMB in Reserve Currency?

On August 4, 2015, Bloomberg reported:
“The International Monetary Fund said the yuan trails its global counterparts in major benchmarks and that ’significant work’ in analyzing data is needed before deciding whether to grant the Chinese currency reserve status.

IMF staff members also opened the door to a possible delay in any approval with a proposal to postpone by nine months, until September 2016, the implementation of a change in the basket of currencies that make up the lender’s Special Drawing Rights…

China has been pushing for the yuan to join the dollar, euro, yen and pound in the SDR basket; while France has called for including the yuan, the U.S. has urged China to keep moving toward a flexible exchange rate and making financial reforms to qualify.”

Inclusion of RMB in the reserve currency basket will create demand for the RMB, as desired by the Chinese government. If the motive for the devaluation of the RMB was to appease the IMF, such a token action could hardly get the job done.
On August 19, 2015, The Wall Street Journal reported:
“the yuan doesn’t meet the IMF’s key criterion that reserve currencies must be ‘freely usable,’ meaning countries could face problems trying to buy and sell the yuan in a pinch”

So the question is: At what level will the RMB trade if China were to leave the RMB to its own devices?

6. Hemorrhaging China Foreign Reserve and Capital Outflow?

US$ hundred million


China has sustained the largest capital outflow on record in 2015. However, US$1 billion per quarter as indicated above is nominal. The real alarming sign is the rapid decline in China’s foreign reserve, which is down over US$400 billion in the first half of 2015.

US$ million


Despite a 25% increase in GDP since 2012 and a continued current account surplus throughout, the Chinese foreign reserve has stayed at the 2012 level. With a positive current account, where did the US$400 billion go? Could there possibly be a run on the currency? I suspect only an inner circle of Chinese bureaucrats know the answer.

Yuan to US$


Since 2006, investors and speculators have made only one-way bets on the RMB, with guaranteed results as it seemed, until now.

Just the offshore RMB deposits held in Singapore, Taiwan and Hong Kong alone amount to over 1.3 trillion RMB valued at US$200 billion. How much pent-up demand exists today to repatriate money out of China from foreign speculators, funds, investors and foreign companies? Maybe the Chinese government will no longer be able to keep the flood off the gates?

China and India are two of the world’s largest gold consumers. Naturally, gold prices should have gone down when the RMB was devalued, given the reduced Chinese purchasing power for gold. Quite to the contrary however, gold prices went up during five straight trading days following the RMB devaluation.

The reason? Are RMB speculators possibly moving out of RMB into gold? This could be entirely plausible as RMB investors were likely seeking an alternative to the US dollar and the euro in the first place. Commodity currencies remained unattractive given the slowdown in the world’s economy. The gold market is small, with annual gold production amounting to approximately US$160 billion, and total above ground gold stocks amounting to approximately $8 trillion, in all shapes and forms. Even the slightest increase in physical demand for gold can have a profound impact on the price of gold.
Now that the cat is out of the bag, the run on RMB might intensify, which could force or speed up action by the PBoC to decisively devaluate RMB to approximately free market trading levels to lessen the reserve bleeding, with the added benefit of reviving export and foreign direct investment.
What is the free market RMB to US dollar exchange rate? Having visited and stayed in China on a monthly basis, I can say it’s not cheap to live in China where a bottle of beer can cost you US$10 and a modest 1,000-square-foot flat can easily set you back a cool US$2 million in Beijing. China set up its modern foreign exchange system in 1994, when it devalued the yuan by 33% at a stroke. We may just see that for the second time very soon.

Instead of focusing on the Federal Open Market Committee’s sideshow regarding the US interest rate, gold investors should monitor the Chinese foreign reserve for investment clues. I like gold’s risk-reward profile at $1,120. I own physical gold and silver and manage a company engaged in silver exploration.

John Lee, CFA
Executive Chairman, Prophecy Development Corp.
www.prophecydev.com
jlee@prophecydev.com



Author’s Biography:

John Lee, CFA
Executive Chairman, Prophecy Development Corp.

www.prophecydev.com

John Lee is an entrepreneur with degrees in economics and engineering from Rice University. Under John’s leadership, Prophecy raised over $100 million and acquired substantial silver mining projects in Bolivia and coal mining projects in Mongolia.

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

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The Global Economy’s Health Is Not That Complicated

 
The Global Economy’s Health Is Not That Complicated

The Federal Reserve Bank has printed trillions of dollars to monetize US government debt just to keep the government afloat. Any significant rise in interest rates will probably decimate US government finances, the fragile housing market and in the bond market it will cause a financial catastrophe through interest rate derivatives.

This is a solid reason why the Fed will not raise any rates in any foreseeable future.

The power to create money out of thin air is great! Should we give it to politicians and secretive central bankers? Will this power be abused? Will those in charge yield to the temptation for “legalized counterfeiting?” Apparently the answer is YES.

All that the Federal Reserve has done was to inflate equity markets. They never solved any of the original financial problems that lead to creating “The Credit Bubble of 2007″. There was as well no financial resolution by our elected political officials to resolve this serious problem so that it would never occur again in the near future. This process called “Quantitative Easing” created a shift of a tremendous amount of wealth from the middle class and the poor to the rich.

Inflated stock prices, usually held by the wealthy, created a clear “redistribution of wealth” which will be paid for by future generations to come. The concept by the Fed was that centralizing the wealth would help in creating new jobs and increase capital expenditures in their businesses.

The problem with this philosophy is that it never filtered down from the Billionaires into real economic growth within our economy. Instead, rather than experience expansion, we have been experiencing contraction which is resulting into an economic deflationary depression that will appear evident to all by the end of this year.

The top 1% of Americans hold 35% of the nation’s wealth. This inequality has continued to grow exponentially.

There are several reason that I can refer to why the Fed will NOT raise rates anytime in the near future. There are interest rate cuts and devaluations going on all around the world at the moment. Japan and the Eurozone are both implementing Quantitative Easing. China is resorting to its alternatives to hold its financial system together and stave off a hard landing. Emerging market economies are being hammered by commodity price falls, while oil producers are being similarly hit by oil price falls. There is no Inflation in developed countries. The world is entering a deflationary slump. Why would the Fed ever even think about raising interest rates???

The unwinding of QE will have many negative effects in a market that is already short of liquidity. So, the unwinding that must be delayed for quite some time will be welcomed by many. The unwinding of QE purchases and the normalization of bond prices would be extremely negative for the bond markets, so the tin can will be kicked down the road for quite some time still.

The PBOC has significant room to lower required reserve ratios on banks to encourage lending. Even after a series of cuts, the RRR remains at 18.5 percent for major banks which is among the world’s highest. Reducing the ratio by 10 percentage points would free up 13 trillion yuan ($2.1 trillion) of additional capacity for banks to lend. On the fiscal policy side, the country’s $3.69 trillion of foreign-exchange reserves and relatively low national government debt levels mean it has the ammunition for fiscal stimulus. China is planning at least 1 trillion yuan ($161 billion) in long-term bonds to fund construction projects as the economy struggles. Most of the interest payments on the bonds will be subsidized by the central government. I believe that more projects of this type will be initiated in 2015. This is a major factor why the Federal Reserve will continue pumping liquidity in the financial system.

I believe that the FOMC minutes suggest that it is very far from a rate hike, the US economy is more likely to see QE4 first!

In short, there is no reason to believe that core inflation will rise to the 2% target any time soon and raising interest rates at the moment would jeopardize the US’s fragile recovery.

The FOMC members gave the following reasons for caution:

Wages aren’t rising much
Prices aren’t rising much either
The dollar is strengthening
Commodity prices are falling
Economic growth is still pretty weak
The labor market isn’t as strong as the unemployment figures suggest

In Conclusion:

We continue to see the US and global economies struggle. The writing is on the wall that a collapse in equities is drawing near, but we have yet to see the broad stock markets break down. When they do, there will be a lot of money made by taking advantage of falling prices, which is what my focus will be with my trading capital and ETF trade alert newsletter: www.TheGoldAndOilGuy.com – SPECIAL OFFER

Chris Vermeulen
http://www.thetechnicaltraders.com/partners/idevaffiliate.php?id=382_143

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

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How Cheap are Mining Stocks Now?

 
Are Gold Stocks Cheaper Than They Were in 2008?
Chris Marchese, Senior Equity Analyst
The Morgan Report

The short and simple answer to this question is yes! Some will say–that is just my opinion. I could show you numerous equations proving the gold stocks were cheaper in 2008 than today and vice versa using similar metrics.

Over the past 4-to-6 weeks there have been countless articles arguing one way or other, however each one I’ve read suffers from one serious flaw, not one has even mentioned how the value of an asset is determined. The value of any asset is the present value of the (free) cash flows generated over the life of an asset.

This doesn’t mean a discounted cash flow model has to be used or even a net asset value calculation which can be accurate if any only if the assumptions or inputs which go into the model are accurate. A valid valuation model must take the time value of money into account. Furthermore, what matters isn’t the current price of the underlying commodity but the near, the intermediate and long term prices.

In this case, the underlying fundamentals for gold and silver are significantly better than they were in 2008. I will discuss why I hold that view but it is far more important to acknowledge why all these articles fail to make a convincing argument.

How the value of an asset is determined goes unacknowledged, in other words, the writers of most (not all) don’t fully comprehend the argument they were making. Even if they had said something like “the price of gold will go to $1,500/oz. in the future”, it would take the time element into account, at least to some degree but this is a rather vague explanation. The reason why Austrian Economics provides a very sound explanation of the modern day business cycle and economics in general is because time is taken into account.

All other “schools” of economic thought such as the Keynesians, Neo-Cons, and Monetarists etc. are flawed for countless reasons including the exclusion of time from human action, in other words they assume economic activity takes places in a vacuum. An example of this is using a ratio calculated by taking a mining stock index, ETF or the like such as the XAU, HUI, GDX. This would be a very useful metric IF we lived in a static world but our circumstance is quite the opposite, being we live in an extremely dynamic world. That being said, using a metric of the XAU/Gold Price or a variant thereof is absurd.

Another article I read attempted to argue that gold miners were making a lot of money as measured by a fairly recent industry wide adoption of reporting costs via “AISC (All in Sustaining Costs)” to replace “Cash Costs”, but this article failed to prove the thesis. The first assumption implicitly states that by taking the average realized gold price less AISC, it results in free cash flow or operating cash flow, the true measure of profitability. If you invest in the mining sector, you know that net income is only a starting point when calculating profitability and that operating performance is seen through operating/free cash flow and true profitability or that which is above and beyond what is needed to reinvest in new and existing operations and can (not necessarily is) paid out as dividends to shareholders is Free Cash Flow.

AISC does provide us with information about the operating performance over a period of time but does NOT say anything about the future. While AISC is a vast improvement over cash costs, it has its shortcomings. The first is that it excludes taxes, which is unavoidable and in reality is a cost arising from operations because the determination a company’s income tax liability is largely a function of how efficient or inefficient operations are as well as the price of gold and accounting or the accounting strategy employed, particularly with deferring income taxes, paying off a previous deferred tax liability etc.

The second is that it doesn’t take into account such things as changes in non-cash working capital. In other words, the average realized gold price less AISC does not measure operating cash flow, let alone free cash flow. Lastly greenfield exploration and other re-occurring non-operating expenses, which are cash outflows and therefore reduce free cash flow are excluded from the fore mention missive.

Why Gold (and Silver) are far more attractive today relative to 2008

All major governments around the world (inclusive of central banks because they are not independent) have pumped remarkable amounts of fiat “money” into the system which despite the relentless arguments of deflation that have been on-going since 2009, has resulted is very substantial monetary inflation.

Let us note that using the classical definition of inflation is an increase in the supply of money and credit with rising consumer and producer goods being a symptom. There was a short period of credit contraction in 2008-2009, but with all the bailouts and currency injected into the system combined with QE1 made this short lived. At the 2014 Silver Summit, during a panel discussion I polled the audience asking everyone to raise their hand if they thought their average cost of living has increased 5% or more annually since 2008. Nearly all those willing to participate raised their hands. The question was at least 5.00%, so if you asked each individual to guess the average annual increase it might actually be higher than 5.00%.

Many precious metals investors think inflation is what will drive gold and silver prices in the future, but 10% inflation doesn’t compare to the ticking debt bomb that will bring down the global fiat money empire. This is not to say that hyperinflation will become a worldwide issue although it may result in some places in the world. Let me state it there will be monetary resets throughout the currency markets. This means, like all other times monetary resets have occurred, a very substantial devaluation of the currency. Reckless monetary policy, while destructive has not compared to the fiscal recklessness, which has caused gross federal debt + state debt + municipal debt + household debt + corporate debt (Non-Financial) + corporate debt (financial institution debt) = (total debt) to become unmanageable.

Today, in Japan total debt/GDP is well over 500%, debt/GDP in the U.S. is over 300% and the same goes for most every country in western world. If you look back throughout history the earmarking of every currency crisis is a debt laden economy. The point is that you can’t compare the price of gold stocks today vs. 2008. Things have changed, the world is dynamic and forecasting the future based on static metrics is simply invalid. It is analogous to comparing an apple on one’s head to the accelerating arrow coming at it from an archer.

Chris Marchese writes for The Morgan Report, consults, and worked as a financial analyst for a major brokerage firm. He is co-author of The Silver Manifesto and participates at all levels in equity analysis including site visits. Learn more about TMR — The Morgan Report here: http://www.silver-investor.com/aboutus.html

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

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China devaluation sparks fear of currency war, angers U.S. lawmakers

 
China devaluation sparks fear of currency war, angers U.S. lawmakers.

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

Join The Morgan Report Free for 30 Days *
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SmartWealth Radio – Money is Discussed with David Morgan

 
SmartWealth Radio – Money is Discussed with David Morgan

 

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?

 

Join The Morgan Report Free for 30 Days *
* 30 Day Trial applies to new user sign ups only!
Offer does not apply to Premium Memberships.
  

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